Two Questions and a Hypo for Supply Siders

I grew up in an age when conservatives paid their bills. Which may explain why I can’t think of anything that bespeaks the intellectual bankruptcy of modern “conservatism” than the idea of “supply-side economics”—the idea that you can retain or even increase revenues by cutting taxes. I suppose it was possible to give it grudging respect back in the 80s when the idea was new and untested. But now that we’ve had a chance to think of it. Well, maybe “think” isn’t the word.

Anyway, this is all a ranting intro to a couple of helpful snippets that offer ammunition in the supplied “debate” (I can see I’m overdoing the quotation marks here—but it is stretch to use the word “debate” in any discussion that is so much an article of faith).

First, from Andrew Samwick, former Chief Economist at W.’s Council of Economic Advisers (link):

Here are the two questions [supply-siders] should answer if they believe that the 2001 and 2003 tax cuts raised revenues:

1. How much wider would the deficit be now if those tax cuts had not been enacted?

2. How much lower would tax rates have to go in order for you to stop insisting that further tax cuts would raise more revenue?

I would press it a step further: if they believe taxes decrease revenues, would they offer subsidies to increase revenues. And if so, to whom and by how much?

The second, by “Bill,” hoisted from the comments at Dani Rodrik’s weblog:

Assume an economy with a $10 trillion GDP. Let's say that current taxes give 30% of that ($3 trillion), to the federal government.

Supply-siders come along and cut tax rates. The net effect of the cuts is that the federal government receives only 25% of GDP, or $2.5 trillion.

To even EQUAL the previous tax revenues (let alone exceed them, as the argument often goes), growth alone will have to supply $500 billion of tax revenues.

So, at the new 25% rate, we need a GDP of $12 trillion to bring in the pre-cut amount of tax revenue: $3 trillion.

In other words, we need to achieve growth of *almost 20%* to equal those revenues.

A little more formally: suppose a tax rate of 10 percent yields $100. Then the value of the economy must = 100/0.1=1,000. If we want to raise $100 at a rate of 8 percent, how big an economy will we need? The answer is 100/0.08=1250. So, a 20 percent drop in rates requires a 25 percent increase in base. Not plausible.

Samwick also points to Jeff Frankel’s commendable catalogue of supply-side looniness here. This might all seem abstract and hypothetical except it seems like we’re going to be hearing this stuff recycled my the McCain campaign all summer.