David R. Henderson  

Henderson on George Melloan

PRINT
Forza Italia!... What if Trump wins the China I...

417tQSMuwSL._SX331_BO1,204,203,200_.jpg

We can thank [Bob] Bartley for making supply-side economics understandable, popular, and influential. Supply-side economics, as he and other Journal writers describe it, is the idea that high marginal tax rates discourage work, saving, and investment. It still shocks me how little emphasis academic economists placed on that insight before Bartley came along.

Remember that the top marginal tax rate on individual income in the 1970s was a whopping 70%, so the idea that marginal tax rates matter should not have been so controversial.
The Journal's persistent call for lower marginal tax rates helped strengthen President Ronald Reagan's hand. From 1981 to 1987, Reagan and Congress cut the tax rate paid by the highest-income people from 70% to 28%. For that, those of us who believe in giving people incentives to produce and those of us who believe that people should keep more of their income should thank the Journal.

But there was a downside to this advocacy. First, many of the Journal's unsigned editorials (under the heading "Review and Outlook") and guest op-eds during the Bartley era suggested that the economic growth sparked by tax cuts would result in higher federal tax revenues than if tax rates weren't cut. Reasonable back-of-the-envelope calculations showed that this was highly unlikely. As economist Lawrence Lindsey demonstrated with a careful examination of the data, more taxes were paid by the highest-income people, whose marginal tax rates were cut in the early 1980s from 70% to 50%. But it was not true for taxpayers overall.

Second, because the Journal's editors did not worry much about the revenue effects of large cuts in tax rates, they didn't put much emphasis on proposals for reining in federal government spending. Imagine, for example, that the editors had advocated in 1972 that federal spending rise by 0.5 percentage points less per year than it actually did rise. In 1972, federal government spending was $244.3 billion. In 2016, it was $3,852.6 billion. That's a compounded annual growth rate of 6.5%. If our imaginary editors had gotten their way and federal spending had instead risen by "only" 6% annually, it would have been $3,172.4 billion in 2016. The result, with taxes the same as they are, would have been a federal budget surplus of $95.6 billion rather than the actual budget deficit of $584.7 billion.


This is from David R. Henderson, "The
Journal Through Time," Regulation, Spring 2018. It's the lead book review in the Spring issue. Read the whole thing.


Comments and Sharing






COMMENTS (7 to date)
Brandon Berg writes:

While reading this, it occurred to me that many people simultaneously hold the following beliefs:

1. That cutting the top marginal personal income tax rate from 70% to about 40% caused a doubling in the share of market income earned by the top 1%.

2. That the idea that this increased tax revenues has been thoroughly discredited.

Alan Goldhammer writes:

Nice book review. Is the opening line, "...the most widely read and probably most influential editorial page..." really true? How do we know that it is the most widely read and if so, by whom? One might argue that The New York Times is more influential but in the end such comparisons are fools' errands.

I am not a believer in pure supply side economics and certainly the Laffer Curve is very simplistic and easy to understand. We know that Jude Wanniski, a writer for the WSJ was the one who coined the term following the famous dinner where the curve was drawn on the napkin. The origins of the idea certainly predate Laffer as can be seen in the Wikipedia entry on the topic.

The bigger problem IMO is that the WSJ proselytizers cannot accept alternative explanations, nor do they ever seem to apologize for views that were clearly wrong (Gulf Warism). How can one reconcile the economic growth of the 1950s with usuriously high tax rates and the Clinton period following a tax increase that all of those on the right said would be destructive to the economy and then on to the widely celebrated Bush tax cuts that were shortly followed by the Great Depression. The US economy is complex and any single tax policy action is likely not to have the result that those who tout it want.

It's going to be interesting to see the impact of last year's tax reform (widely supported by the WSJ) on the economy and whether the GDP growth is achieved. One thing we do know for sure is that corporate repurchase of stock has increased markedly (I've already seen some proxy statements from companies seeking to increase activity in this area).

Thaomas writes:

@ Brandon Berg

1) I've never run across the idea "That cutting the top marginal personal income tax rate from 70% to about 40% caused a doubling in the share of market income earned by the top 1%." What I've heard said is that the the increased share of income received by the top 1% suggests that it would be fair to collect more in revenue from them.

I think everyone but Republican lawmakers agree "That the idea that this increased tax revenues (by enough to prevent the reduction from increasing the deficit) has been thoroughly discredited."

Thaomas writes:

Neither Dave nor I are mind readers, but I suspect that the Journal's indifference to deficits was strategic, thinking that the time was not right to identify enough low value expenditures (and persuade people that they WERE of low value) to prevent the reductions in revenue from increasing deficits.

I'd say the key Journal error was not to discuss openly the income distribution effects of the the rate reductions.

Ed Hanson writes:

Quote from the review article.

"As economist Lawrence Lindsey demonstrated with a careful examination of the data, more taxes were paid by the highest-income people, whose marginal tax rates were cut in the early 1980s from 70% to 50%. But it was not true for taxpayers overall."

Am I reading this correctly, if the measure of tax policy is to raise greater revenue for the government, than the best tax cut policy should be limited to highest-income people and the worse policy is cutting taxes on anyone else.

Sure puts the truth to those who oppose supply-side tax under the guise it only benefits the richest, and exposes them to what they really are, opponents of any tax cuts. And in favor of bigger and more powerful government who instead of allowing people to keep more of what they earn, they would rather direct unearned moneys to the politically favored.

Ed

David R Henderson writes:

@Ed Hanson,
Am I reading this correctly, if the measure of tax policy is to raise greater revenue for the government, than the best tax cut policy should be limited to highest-income people and the worse policy is cutting taxes on anyone else.
No, you're not reading it correctly. It's not the measure; it's a measure. Many other things matter.

Ed Hanson writes:

David

Yes, you are correct, of course, but I guess you have not been in communication with the loud left. It is the only measure to them. About tax cuts its always for the rich and Reagan caused huge increase in debt, Bush caused huge increase in debt, Trump caused huge increase in debt. It is all you hear, and that is who I was talking to.

Ed

PS. Sorry to bring politics into an excellent economics post.

POST A COMMENT




Return to top