Steve Forbes spouts supply side nonsense

The politically convenient but intellectually unsupportable claim that tax cuts increase revenue will not go away. Today, Steve Forbes follows President Bush's example in the Wall Street Journal (subscription required):

How would a flat tax do this? What so many "experts" can't grasp is that taxes are not only a means of raising revenue for governments but also a price and a burden. The tax you pay on income is the price you pay for working; the tax on profits is the price you pay for being successful, and the levy on capital gains is the price you pay for taking risks that work out. When you lower the price of good things, such as productive work, success and risktaking, you get more of them. The flat tax does that dramatically.

Experience demonstrates time and time again -- the Harding-Coolidge tax cuts of the 1920s, the Kennedy cuts of the '60s, the Reagan cuts of the '80s and the Bush reductions of 2003 -- that lower tax rates lead to more economic activity, which leads to more government revenue.

(If you're interested, Michael Kinsley annihilates takes some satisfying potshots at Forbes' plan in the Washington Post.)

Comments

[Michael Koplow]

When Brendan Nyhan says that a column "annihilates" a plan, I expect to see the sort of rigorous analysis that Spinsanity did so well (BN and his former colleagues set a very high bar for themselves, and in general I think BN acquits himself well).

Kinsley points out that Forbes's plan benefits the rich, keeps Social Security regressive, and isn't likely to do what it's supposed to. Fine, but hardly an annihilation.

Beyond that, the article is ad hominem stuff about Forbes's looks and wealth, but mostly it's a few laughs about the GOP's trotting out of new fads--sorry, I meant ideas--and then disappearing them when they don't get much traction (term limits, flag burning amendment, etc.). This last is good fun for those of us, like me, who agree with Kinsley, but it really isn't argument.

[Scott Ferguson]

Intellectually unsupportable? Arthur Laffer doesn't qualify as an intellectual then, huh. How about empirically unsupportable? That doesn't work, either. :)

The best thing about a flat tax is that it removes the ability of politicians to use class warfare politics to hide aggregate tax increases.

"Look, we raised your taxes a little, but we raised the taxes of those rich people a whole bunch!" usually translates into "Those rich people as a class are sheltering more of their income, but people like you are kicking in a whole lot more!" It's slimy politics. Make it one rate.

[rone]

A person making $10k a year will miss $2000 a lot more than someone making $100k a year will miss $20000. A flat rate doesn't help the poor. To say that a flat tax will make class warfare a thing of the past is, at the least, a gross overstatement.

[Brendan Nyhan]

Michael is right; amended "annihilates" above. As for Laffer being an intellectual - I am indeed saying he's not, at least not as far as the so-called "Laffer curve" is concerned, which almost no respectable economists take seriously.

[Scott Ferguson]

"As for Laffer being an intellectual - I am indeed saying he's not, at least not as far as the so-called "Laffer curve" is concerned, which almost no respectable economists take seriously."

The Laffer Curve was a popularization (primarily by Jude Wanniski) of the notion that somewhere between 100% taxation and 0% taxation, there is an optimal point at which maximum revenue is generated; and tax rates higher than that the apex of the curve generate less revenue. It takes into account that as the opportunity cost of the next dollar increases (what you earn vs. what you keep after taxes), fewer people will put in the effort to earn that next dollar.

And you're saying that no "respectable" economist takes that notion seriously? Milton Friedman takes that seriously, so I guess he isn't "respectaable" or "intellectual," then. One wonders how such unrespectable non-intellectuals got their professorships.

[Brendan Nyhan]

Here's Jude Wanninski saying that Friedman disavows the Laffer curve:

Please note that Friedman still rejects the Laffer Curve on tax policy, repeating the assertion he has been making for decades that taxes should be cut in order to starve the government of spending. There is no growth dynamic in his fiscal world.

And as far as the idea behind the Laffer curve -- that a tax cut can raise revenue -- here's Bruce Bartlett, a conservative:

Yet even in the first edition of his textbook, Mankiw acknowledged that the Laffer Curve is correct in theory — it simply shows that at a 100% tax rate or a 0% tax rate no revenue is collected. Every economist knows that this is true. But of course, we are nowhere near a 100% tax rate — nor were we in 1981 — such that one could expect an across-the-board reduction in tax rates actually to raise revenue. Ronald Reagan never said so, nor did any other responsible economist.

[Scott Ferguson]

Hey, my bad. I see Laffer and Milton Friedman mentioned in the same breath so often that it's an easy assumption to make.

As for Bartlett: Like Wanniski (and unlike Laffer), he's more of a wonk/hack than an academic. And more than anyone, Wanniski, by pimping Laffer, ended up trashing his reputation by promoting his own ideas under Laffer's name. Now the yammering classes embrace the canard that Laffer isn't "intellectual" and that the Laffer Curve (Wannniski's invention, really) is "discredited". Many working economists think differently.

[Bryan]

Ok, Kinsley confuses me:

"Of course this family would still pay the FICA Social Security tax. FICA, which starts at dollar one, is already a bigger burden than the income tax for most people. But it tops out at incomes of $90,000 and doesn't apply to investment income at all. But that's just fairness talking."

I'm confused. From my understanding, per Democrats, Social Security is in good shape, and FICA is not a "tax" so much as an investment in future retirement income.

In other words, if I pay a 12.4% income tax, that money does not directly benefit me. If I pay a 12.4% FICA tax, I will get a future benefit based (largely) on how much I pay.

Thus FICA is not a regressive "tax" but rather forced retirement savings for everyone.

Did I miss something?