Truth Detector

The Supply-Side Solution
If tax-cut strategies don't work, why are they so popular abroad?

BY STEPHEN MOORE
Friday, November 9, 2007 12:01 a.m. EST

I recently spoke with Mart Laar, the former prime minister of Estonia and the godfather of that nation's flat tax. The major opposition to his tax reform, he explained, was not the citizenry; rather it came from the economists and the other Wise Men of government.

"I was told, 'We cannot do a flat tax. It is untested. It will not work. It will cause budget deficits," Mr. Laar recalls. However, he believed it would work because of what he'd read about it in Milton Friedman's classic, "Free to Choose." And so, in 1994, Mr. Laar ignored the economic pundits and snapped into place a 23% flat tax. Estonia has since experienced one of the most rapid growth spurts of any nation in the world.

There's a lesson here for our country: Revolutionary ideas in economics, especially if they don't leverage the power of the state, are often resisted by the intellectual elite. Ronald Reagan discovered this in 1980 when he was ridiculed by the establishment for proposing cuts in marginal tax rates as a cure for the high inflation and economic malaise of the 1970s.

Gardner Ackley, a former chairman of the Council of Economic Advisers, famously told Congress that it would be "a miracle" if the tax cuts worked to reduce inflation and increased growth. But reduced inflation (with an assist from Fed Chairman Paul Volcker) and increased growth is what happened in the 1980s.

Here we are 27 years later--with 40 million more jobs and a nearly $50 trillion higher net worth--yet the left intelligentsia is still obsessed with discrediting supply-side economics. In recent weeks, the New York Times, the New Yorker, the New Republic and many other liberal publications have devoted great space and attention to attacking the entire theory that lower tax rates can increase incentives for investment, saving and work.

The original champions of these ideas, men such as Arthur Laffer and George Gilder, are not just misguided, they are, according to the New Republic, "deranged," "crackpots," and even "possibly insane." James Surowiecki complains in the New Yorker that supply-side tax prescriptions for the economy are the equivalent of "saying that the best way to treat sick people is to bleed them to let out the evil spirits."

The rest of the story:
OpinionJournal - Extra

Kandahar

For the same reason that they're popular here: People don't like paying them (despite liking all of the associated spending). That doesn't say ANYTHING as to whether or not "tax cut strategies work." Assessing the effectiveness of a policy based on its popularity is idiotic.

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The only solutions ever offered by Democrats and leftists is how to find more creative ways to extract the hard earned money from their citizens for political gain.

Even when faced with the FACT that after the Bush tax cuts, the revenue coming into the Fed has exceeded all projections. This primarily is due to the increased economic activity we have seen.

I cannot state without conviction that the resulting economic activity was partially a result of the tax changes implemented by the Republican lad congress, but I would say that anytime you put MORE money into the hands of the citizens and investors, it will lead to growth which creates more wealth, lower unemployment and results in more tax revenue.

It's time for the Democrats and the Leftists to realize that no society ever TAXED it's way into prosperity and that taxing investment income is anathema to a growing economy.

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"I was told, 'We cannot do a flat tax. It is untested. It will not work. It will cause budget deficits," Mr. Laar recalls. However, he believed it would work because of what he'd read about it in Milton Friedman's classic, "Free to Choose." And so, in 1994, Mr. Laar ignored the economic pundits and snapped into place a 23% flat tax. Estonia has since experienced one of the most rapid growth spurts of any nation in the world.

Kandahar

As opposed to Republicans, who just want to put our bills on the nation's credit card.

Since when is raising taxes politically popular? Whether you agree with Democrats or not, they're courageous for occasionally (although not often enough) standing up for their beliefs regarding taxation even though it might cost them votes.

I don't know what planet you're living on, but did you forget that we've had a huge deficit for the past seven years? And that we had a surplus prior to that?

The economy grew at a faster rate with the Clinton tax rates than it did with the Bush tax rates.

Well "taxing our way into prosperity" isn't the goal of higher taxes, so your straw man is irrelevant. The purpose of higher taxes is to generate revenue to pay for our government, instead of running up a big budget deficit which causes inflation (among other economic problems).

SouthernDemocrat

This is an apples to oranges comparison. Tax cuts work in terms of economic stimulus when taxes are high enough to present a drag upon personal production.

So, say your France, and your effective tax rates are three times what ours are, then a tax cut will have a positive effect on your economic growth because your taxes were so high that they were inefficient from an economics perspective and were a drag upon personal productivity.

This is economics 101 here. As to Estonia, what works in Estonia, and its per-capita GDP of less than 10k, might not work in the U.S. with our per-capita GDP of over 40k.

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Iriemon

Yep. Democrats actually think we should pay for what *our* government spends, instead of borrowing and fobbing off the costs of our government to future taxpayers.

What a bunch of losers.

Flat out false. Maybe the revenues in 2006 were a bit more than projected in 2005; but the revenues after the tax cuts are nowhere near what they were projected in 2000 before the tax cuts.

Flat out false, well, at least misleading. Economic activity has increased but at a much slower rate than average. Real economic growth has been subpar since the tax cuts, below average for the last 6 years and the last 6 quarters.

Average annual real growth in the 50s = 4.15%.
Average annual real growth in the 60s = 4.44%.
Average annual real growth in the 70s = 3.26%.
Average annual real growth in the 80s = 3.07%
Average annual real growth in the 90s = 3.11%
Average annual real growth in the 00s (thru 2006) = 2.71%
Average annual real growth during Reagan: 3.42%
Average annual real growth during Reagan & Bush1: 3.0%
Average annual real growth during Clinton: 3.71%
Average annual real growth during Bush2 (thru FY2006): 2.55%
Average annual real growth 2006q2 to 2007q3: 2.29% (annualized)

Data derived from BEA.gov.

But when you do it by borrowing trillions of dollars, and taking the money you are borrowing and waste it on things like unnecessary wars, any such advantage is offset by the growing costs of debt.

The truth is, the US in the 50s 60s and 70s had top marginal rates up of 70 to 91%, and somehow we muddled through.

It's time for the Republicans and right wingers to realize that no society ever BORROWED its way into prosperty, and that borrowing is anathema to a growing economy.

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SouthernDemocrat

I wonder what Estonia's Defense Budget is?

mpg

The current tax rates are just about right, but we need to revamp the system to increase energy taxes but offset the increase by some kind of tax cut(s). If we want to be more fiscally responsible, we have to cut spending.

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Iriemon

How anyone could say taxes have been "just about right" knowing the Govt has borrowed $3 1/2 trillion dollars over the past 6 years is beyond me.

The pass the buck generation.