Posts Tagged ‘Supply-side economics’

In addition to being a contest over expanding the burden of government spending, the Democratic primary also is a contest to see who wants the biggest tax increases.

Bernie Sanders and Elizabeth Warren have made class-warfare taxation an integral part of their campaigns, but even some of the supposedly reasonable Democrats are pushing big increases in tax rates.

James Pethokoukis of the American Enterprise Institute opines about the anti-growth effect of these proposed tax hikes, particularly with regard to entrepreneurship and successful new firms.

The Democratic presidential candidates have plenty of ideas about taxes. Wealth taxes. Wall Street taxes. Inequality taxes. And probably more to come. So lots of creative thinking about wealth redistribution. Wealth creation? Not so much. …one way to look at boosting GDP growth is thinking about specific policies to boost labor force and productivity growth. But there’s another way of approaching the issue: How many fast-growing growing new firms would need to be generated each year to lift the economy-wide growth rate each year by one percent? …a rough calculation by analyst Robert Litan figures there about 15 billion-dollar (in sales) companies formed every year. But what if the American entrepreneurial ecosystem were so vibrant that it produced 60 such companies annually? …The big point here is that the American private sector is key to growth. No other large economy is as proficient as the US in creating high-impact startups. But it doesn’t appear that the Democratic enthusiasm for big and bold tax plans is matched by concern about unwanted trade-offs.

If you want a substantive economic critique of class-warfare tax policy, Alan Reynolds has a must-read article on the topic.

He starts by explaining why it’s important to measure how sensitive taxpayers are (the “elasticity of taxable income”) to changes in tax rates.

Elasticity of taxable income estimates are simply a relatively new summary statistic used to illustrate observed behavioral responses to past variations in marginal tax rates. They do so by examining what happened to the amount of income reported on individual tax returns, in total and at different levels of income, before and after major tax changes. …For example, if a reduced marginal tax rate produces a substantial increase in the amount of taxable income reported to the IRS, the elasticity of taxable income is high. If not, the elasticity is low. ETI incorporates effects of tax avoidance as well as effects on incentives for productive activity such as work effort, research, new business start-ups, and investment in physical and human capital.

Alan then looks at some of the ETI estimates and what they imply for tax rates, though he notes that the revenue-maximizing rate is not the optimal rate.

Diamond and Saez claim that, if the relevant ETI is 0.25, then the revenue-maximizing top tax rate is 73 percent. Such estimates, however, do not refer to the top federal income tax rate, …but to the combined marginal rate on income, payrolls, and sales at the federal, state, and local level. …with empirically credible changes in parameters, the Diamond-Saez formula can more easily be used to show that top U.S. federal, state, and local tax rates are already too high rather than too low. By also incorporating dynamic effects — such as incentives to invest in human capital and new ideas — more recent models estimate that the long-term revenue-maximizing top tax rate is between 22 and 49 percent… Elasticity of taxable, or perhaps gross income…can be “a sufficient statistic to approximate the deadweight loss” from tax disincentives and distortions. Although recent studies define revenue-maximization as “optimal,” Goolsbee…rightly emphasizes, “The fact that efficiency costs rise with the square of the tax rate are likely to make the optimal rate well below the revenue-maximizing rate.”

These excerpts only scratch the surface.

Alan’s article extensively discusses how high-income taxpayers are especially sensitive to high tax rates, in part because they have considerable control over the timing, level, and composition of their income.

He also reviews the empirical evidence from major shifts in tax rates last century.

All told, his article is a devastating take-down of the left-of-center economists who have tried to justify extortionary tax rates. Simply stated, high tax rates hinder the economy, create deadweight loss, and don’t produce revenue windfalls.

That being said, I wonder whether his article will have any impact. As Kevin Williamson points out is a column for National Review, the left isn’t primarily motivated by a desire for more tax money.

Perhaps the strangest utterance of Barack Obama’s career in public office…was his 2008 claim that raising taxes on the wealthy is a moral imperative, even if the tax increase in question ended up reducing overall federal revenue. Which is to say, Obama argued that it did not matter whether a tax increase hurt the Treasury, so long as it also hurt, at least in theory and on paper, certain wealthy people. …ideally, you want a tax system with low transaction costs (meaning a low cost of compliance) and one that doesn’t distort a lot of economic activity. You want to get enough money to fund your government programs with as little disruption to life as possible. …Punitive taxes aren’t about the taxes — they’re about the punishment. That taxation should have been converted from a technical question into a moral crusade speaks to the basic failure of the progressive enterprise in the United States…the progressive demand for a Scandinavian welfare state at no cost to anybody they care about…ends up being a very difficult equation to balance, probably an impossible one. And when the numbers don’t work, there’s always cheap moralistic histrionics.

So what leads our friends on the left to pursue such misguided policies? What drives their support for punitive taxation?

Is is that they’re overflowing with compassion and concern for the poor?


Writing for the Federalist, Emily Ekins shares some in-depth polling data that discovers that envy is the real motive.

Supporters often contend their motivation is compassion for the dispossessed… In a new study, I examine…competing explanations and ask whether envy and resentment of the successful or compassion for the needy better explain support for socialism, raising taxes on the rich, redistribution, and the like. …Statistical tests reveal resentment of the successful has about twice the effect of compassion in predicting support for increasing top marginal tax rates, wealth redistribution, hostility to capitalism, and believing billionaires should not exist. …people who agree that “very successful people sometimes need to be brought down a peg or two even if they’ve done nothing wrong” were more likely to want to raise taxes on the rich than people who agree that “I suffer from others’ sorrows.” …I ran another series of statistical tests to investigate the motivations behind the following beliefs: 1) It’s immoral for our system to allow the creation of billionaires, 2) billionaires threaten democracy, and 3) the distribution of wealth in the United States is “unjust.” Again, the statistical tests find that resentment against successful people is more influential than compassion in predicting each of these three beliefs. In fact, not only is resentment more impactful, but compassionate people are significantly less likely to agree that it’s immoral for our system to allow people to become billionaires.

Here’s one of her charts, showing that resentment is far and away the biggest driver of support for class-warfare proposals.

These numbers are quite depressing.

They suggest that no amount of factual analysis or hard data will have any effect on the debate.

And there is polling data to back up Emily’s statistical analysis. Heck, some folks on the left openly assert that envy should be the basis for tax policy.

In other words, Deroy Murdock and Margaret Thatcher weren’t creating imaginary enemies.

P.S. If you think Kevin Williamson was somehow mischaracterizing or exaggerating Obama’s spiteful position on tax policy, just watch this video.

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The New York Times is going overboard with disingenuous columns.

A few days ago, I pointed out the many errors in David Leonhardt’s column extolling the wealth tax.

I also explained back in August how Steven Greenhouse butchered the data when he condemned the American economy.

And Paul Krugman is infamous for his creative writing.

But Mr. Leonhardt is on a roll. He has a new column promoting class warfare tax policy.

Almost a decade ago, Warren Buffett made a claim that would become famous. He said that he paid a lower tax rate than his secretary, thanks to the many loopholes and deductions that benefit the wealthy.oct-8-19-nyt …“Is it the norm?” the fact-checking outfit Politifact asked. “No.” Time for an update: It’s the norm now. …the 400 wealthiest Americans last year paid a lower total tax rate — spanning federal, state and local taxes — than any other income group, according to newly released data. …That’s a sharp change from the 1950s and 1960s, when the wealthy paid vastly higher tax rates than the middle class or poor.

Here’s the supposed proof for Leonhardt’s claim, which is based on a new book from two professors at the University of California at Berkeley, Emmanuel Saez and Gabriel Zucman.

Here are the tax rates from 1950.


And here are the tax rates from last year, showing the combined effect of the Kennedy tax cut, the Reagan tax cuts, the Bush tax cuts, and the Trump tax cut (as well as the Nixon tax increase, the Clinton tax increase, and the Obama tax increase).


So is Leonhardt (channeling Saez and Zucman) correct?

Are these charts evidence of a horrid and unfair system?

Nope, not in the slightest.

But this data is evidence of dodgy analysis by Leonhardt and the people he cites.

First and foremost, the charts conveniently omit the fact that dividends and capital gains earned by high-income taxpayers also are subject to the corporate income tax.

Even the left-leaning Organization for Economic Cooperation and Development acknowledges that both layers of tax should be included when measuring the effective tax rate on households.

Indeed, this is why Warren Buffett was grossly wrong when claiming he paid a lower tax rate than his secretary.

But there’s also another big problem. There’s a huge difference between high tax rates and high tax revenues.

feb-4-19-perrySimply stated, the rich didn’t pay a lot of tax when rates were extortionary because they can choose not to earn and declare much income.

Indeed, there were only eight taxpayers in 1960 who paid the top tax rates of 91 percent.

Today, by contrast, upper-income taxpayers are paying an overwhelming share of the tax burden.

It’s especially worth noting that tax collections from the rich skyrocketed when Reagan slashed the top tax rate in the 1980s.

Let’s close by pointing out that Saez and Zucman are promoting a very radical tax agenda.

Saez and Zucman sketch out a modern progressive tax code. The overall tax rate on the richest 1 percent would roughly double, to about 60 percent. The tax increases would bring in about $750 billion a year, or 4 percent of G.D.P…. One crucial part of the agenda is a minimum global corporate tax of at least 25 percent. …Saez and Zucman also favor a wealth tax

Punitive income tax rates, higher corporate tax rates, and a confiscatory wealth tax.

Does anybody think copying France is a recipe for success?

P.S. I pointed out that Zucman and Saez make some untenable assumptions when trying to justify how a wealth tax won’t hurt the economy.

P.P.S. It’s also worth remembering that the income of rich taxpayers will be subject to the death tax as well, which means Leonhardt’s charts are doubly misleading.

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At the risk of over-simplifying, the difference between “supply-side economics” and “demand-side economics” is that the former is based on microeconomics (incentives, price theory) while the latter is based on macroeconomics (aggregate demand, Keynesianism).

When discussing the incentive-driven supply-side approach, I often focus on two key points.

  • Marginal tax rates matter more than average tax rates because the incentive to earn additional income (rather than enjoying leisure) is determined by whether the government grabs a small, medium, or large share of any extra earnings.
  • Some taxpayers such as investors, entrepreneurs, and business owners are especially sensitive to changes in marginal tax rates because they have considerable control over the timing, level, and composition of their income.

Today, let’s review some new research from Spain’s central bank confirms these supply-side insights.

Here’s what the authors investigated.

The impact of personal income taxes on the economic decisions of individuals is a key empirical question with important implications for the optimal design of tax policy. …the modern public finance literature has devoted significant efforts to study behavioral responses to changes in taxes on reported taxable income… Most of this work focuses on the elasticity of taxable income (ETI), which captures a broad set of real and reporting behavioral responses to taxation. Indeed, reported taxable income reflects not only individuals’ decisions on hours worked, but also work effort and career choices as well as the results of investment and entrepreneurship activities. Besides these real responses, the ETI also captures tax evasion and avoidance decisions of individuals to reduce their tax bill.

By the way, “elasticity” is econ-speak for sensitivity. In other words, if there’s high elasticity, it means taxpayers are very responsive to a change in tax rates.

Anyhow, here’s how authors designed their study.

In this paper, we estimate the elasticity of taxable income in Spain, an interesting country to study because during the last two decades it has implemented several major personal income tax reforms… In the empirical analysis, we use an administrative panel dataset of income tax returns… We calculate the MTR as a weighted average of the MTR applicable to each income source (labor, financial capital, real-estate capital, business income and capital gains).

You can see in Figure 1 that the 2003 reform was good for taxpayers and the 2012 reform was bad for taxpayers.

If nothing else, though, these changes created the opportunity for scholars to measure how taxpayers respond.

And here are the results.

We obtain estimates of the ETI around 0.35 using the Gruberand Saez (2002) estimation method, 0.54 using Kleven and Schultz (2014)’s method and 0.64 using Weber (2014)’s method. …In addition to the average estimates of the ETI, we analyze heterogeneous responses across groups of taxpayers and sources of income. …As expected, stronger responses are documented for groups of taxpayers with higher ability to respond. In particular, self-employed taxpayers have a higher ETI than wage employees, while real-estate capital and business income respond more strongly than labor income. …we find large responses on the tax deductions margin, especially private pension contributions.

In other words, taxpayers do respond to changes in tax policy.

And some taxpayers are very sensitive (high elasticity) to those changes.

Here’s Table 6 from the study. Much of it will be incomprehensible if you’re not familiar with econometrics. But all that matters is that I circled (in red) the measures of how elasticities vary based on the type of income (larger numbers mean more sensitive).

I’ll close with a very relevant observation about American fiscal policy.

Currently, upper-income taxpayers finance the vast majority of America’s medium-sized welfare state.

But what if the United States had a large-sized welfare state, like the ones that burden many European nations?

If you review the data, those large-sized welfare states are financed with stifling tax burdens on lower-income and middle-class taxpayers. Politicians in Europe learned that they couldn’t squeeze enough money out of the rich (in large part because of high elasticities).

Indeed, I wrote early this year about how taxes are confiscating the lion’s share of the income earned by ordinary workers in Spain.

And if we adopt the expanded welfare state envisioned by Bernie Sanders, Alexandria Ocasio-Cortez, and Kamala Harris, the same thing will happen to American workers.

P.S. I admire how Spanish taxpayers have figured out ways of escaping the tax net.

P.P.S. There’s also evidence about the impact of Spain’s corporate tax.

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Assuming the goal is faster growth and higher living standards, there are three core principles of good tax policy.

You could call this list the Holy Trinity of supply-side economics. Simply stated, incentives matter, so it makes no sense for government to discourage the things that make a nation more prosperous.

Regarding low marginal tax rates, my left-leaning friends sometimes dismiss the importance of this principle by pointing out that they don’t pay much attention to their marginal tax rates.

I can sympathize with their skepticism. When I was first learning about public finance and studying supply-and-demand curves showing deadweight loss, I also wondered about the supply-side claim that marginal tax rates mattered. Even after I started working, I had doubts. Would I somehow work harder if my tax rate fell? Or goof off if my tax rate went up? It didn’t make much sense.

What I didn’t recognize, however, is that I was looking at the issue from the perspective of someone working a standard, 9-to-5 job with a modest income. And it is true that such workers are not very responsive (especially in the short run) to changes in tax rates.

In the real world, though, there are lots of people who don’t fit that profile. They have jobs that give them substantial control over the timing, level, and composition of their income.

And these people – such as business owners, professionals, second earners, investors, and entrepreneurs – often are very responsive to changes in marginal tax rates.

We have a new example of this phenomenon. Check out these excerpts from a story in the U.K.-based Times.

About three quarters of GPs and hospital consultants have cut or are planning to cut their hours… About 42 per cent of family doctors and 30 per cent of consultants have reduced their working times already, claiming that they are being financially penalised the more they work. A further 34 per cent and 40 per cent respectively have confirmed that they plan to reduce their hours in the coming months… The government has launched an urgent consultation over the issue, which is the result of changes to pension rules limiting the amount that those earning £110,000 or more can pay into their pensions before they are hit with a large tax bill.

In other words, high tax rates have made leisure more attractive than work. Why work long hours, after all, if the tax authority is the biggest beneficiary?

There are also indirect victims of these high tax rates.

Last month figures from NHS Providers, which represents hospitals, showed that waiting lists had climbed by up to 50 per cent since April as doctors stopped taking on extra shifts to avoid the financial penalties. Richard Vautrey, chairman of the BMA GPs’ committee, said: “These results show the extent to which GPs are being forced to reduce their hours or indeed leave the profession altogether because of pension taxes. …swift and decisive action is needed from the government to end this shambolic situation and to limit the damage that a punitive pensions taxation system is inflicting on doctors, their patients and across the NHS as a whole.”

The U.K.’s government-run health system already has plenty of problems, including long wait times and denial of care. The last thing it needs is for doctors and other professionals to cut back their hours because politicians are too greedy.

The moral of the story is that tax rates matter. Depending on the type of person, they can matter a lot.

This doesn’t mean tax rates need to be zero (though I like that idea).

It simply means that taxes impose costs, and those costs become increasingly apparent as tax rates climb.

P.S. If you want a horror story about marginal tax rates, check out what happened to Cam Newton, the quarterback of the Carolina Panthers.

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Yesterday’s column weighed in on the debate whether Jesus was a socialist.

Like Cal Thomas, I don’t think the Bible supports coercive redistribution by government.

Today, let’s look at the same issue, but from a humorous perspective.

For those on the other side of the debate, Socialist Jesus has a very efficient mechanism to collect alms for the poor.

This approach is supported by some parishoners.

From Babylon Bee, we have a story about a disciple of Socialist Jesus.

A lot of Christians are criticized for not being very compassionate to the poor. But you can’t say that about Larry DeManson, a local believer who is so committed to charity for those less fortunate than himself that he always votes for government to steal money from his neighbor and give it to the impoverished. …DeManson no longer has a guilty conscience whenever he sees people in need. “I don’t personally have to do anything,” he said. “The government does it for me.” The man cites the verse “somewhere in James” that says that “true religion before the Father is to forcibly redistribute money from those wealthier than you in order to take care of the poor.”

Now let’s look at an alternative approach.

Except we won’t be sharing insights from Libertarian Jesus.

Instead, courtesy of Imgur, we have the story of Supply-Side Jesus.

And this Supply-Side Jesus is an advocate of trickle-down economics.

He creates lots of jobs.

And he believes in self-sufficiency.

He also opposes class warfare.

Supply-Side Jesus is a fan of the entrepreneur class.

And he understands self-promotion.

But not everyone is happy.

Supply-Side Jesus was in trouble.

But he avoided trouble, thanks to majoritarianism.

Supply-Side Jesus then decided to enter politics.

I don’t know who created this cartoon strip, but kudos for some clever humor (though I imagine practitioners of the “Prosperity Gospel” won’t be amused).

As a general rule, I find that leftists are too dour to create effective political humor (see the Black NRA, for instance). But when they come up with something clever (see here, here, and here), I’m more than willing to applaud.

Even when they mock libertarians!

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There’s general agreement among public finance experts that personal income taxes and corporate income taxes, on a per-dollar-collected basis, do the most economic damage.

And I suspect there’s a lot of agreement that this is because these levies often have high marginal tax rates and often are accompanied by a significant bias against income that is saved and invested.

Payroll tax and consumption taxes, by contrast, are thought to be less damaging because they generally don’t have “progressive rates” and they are “neutral,” meaning they rarely involve any double taxation of saving and investment.

But “less damaging” is not the same as “no damage.”

Such taxes still drive a wedge between pre-tax income and post-tax consumption, so they do result in less economic activity (what economists refer to as “deadweight loss“).

And the deadweight loss can be significant if the overall tax burden is sufficiently onerous (as is the case in many European nations).

Interestingly, the (normally pro-tax) International Monetary Fund just released a study on this topic. It looked at the impact of taxes on work in the new member states (NMS) of the European Union. Here’s a summary of what the authors wanted to investigate.

Given demographic and pension pressures facing many EU28 countries amidst low labor market participation rates together with still high tax wedges, the call to review public policies has gained renewed prominence in the EU political debate. …tax wedges remain high and participation rates, while having increased importantly in a few countries over 2000-17 , are still around or below 70 percent in many of them. This hints at the need for addressing structural problems to improve economic fortunes. In this paper we focus our attention on hours worked (per working age population). …At country level, hours worked reflect labor supply decisions and could be thought of a measure of labor utilization. Long-run changes in labor supply are driven by incentives, of which taxes are perceived to be central. Assessing the importance of taxation on hours is key to provide new insights for potential policy actions.

And here’s what they found.

We study the role of taxes in accounting for differences in hours worked across NMS over the 1995-17 period… We find that consumption and labor taxes significantly discourage labor supply and can explain close to 21 percent of the observed variation of hours across NMS. …Higher tax rates reduce households’ net labor income and real purchasing power, inducing them to substitute consumption for leisure, which cannot be taxed. …Our findings show that, conditional on other factors, taxes are an important determinant of hours. Point estimates suggest a high elasticity of hours to taxes (close to 0.5), which is robust to the inclusion of other factors.

What’s interesting about the new member states of Eastern Europe is that many of them have flat taxes and low corporate rates.

So the personal and corporate income taxes are not a major burden.

But they so have relatively high payroll taxes (a.k.a., social insurance taxes) and relatively onerous value-added taxes.

So it’s hardly a surprise that these levies are the ones most associated with deadweight loss.

We find that social security contributions deter hours the most, followed by consumption taxes and, to a lesser extent, personal income taxes. …Consumption and personal income taxes are found to affect hours per worker, but not employment rates. On the other hand, social security contributions are negatively associated with employment rates, but do not seem to affect hours per worker. …In line with the literature, we document that women’s employment rate is more sensitive to changes in tax policies. We find the elasticity of employment rate to social security contributions to be 7 percent larger for women vis-à-vis men.

Here’s one of the charts from the study.

And here’s an explanation of what it means.

Figure 4 shows the evolution of hours and effective taxes. Hours worked increased substantially for Group 1, while it remained stable in Group 2 (Panel (a)). In both groups, the effect of the GFC is noticeable as hours sharply declined after 2008. Panel (b) shows the evolution of the average effective tax rate in each group. Interestingly, countries in Group 1, which observed an increase in hours, had lower effective tax rates (below 40 percent) throughout the period. In addition, we observe a negative correlation between hours and taxes for most of the sample. For Group 1, the large increase in hours – between year 2000 and the GFC – happened at the same time taxes declined

Here’s another chart from the IMF report.

And here’s some of the explanatory text.

Figure 5 depicts the relationship between hours worked and taxes across countries. In Panel (a), we observe a negative correlation between hours and taxes in levels for each group, with the negative correlation being stronger in Group 2 than in Group 1 (it has a steeper slope). Panel (b) shows total log changes in hours and taxes throughout the period. It also displays a negative correlation.

Looking at the conclusion, a key takeaway from the study is that there is a substantial loss of economic activity because of theoretically benign (but in reality onerous) taxes on consumption and labor.

Our modelling exercise shows that taxes influence the long-run trend in hours and our econometric exercise shows that the findings are robust to the inclusion of other labor market determinants. Furthermore, we document an elasticity of hours to overall taxes close to 0.5. We find that differences in tax burden can explain up to 21 percent in the variation of hours worked across NMS. The main takeaway of this study is that excessive tax burden, either in the form of consumption or labor taxes, can lead to substantial deadweight losses in terms of labor supply. .. overall tax burden – and not only labor taxes – should be considered when thinking about incentives from tax schemes.

Yes, incentives do matter.

And it’s good that an IMF report is providing good evidence for lower tax rates.

But I’m not optimistic we’ll get pro-growth changes. There’s been a lack of good reform this decade from the new member states from Eastern Europe. Combined with demographic decline (and the associated pressure for higher tax rates), this does not bode well.

P.S. While the professional economists at the IMF often produce good research and sensible advice, the bureaucracy’s political leaders almost always ignore those findings and instead push for bad tax policy. Including in the new member states from Eastern Europe.

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I’m a big fan of the Laffer Curve, which is simply a graphical representation of the common-sense notion that punitively high tax rates can result in less revenue because of reductions in the economy-wide level of work, saving, investment, and entrepreneurship.

This insight of supply-side economics is so obviously true that even Paul Krugman has acknowledged its veracity.

What’s far more important, though, is that Ronald Reagan grasped the importance of Art’s message. And he dramatically reduced tax rates on productive behavior during his presidency.

And those lower tax rates, combined with similar reforms by Margaret Thatcher in the United Kingdom, triggered a global reduction in tax rates that has helped boost growth and reduce poverty all around the world.

In other words, Art Laffer was a consequential man.

So it was great news that President Trump yesterday awarded Art with the Presidential Medal of Freedom.

Let’s look at some commentary on this development, starting with a column in the Washington Examiner by Fred Barnes.

When President Trump announced he was awarding the Presidential Medal of Freedom to economist Arthur Laffer, there were groans of dismay in Washington… Their reaction was hardly a surprise. Laffer is everything they don’t like in an economist. He’s an evangelist for tax cuts. He believes slashing tax rates is the key to economic growth and prosperity. And more often than not, he’s been right about this. Laffer emerged as an influential figure in the 1970s as the champion of reducing income tax rates. He was a key player in the Reagan cuts of 1981 that touched off an economic boom lasting two decades. …Laffer, 78, is not a favorite of conventional, predominantly liberal economists. Tax cuts leave the job of economic growth to the private sector. Liberal economists prefer to give government that job. Tax cuts are not on their agenda. Tax hikes are. …His critics would never admit to Laffer envy. But they show it by paying attention to what he says and to whom he’s affiliated. They rush to criticize him at any opportunity. …Laffer was right…about tax cuts and prosperity.

And here are some excerpts from a Bloomberg column by Professor Karl Smith of the University of North Carolina.

Most important, he highlights how supply-side economics provided a misery-minimizing way of escaping the inflation of the 1970s.

President Donald Trump’s decision to award Arthur Laffer the Presidential Medal of Freedom has met with no shortage of criticism… Laffer was a policy entrepreneur, and his..boldness was crucial in the development of what came to be known as the “Supply Side Revolution,” which even today is grossly underappreciated. In the 1980s, the U.S. economy avoided the malaise that afflicted Japan and much of Western Europe. The primary reason was supply-side economics. …Reducing inflation with minimal damage to the economy was the central goal of supply-side economics. …most economists agreed that inflation could be brought down with a severe enough recession. …Conservative economists argued that the long-term gain was worth that level of pain. Liberal economists argued that inflation was better contained with price and income controls. Robert Mundell, a future Nobel Laureate, argued that there was third way. Restricting the money supply, he said, would cause demand in the economy to contract, but making large tax cuts would cause demand to expand. If done together, these two strategies would cancel each other out, leaving room for supply-side factors to do their work. …Laffer suggested that permanent reductions in taxes and regulations would increase long-term economic growth. A faster-growing economy would increase foreign demand for U.S. financial assets, further raising the value of the dollar and reducing the price of foreign imports. These effects would speed the fall in inflation by increasing the supply of goods for sale. In the early 1980s, the so-called Mundell-Laffer hypothesis was put to the test — and it was, by and large, successful.

I’ve already written about how taming inflation was one of Reagan’s great accomplishments, and this column adds some meat to the bones of my argument.

And it’s worth noting that left-leaning economists thought it couldn’t be done. Professor Bryan Caplan shared this quote from Paul Samuelson.

Today’s inflation is chronic.  Its roots are deep in the very nature of the welfare state.  [Establishment of price stability through monetary policy would require] abolishing the humane society [and would] reimpose inequality and suffering not tolerated under democracy.  A fascist political state would be required to impose such a regime and preserve it.  Short of a military junta that imprisons trade union activists and terrorizes intellectuals, this solution to inflation is unrealistic–and, to most of us, undesirable.

It’s laughable to read that today, but during the Keynesian era of the 1970s, this kind of nonsense was very common (in addition to the Samuelson’s equally foolish observations on the supposed strength of the Soviet economy).

The bottom line is that Art Laffer and supply-side economics deserve credit for insights on monetary policy in addition to tax policy.

But since Art is most famous for the Laffer Curve, let’s close with a few additional observations on that part of supply-side economics.

Many folks on the left today criticize Art for being too aggressive about the location of the revenue-maximizing point of the Laffer Curve. In other words, they disagree with him on whether certain tax cuts will raise revenue or lose revenue.

While I think there’s very strong evidence that lower tax rates can increase revenue, I also think it doesn’t happen very often.

But I also think that debate doesn’t matter. Simply stated, I don’t want politicians to have more revenue, which means that I don’t want to be at the revenue-maximizing point of the Laffer Curve.

Moreover, there’s a lot of economic damage that occurs as tax rates approach that point, which is why I often cite academic research confirming that one additional dollar of tax revenue is associated with several dollars (or more!) of lost economic output.

Call me crazy, but I’m not willing to destroy $5 or $10 of private-sector income in order to increase Washington’s income by $1.

The bottom line is that the key insight of the Laffer Curve is that there’s a cost to raising tax rates, regardless of whether a nation is on the left side of the curve or the right side of the curve.

P.S. While I’m a huge fan of Art Laffer, that doesn’t mean universal agreement. I think he’s wrong in his analysis of destination-based state sales taxes. And I think he has a blind spot about the danger of a value-added tax.

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