Wall Street Journal recycles supply side nonsense

Those wacky editors at the Wall Street Journal are still peddling the supply-side nostrums that every respectable economist disavows. In an editorial today, they trumpet the recent decline in the federal budget deficit as vindicating President Bush's tax cuts:

Not even the most unbridled supply-sider predicted that President Bush's investment tax cuts would unleash such a spurt of tax receipts this year. But thanks to sustained economic growth, more Americans working and improved business profits, individual income tax receipts have shot up by 17.6%. Even more astonishing is the nearly 41% spike in corporate revenues. There's a fiscal lesson here that bears repeating: The best way to grow tax revenues is to grow the tax base, and that is what has happened this year.

This is wildly dishonest -- tax revenues haven't grown! As the Center on Budget and Policy Priorities points out, they're down significantly from projections:

The recent increase in revenues follows three consecutive years (2001-2003) in which revenues declined in nominal terms, an extremely rare occurrence, and a year (2004) in which revenues were lower as a share of the economy than in any year since 1959. Even with the recent increase, revenues in 2005 will remain well below the levels at which they were projected to be when the 2001 tax cut was enacted.

Nor has economic growth been especially strong. But the Journal is still drinking the Kool-aid, so all of these points are omitted. Instead, here's how the editors conclude the column:

All of this is to say that Washington doesn't have a budget deficit problem, it has a spending problem. Thank goodness for Mr. Bush's tax cuts or things would be much worse.

The implication, of course, is that the budget deficit would be worse without Bush's tax cuts, which means that the tax cuts have increased revenue (the idea behind the so-called Laffer Curve). This claim has been made frequently by President Bush and other administration officials, and it is so outrageous that even the President's economic advisers have cast doubt on it on two separate occasions. The reality, according to CBPP, is that revenues are lower than CBO projected in January 2002 after taking the tax cut into account.

Why the readers of the Journal continue to pay for this nonsense is beyond me.

Correction 7/13: Jon Henke's comment below made me realize that I had misread CBPP and made a claim about projections from before the tax cut that wasn't included in their article. This error has been fixed above - apologies. The salient point is that revenues are below CBO's projections made in 2002, which came after the bubble bursting, Sept. 11 and major CBO technical adjustments that substantially decreased projected revenues.

Update 7/15: The Journal has published another editorial on the subject, which also suggests that tax cuts increase revenue (though less blatantly).

Comments

[Jon Henke]

Even with the recent increase, revenues in 2005 will remain well below the levels at which they were projected to be when the 2001 tax cut was enacted.

I'm no supply-sider, Brendan, but this is serious hardly evidence. If revenues are "below the levels at which they were projected to be when the 2001 tax cut was enacted", that might be a result of tax cuts draining potential revenues, or it might be a result of the myriad other assumptions that went into the 2001 and 2002 assumptions. The CBO made massive corrections to those early assumptions, and the majority of them were technical changes and changes in basic economic assumptions.

Simply pointing to higher revenues is pretty weak, because it ignores the opportunity cost of tax cuts. But simply pointing to higher '01-'02 projections is every bit as dishonest, as those projections also don't account for the opportunity costs that did obtain in the real world.

[John K]

Wasn't there an ASU (former Chicago University) professor who received the Nobel Prize last year in economics for basically stating the obvious that lower taxes = higher economic growth?

Isn't that supply-side? Or is supply-side economics just cutting taxes for the very wealthy so that the progressive structure disapears? If you have some information to point me to on this matter I would appreciate it.

["Mindles H. Dreck"]

"peddling the supply-side nostrums that every respectable economist disavows"

I think this may be overly broad, or at least points to problems with the definition of 'supply-side'. much like criticism of the Laffer curve. There's a difference between believing that lower marginal tax rates will spur prodctivity and growth on the margin, and believing that they will do so immediately regardless of circumstance (and that any uptick is clearly the result of tax cuts, as opposed to merely coming out of a slowdown...). Similarly, the idea that there is a revenue-optimal point of taxation under simplified assumptions (Laffer Curve) is much more widely accepted than the suggestion that lower taxes always pay for themselves.

The author of so many excellent Spinsanity columns should see through efforts to trash legitimate and supportable economic theory by misrepresenting the entire school with the arguments of its extremists.

Wikipedia has a decent entry on Supply-Siders, and draws the distinction between arguments for long-term growth and short-term miracles.

On a lighter note, can you point to an administration's lowball conservative projections of economic growth? Perhaps around the bubble, but even then remember, it was surpluses 'as far as the eye can see'. Except that it can't see very far.

Regards,
'MHD'

[Brendan Nyhan]

The nostrum that I talk about is that tax cuts pay for themselves, which is the core idea of supply side economics (ie tax cuts will increase revenues by moving toward the optimum point on the Laffer Curve). And it is true that that idea has been discredited - as the linked articles document, even Bush's economists dispute that claim.

[Mark]

If lower taxes really increases revenue -- then cut FICA - the one area where it really might do that. Cutting FICA payroll taxes by 10%, would immediately give workers -- and more importantly business -- more cash. More cash to invest, spend, and hire more workers, and be less of a disadvantage to foreign competition.

FICA taxes are the highest taxes on many workers -- especially when both halves are considered. My FICA tax bill was almost always higher than my income tax, for example.

I dont doubt that cutting income tax helped those who paid the most income taxes. I dont doubt that that heated up the economy. But we had to borrow to let that happen -- endless borrowing, and overspending, of course heats up the economy.

Thats one of the real reasons our economy has been heated up since 2000 -- overspending and lower taxes. And thats fine if it didnt include borrowing -- but it did include borrowing. Massive borrowing.

Cut FICA payroll tax 10% on workers and 10% on business. That will give immediate and very real benefits to business large and small. And help workers -- but the biggest benefit would be to business.

The myth is that cutting cap gains helps business -- it might help them. But I make capital gains on Chinese stocks, and Canadian stocks. Explain to me how my cap gains from those investments help business here.

But American Businesses pay 378 billions dollars a year in FICA, employees pay 450 billion. There is so much FICA coming in that there is a "surplus" on paper. FICA is really an income tax on workers and business in disguise.

Cut FICA -- put more money in the economy. IF cutting income tax primarily on the wealthy is great for economy -- cutting FICA tax, which is primarily on American business, would help American business.