supply-side still going strong

Josh Barro's March 17 column for the Upshot highlights the role that the tenets of supply-side economics still play in today's political discourse. At issue is a seemingly arcane point of federal budget accounting known as "dynamic scoring." Recently adopted by the Republican-controlled House, this method requires the Congressional Budget Office to include the likely effects of considered policies on the economy itself when tabulating the budget ramifications of revenue and spending initiatives. Using the favored conservative scenario as an example, if a tax cut were to stimulate employment and economic growth, then the greater number of people working and the larger amount of total nationwide income would would actually increase government income. The old system of "static scoring" required researchers to assume that these policies had no effect at all; as such it often led to the somewhat commonsensical conclusion that tax cuts will increase deficits.

As Barro points out, dynamic scoring is not inherently inaccurate. "Tax policy really does affect the economy," he writes, "and the right tax policies can produce economic growth that increases the amount of taxable income." It is unreasonable to assume that taxes will not have any impact on the economy, so static scoring is wrong almost by definition. But since we cannot know the future, the real question is not whether it is wrong, but whether it is more wrong than a score based on any specific set of assumptions.

The trouble comes from the fact that there is no neutral way to determine the effect of any given tax change. Thus the various assumptions included in a given policy will necessarily betray some ideological commitment. As Barro puts it, "you can get essentially any answer you want out of a dynamic tax model by changing the assumptions about economic behavior that you plug into it. If you turn the dials far enough, you’ll get a report that shows a tax cut will pay for itself, even if it won’t." 

And the assumptions to which conservatives consistently turn are those of supply-side economics. This approach holds that high taxes impede the ability of "job creators" to expand economic production and so the solution to many economic problems is to lower marginal tax rates on corporations and the wealthy. (I discuss the origins of supply-side economics more fully in chapter six of A Commercial Republic.) Yet the cuts that it mandates run afoul of another conservative bogeyman, the balanced budget. Thus one of the centerpieces of supply-side is the famous graph developed by conservative economist Arthur Laffer in the 1970s. The Laffer curve pointed out that all levels of government revenue correspond to two different tax rates: one in which a small amount of economic activity is taxed heavily and another in which a much larger amount is taxed at a lower rate. In certain circumstances, then, lowering taxes could actually increase revenue. Thus tax cuts not only produce employment and production increases, but also helped to balance the budget. Laffer's observation was really just a thought experiment rather than an empirical observation--the curve didn't have any actual numbers on it. But Republicans have consistently argued at every moment since that the country is currently on the part of the curve in which tax cuts are well-advised. 

Sure enough, these are the assumptions that are baked in to the Republican tax cut proposal du jour, the recent plan from Senators Marco Rubio (R-FL) and Mike Lee (R-UT). Their plan would eliminate entirely the capital gains and estate taxes, and offer the majority of its tax relief to the wealthy. While Rubio has disavowed any claim that the tax cuts will pay for themselves, Barro notes that the conservative Tax Foundation has released a report saying that they will do just that. These presumptions reflect supply-side ideology, however, more than dispassionate analysis. Barro approached ten public finance professors to ask them about the assumptions of the Tax Foundation's model, and every one said that they were too aggressive.

For contemporary conservatives cutting taxes is always the solution, no matter what the problem. When coupled with unrealistic projections as to the positive effects of such cuts, dynamic scoring only makes it easier to disguise an ideological preference as an empirical analysis.