What "Supply Side Economics" Means

Bruce Bartlett, a former Reagan official and author of the book Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, recently took issue in a New York Times op ed piece with the idea that supply-side economics justifies any form of tax cut.

According to Bartlett:

[S]upply-side economics [means] cutting marginal tax rates — the tax on each additional dollar earned . . . The original supply-siders suggested that some tax cuts, under very special circumstances, might actually raise federal revenues. . .But today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue. Last year, President Bush said, “You cut taxes and the tax revenues increase.” . .

It’s important to remember that at the time supply-side economics came into being, Keynesian economics dominated macroeconomic thinking and economic policy in Washington. Among the beliefs held by the Keynesians of that era were these: budget deficits stimulate economic growth[. That] led to many bad economic policies. In particular. . . stagflation, that awful combination of high inflation and slow growth that bedeviled policy makers in the 1970s.

. . . supply-siders developed a new program based on tight money to stop inflation and cuts in marginal tax rates to stimulate growth. . . Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964. . . We believed that our tax plan would stimulate the economy to such a degree that the federal government would not lose $1 of revenue for every $1 of tax cut. . .

Moreover, we were adamant that only permanent cuts in marginal tax rates would stimulate the economy. We thought that temporary tax cuts, tax rebates, tax credits and such were economically worthless, and we strongly opposed them. . . . [S]upply-side economics has done its job. . . and it is time for supply-side rhetoric to go, with its . . . perversions discarded for good.

Where Bartlett’s analysis fails is in his ignorance of the evidence from several states over several years in the 1990s that tax cuts inevitably increase revenue beyond “green eyeshade” projections and that the opposite—tax increases—inevitably collect less revenue than projected. Bush, as an ex-governor, was aware of these state-modeled successes when he pushed for the federal tax cuts in 2001-04 that led to the revenue surges we enjoy today.