Scott Ford: If it sounds too good to be true, it probably is
October 12, 2008
Steamboat Springs — The Laffer theorem (supply-side economics) has been morphed into an absolute truism in the minds of Republicans so that tax cuts always increase jobs, increase wages and, therefore, tax revenue. I am not buying it this time.
Supply-side economic theory had a growing acceptance in the late 1970s. The now all-too-familiar Laffer Curve was its key feature. The premise of the theory was that under certain specific conditions of high marginal tax rates, tax cuts might actually increase revenues. In theory, it was felt that high marginal tax rates could possibly discourage some pursuit of income.
Keep in mind that the Laffer theorem promoted in the 1970s was just that – a theory. It had never been tested on a grand scale.
That all changed with the Reagan tax cuts made in the early 1980s. Prior to the Reagan tax cuts, the top U.S. marginal tax rate was 70 percent. The Laffer theory did seem plausible, albeit without actual empirical data to support it. The grand experiment began when President Reagan sponsored sweeping tax reform legislation that ushered in a new era in American economics. In the span of three years, the top tax bracket was cut from 70 percent down to 50 percent and then down again to 28 percent.
The theory behind this legislation was wonderfully simple. Give the nation’s relatively few affluent the opportunity to keep more of their riches; they will in turn use this money to create a growing economic tide that will trickle down to the working class, which will, in turn, generate a lot of new tax revenue. As President Reagan himself put it in folksy terms for us all to understand, “A rising tide lifts all boats.” In theory, the new tax revenues generated would more than pay for the tax cuts given to the affluent. The only problem with this theory is that it doesn’t work.
The results of the grand supply-side economic theory experiment have been disappointing in the two areas it was theorized to help the most: increased tax revenues and trickle-down benefit for all. Since 1980, America’s deficit has exploded. To be sure, some of this explosion in debt is because of irresponsible spending. However, some is because of not collecting sufficient revenues. In 1980, the per capita United States resident population share of the national debt, adjusted for inflation, was $10,917. That number as of Oct. 1, 2008, is $32,895.
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During the past 25 years, the affluent have become vastly richer, and this trend accelerated with the Bush tax cuts of 2001 and 2003. According to research done by The Center on Budget and Policy Priorities, 80 percent of the net income gains in the past 25 years benefited the people in the top 1 percent of the income distribution. Since 2002, the average inflation-adjusted income of the top 1 percent of households has risen 42 percent, whereas the average inflation-adjusted income of the bottom 90 percent of households has risen about 4.7 percent.
At what point in time do we call an end to the tax policy experiment associated with Arthur Laffer’s theory of supply-side economics? Although the economic tide has risen dramatically for a few, most of the boats in the harbor are slowly sinking.
It is time for a change.