Burying Supply-Side Once and for All by Neera Tanden

Neera Tanden has an interesting article in Democracy Journal on supply side economics.

Supply-side economics assumes that lower tax rates boost economic growth by giving people incentives to work, save, and invest more. A critical tenet of this theory is that giving tax cuts to high-income people produces greater economic benefits than giving tax cuts to lower-income folks. Essentially, the more money the rich are able to keep, the more the whole economy will grow.

But the evidence reveals two fundamental problems with this story. First, its primary prediction is wrong—giving tax cuts to the rich does not increase economic output or create new jobs. Instead, tax cuts for middle- and low-income taxpayers are much more effective at boosting macroeconomic activity. Second, supply-side theory misunderstands the actual mechanism by which tax rates influence macroeconomic activity. While supply-siders maintain that lower rates at the top incentivize people to earn more money, the evidence shows that tax cuts boost output mostly by putting money in people’s pockets and thereby stimulating demand.

These empirical findings carry an important lesson for our tax policy: Rather than increasing inequality by throwing away revenue on tax cuts for the rich, we should ensure that middle- and lower-income Americans have enough after-tax income to maintain strong consumption levels, especially during economic downturns.

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About ozidar

Graduate student at UC Berkeley, studying public finance & labor economics. https://sites.google.com/site/omzidar/
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4 Responses to Burying Supply-Side Once and for All by Neera Tanden

  1. Supply-side economics has lowered the natural interest rate for consumers, while raising the natural interest rate for capital owners. Capital now enjoys very cheap money and has excess liquidity to play with. However, the natural rate of interest for labor is so low in comparison that consumer demand is weak. Thus, low inflation and low liquidity for labor.
    The trend has now pushed labor’s natural rate of interest from over 6% to less than 1% now. Deflation is just a push or two more away.
    Here is an article showing the change to the different natural interest rates for labor and capital since 1967.

    http://effectivedemand.typepad.com/ed/2013/06/exchange-rate-between-capital-labor-a-wild-idea.html

  2. JemWallis says:

    But… But….won’t cutting direct taxes on the working families merely increase the number of moochers? That will never do!

  3. Brian Mc says:

    Let’s put the marginal rate on incomes over $250k at 90% and give the budget surplusses you would imagine to lower income folks, and see how that works.

    You know, you don’t even set up the damn straw man correctly here. The primary tenet of supply-side economics is that economic growth is driven by risk-taking. Therefor, the key policy variable to increase the growth rate is to increase rewards to entrepreneurial risk-taking, and reduce the potential risks (via currency stability, for instance).

    jeez.

  4. carlyle says:

    We could start a push up rather than a trickle down economy. The first step would be a large increase in the minimum wage to increase income and demand. We are way behind the rest of the developed world. Our minimum wage is just twenty eight percent of our median wage. The rest of the wealthy nations of Europe plus Canada and Australia minimum wages average forty five to forty eight percent of their national median wage. I guess we have less respect for working people than the rest of the world or perhaps our country is being managed by the one percent.

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