Effect On Tax Revenues
Many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would be sufficient to compensate completely for the short-term costs of a tax cut, and that tax cuts could, in fact, cause overall revenue to increase. Some hold this was borne out during the 1980s when, advocates of supply-side economics claim, tax cuts ultimately led to an overall increase in governmental revenue due to stronger economic growth. Other economists, however, dispute this assertion.
Although the term "supply-side economics" may have been coined later, an example of lower tax cuts effecting higher government revenues occurred during the 1920s. Tax rates fell from 60% to 25% for the highest brackets (those earning over $100,000) between 1920 and 1928, yet the income paid by those categories grew from $321 million to $714 million. During this period, the highest bracket changed from paying roughly 30% of all income taxes to 61%, and the lowest bracket (under $5,000) went from about 15% to 1%. Although this does not correlate taxes to other policies, it does illustrate that tax cuts are viable as part of a plan to stimulate higher revenue.
Some contemporary economists do not consider supply-side economics a tenable economic theory, with Alan Blinder calling it an "ill-fated" and perhaps "silly" school on the pages of a 2006 textbook. Greg Mankiw, former chairman of President George W. Bush's Council of Economic Advisors, offered similarly sharp criticism of the school in the early editions of his introductory economics textbook. In a 1992 article for the Harvard International Review, James Tobin wrote, " idea that tax cuts would actually increase revenues turned out to deserve the ridicule…"
| “ | The extreme promises of supply-side economics did not materialize. President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This was not the case. Government revenues fell sharply from levels that would have been realized without the tax cuts. - Karl Case & Ray Fair, Principles of Economics (2007), p. 695. |
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Supply side proponents Trabandt and Uhlig argue that "static scoring overestimates the revenue loss for labor and capital tax cuts", and that instead "dynamic scoring" is a better predictor for the effects of tax cuts. To address these criticisms, in 2003 the Congressional Budget Office conducted a dynamic scoring analysis of tax cuts advocated by supply advocates; Two of the nine models used in the study predicted a large improvement in the deficit over the next ten years resulting from tax cuts and the other seven models did not.
Read more about this topic: Supply-side Economics
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