From the Archives:
Supply-Side seems to be experiencing a revival with the recent tax cut rush, primarily for the extremely wealthy.
I started writing here 10 years ago. George Bush was still President, Senator Obama was campaigning for the job, and America was suffering from a Republican recession that looked like an approaching depression. I wrote about the prevailing conservative economic theology:
You could take what most of us know about economic theory, put it into a mosquito, and still have room for a Republican’s heart. Pay attention anyway, because America’s economy has been dramatically damaged by an obscure professor and an elegant idea.
What may turn out to be the fatal blow to everyone’s wallet came at a dinner in November 1974 when Arthur Laffer sketched a curve on a napkin for a few key Republicans. The idea was very simple.
Imagine a widget company paying sales staff on a commission basis. If the sales people are paid 100% of what they sell, what will the company make in profits? Zero, of course, since every sale makes nothing for the company.
Now, then, if the sales people are paid 0% for what they sell, what will the company make in profits? Zero, again. Since sales make nothing for sales people, they won’t sell anything. The company makes 100% of nothing.
So the greatest possible profit for the company will result from a commission rate that is somewhere between zero and 100%. Anything above that whatever-rate or below will reduce profits.
Same with taxes, said Laffer. We tax rich folks too much. If we cut taxes on the wealthy, they will be inspired to earn more and so pay more in taxes. Cut rates and raise more revenue: the ultimate public free lunch.
Republicans won in 1980, and President Ronald Reagan slashed tax rates on the wealthy and corporations. So tax revenues zoomed, right? Not so much, no. Tax revenues went up eventually, when payroll rates on working folk shot up in 1983 and again when corporate taxes went back up in 1986.
Later, the budget was actually balanced for the first time since 1969 when President Clinton…wait for it…raised taxes on the very wealthy. Now, many Bush-tax-cuts-for-the-wealthy later, the budget is way in the red, bills are due, other countries are crowding us, jobs are cut, and good people suffer.
In 2004 someone ran a reality check on tax rates in industrialized countries against the Laffer Curve, and found the mad stagger of a wandering drunk.
This compares the Laffer theory with the Laffer reality. I took it from Wikipedia.org
So, in the end, conservative Supply Side has turned out to be just a huge, steep Laffer cliff over which America is being pushed.