Captured by Supply Side Mythology

THE LAFFER CURVE WAS CREATED BY ART LAFFER IN 1973. IN A MEETING WITH JUDE WANINSKY, ROBERT MUNDELL AND BOB BARTLEY, HE STARTED TO DRAW SOMETHING ON THE NAPKING OF MICHELLE I A VERY WELL KNOWN RESTAURANT IN NEW YORK. THAT WAS THE BIRTH OF SUPPLY-SIDE ECONOMICS AND THE SEED THAT WOULD GIVE MUNDELL THE NOBEL PRICE.

This represents one of the biggest current problems with the Right... A conservative publication, which I will not name, just spiked a book review because I said that the Laffer Curve didn't apply at American levels of taxation, even while otherwise expressing my vast displeasure with the (liberal) economic notions of the book I was reviewing. This isn't me looking for an alternative explanation for the spiking of a bad review: the literary editor accepted it, edited it, and then three hours later told me it couldn't be published because it violated their editorial line on taxation. It's remarkable and embarrassing how captured the Republican Party has become by this dogma; it is sad, because this is so demonstrably false - and yet, large portions of the GOP base and the GOP establishment are utterly convinced of this. It's one thing to make arguments like that when top marginal tax rates were 70%, and rates were being cut significantly. But now, we're talking about a difference in a top marginal rate of 39.6% VS 35.6%. The inflection point on the Laffer Curve does not lie in that range; it is certainly not lower. The GOP has been captured by its mythology, and we are fighting a myth that, as Stephen Moore and Bruce Bartlett have pointed out, we never intended to create. Even the Reagan tax cuts were expected to return only about 1/3rd of their static scoring loss. Bruce Bartlett wrote... Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results. Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn't lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles. Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior. Ramesh Ponnuru reinforced this point yesterday... (emphasis added) I can't think of any serious economist who thinks that [Bush tax cuts raising revenue] happened. The 2003 Economic Report of the President said that "[a]lthough the economy grows in response to tax reductions... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity." Bush's own Treasury Department has disavowed the view that Bush's tax cuts have raised revenue. Rob Portman and Ed Lazear, while serving in the Bush administration (as head of the OMB and the Council of Economic Advisers, respectively), said that the tax cuts had reduced federal revenue. I'll give the last word to Alan Viard, an economist who worked at the White House before joining AEI. Last year, the Washington Post quoted him: "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that."