Why Supply Side Economics Is Evil: Bonddad

Nov 27, 2006

By Bonddad
bonddad@prodigy.net


Republicans are incredibly adept at selling a particular message – regardless of whether or not there is a valid theory behind the message. No other Republican statement qualifies better than “tax cuts pay for themselves.” It is an insidious phrase for two reasons. First – it doesn’t work. Secondly, it’s an easy sell that plays to the worst side of human nature – the desire to have something for nothing.

Here is a history of tax revenue from individual taxpayers for Reagan, Clinton and Bush 43. All information comes from the Bureau of Economic Analysis.

Tax revenues from individual taxpayers were $290 billion in 1981 and $451 billion in 1989 for an increase of 55%. Over the same period, the GDP price deflator increased from 59.128 to 78.569, or an increase of 32.87%. This makes the inflation-adjusted increase in tax revenues from individuals for Reagan's presidency 22.13%.

Tax revenues from individual taxpayers were $505 billion in 1993 and $994 billion in 2001 for an increase of 96%%. Over the same period, the GDP price deflator increased from 88.39 to 102.42 or an increase of 15%. This makes the inflation-adjusted increase in tax revenues from individuals for Clinton's presidency 81%.

Tax revenues from individual taxpayers were $994 billion in 2001 and $1.086 trillion in the third quarter of 2006 for an increase of 9.25%. Over the same period, the GDP price deflator increased from 102.42 to 116.431 or an increase of 13.67%. This makes the inflation-adjusted increase in tax revenues from individuals for Bush a decrease of 4.42%.

So one President who used supply side economics saw an increase of 22.13% in individual tax revenue. However, Reagan raised taxes six times during his presidency, making him somewhat less of true supply-side proponent. Bush has remained steadfast in his "tax revenues pay for themselves" beliefs, with the result being an inflation-adjusted decrease in individual tax revenues for the duration of his presidency.

Neither Reagan nor Bush 43 has done anything to lower spending. Reagan increased discretionary spending from $307.9 billion to $488.8 billion, an inflation adjusted increase of 25.88%. Bush increased discretionary spending from $649 billion to $967 billion, for an inflation-adjusted increase of 35%.

Because the Republicans have failed to acknowledge the obvious – that their tax cuts haven’t paid for themselves and they haven’t lowered spending in any meaningful way – we have seen an explosion of US government debt under Reagan and Bush 43.

The above chart illustrates the underlying insidiousness of supply-side policies. Milton Friedman once said that a tax cut without a proportionate cut in spending is not a tax cut. The above chart illustrates why. If the government does not cut spending it has to increase debt to pay for the tax cuts. Eventually the government must pay-off the debt and to do so they must raise taxes. Or, the government can continually refinance the debt, increase the interest rate expense in the budget which will have the same effect. Either way, the problem is clear: at some future point, the government will have to increase taxes to pay for the original tax cuts.

The Republicans have continually implemented the easy half of conservative economic thinking – cutting taxes. However, no Republican has demonstrated anything like a clear desire to cut spending. As a result, the US national debt has continually increased when supply-side economic policies are implemented.

Despite the fact that no Republican has lowered spending to match the tax cuts that haven’t paid for themselves, Republicans continually argue tax cuts pay for themselves. Why?
Because supply-side economics plays to the worst part of human nature -- that you an get something for nothing. Think about it -- you can cut taxes, not cut spending and still get everything you want. There is no sacrifice involved; no tough choices. Instead, the Republicans offer easy answers to very complicated policy questions. And the public buys it because they want to. Hell -- who wouldn't want what the Republicans are offering? I know I do. Making matters worse is the fact that government debt issues are not exactly a high priority in the news cycle. For example, the US Treasury has issued over $550 billion dollars in net new debt per year for the last four years, yet the news is full of stories stating the deficit is decreasing. The news stories make no mention of the budget gimmicks used to get that number. Instead, they report the official White House number and the public is none the wiser.

Most importantly, the Republicans continued use of this mantra prevents a serious policy debate regarding taxes from actually occurring. They will always fall back on this mantra in any tax debate. And their message will be heard because people want to hear that message.
Until Democrats find a way to effectively counter this message – or until human nature changes – we can expect to hear this message from the Republicans.