Lie Side Economics

Steve Novick

So last week a Christopher Lucia of Vancouver had a letter to the Oregonian defending the Bush tax cuts, and including this statement: "tax cuts have actually resulted in significantly higher government tax revenues."

Now, first of all, Mr. Lucia's statement is a clear and demonstrable lie.  As the Tax Policy Center sets out in this chart (see link), personal income tax revenues (which were the focus of the Bush tax cuts) exceeded one trillion dollars in 2000 and have been dramatically lower since the Bush tax cuts  of 2001 and 2003 -- only $808 billion in 2004. By contrast, personal income tax collections rose every year of the Clinton Administration.  In fact, they normally rise every year, as the population goes up, the economy expands, etc.  Under the tax-cutting Reagan, they were essentially flat for three years.  Under Bush, they have collapsed:

http://www.taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=203

I think it's important for progressives to know that the so-called "supply side" lie is an easily refutable lie; in the words of Casey Stengel, "you can look it up."  But it's also important for us to understand why the THEORY doesn't make sense.  The 'supply-siders' argue that cutting taxes gives people more of an incentive to work hard and be productive.  That spurs the economy to new heights, resulting in higher tax revenues.

What's wrong with that theory?  Well, first of all, most of us have no choice but to work, full-time; we have jobs, with fixed hours, and our bosses aren't going to take kindly to it if we say "sorry, Mr. Dithers, I'm knocking off early today; my marginal income tax rate is just too high to bother staying later than 3:30." 

Rich people do have the option of working less.  But most of them aren't going to take that option; their ego is bound up in their jobs. Michael Eisner doesn't have to stay at Disney, but he dos; that's part of who he is. Now, not everybody is Michael Eisner; maybe some rich people will indeed respomd to a tax increase by saying: "The hell with it, I'm not going to work more than I have to when so much is going to the government."  But logically, at least an equal number will come to exactly the opposite conclusion: They have a certain lifestyle to maintain, which requires a certain amount of post-tax income; in order to maintain that income after a tax hike, they'll have to work MORE. 

Think about it. Your name is Mr. Rich, you make $500,000 a year, two kids in the Ivies and a house in the Hamptons.  Your taxes go up by $50,000 a year.  Do you respond by quitting your job, selling the house, and telling Calvin and Gloria that it's City College from here on?  Or do you buckle down and work harder, to jack up your pre-tax income to $600,000, so you can keep making payments on the house and keep the kids at Harvard and Brown?

The "supply-side" argument is even sillier when it comes to capital gains taxes.  "We need to cut the tax on capital gains from 28% to 15% to give people an incentive to invest."  What exactly do we think rich people wll do with their money if they have to pay capital gains taxes?  Not invest it at all?  And do what -- Put it in their mattresses?  Unless rich people are a lot dumber than I think, given a choice between keeping 72% of a return on an investment, and 100% of nothing, they're going to choose the 72%.   

Obviously, if the tax rate were 100%, there'd be no reason to invest, or to work.  I'll give the supply-siders that much. But at any level under 100% -- even the 91% top marginal rate that prevailed during the reign of that well-known socialist Dwight Eisenhower -- making money is still preferable to not making money. 

Paul Krugman, a very smart economist, has pointed out over and over that no respectable economists ever endorsed the "supply-side" theory.  But you don't need to be a Ph.D to see that the theory is idiotic.  Economics is about human behavior.  And there is no plausible theory of human behavior that would make the supply-siders right. 

 

 

By Steve Novick Oct. 03, 2005