Monthly Archives: November 2008

Supply Side Economics Defended

Ronald Reagan was recently disparaged for “trickle down economics” in correspondence with one of my elite squad of readers, and I would like to defend the Gipper and his faith in Supply Side Economics.

To detractors the centerpiece of supply side economics, namely tax cuts, are merely a sop to the rich. However, this understanding strikes me as less rational, and more borne of envy.I would argue that I have no real claim on another man’s income beyond the sort of basic government services we all consume. Even so, there is the reality that most people who reflexively dump on Reaganomics have no clue what a Laffer curve is, much less the logic behind it.

Let me begin by asking how long you would work if you knew that 100% of your income would be taxed? If you answered zero hours, welcome new member of the of supply side economics fan club. Economist Arthur Laffer reasoned that there is a point where taxation tells a worker or an entrepreneur to not bother working. I remember when a guy would lose more in taxes than he’d gain in a raise. People who would be otherwise enterprising decide, Laffer reasoned, to forego doing extra work because there would be little reward. When Reagan took office, the highest tax rate was 70 percent. Pile on top of that state and local taxes, and you might see a man taking home a mere 20 cents on the dollar earned. It is perfectly intuitive that unless earning the dollar you get 20 cents out of is VERY easy (like say a massive trust fund left behind by a former bootlegger father), you are not going to be in a big hurry to earn it.

Laffer Curve illustrates how reducing tax rates can increase revenue
The Laffer Curve

The Laffer curve seeks to point this out, showing that from 0% up to about 28%, tax revenues collected increase. After that point, they slowly start to decline, and begin a dramatic drop-off as rates approach the upper end. In fact, under Reagan, tax revenues ballooned. Unfortunately, so did spending. Today tax cuts are blamed for the soaring deficits of the Eighties, but at least as strong an argument could be made that deficits were the result of out of control spending (At least Reagan’s military spending had the desired effect – the collapse of the Soviet Union. Can we say the same of welfare?).

Low tax rates, the main tool of supply-side economics, has had the desired effect of letting the creative, enterprising people out there know that their extra effort will benefit themselves and their families, not just the Government. Rich people don’t put their money in coffee cans in the backyard, they spend it, creating demand for goods and services which spell jobs. Moreover, the cost of government over the last few decades has shifted to the wealthiest Americans, something the anti-supply-siders seem to want. I’m not sure why people getting the golden eggs are resentful that we haven’t killed the goose in the process.