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The Balance Sheet of Supply Side Economics

Summary:
The major pluses of their [the supply-siders’] approach have been three. First, they came up with a way to dramatize the fact that an x percent increase in tax rates–even if it leads to higher tax revenues–will cause less than, and possibly much less than, an x percent increase in tax revenues. This was best illustrated by Arthur Laffer, with his Laffer Curve. Second, the supply-side economists’ focus on incentives made unprecedentedly prominent the harmful effects of high marginal tax rates. As a result, in the early to mid-1980s, the supply siders’ views caused a fair number of mainstream members of an elitist economics profession to examine the importance of high marginal tax rates. Third, supply siders had a substantial effect on thinking about taxation in the

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The Balance Sheet of Supply Side Economics

The major pluses of their [the supply-siders’] approach have been three. First, they came up with a way to dramatize the fact that an x percent increase in tax rates–even if it leads to higher tax revenues–will cause less than, and possibly much less than, an x percent increase in tax revenues. This was best illustrated by Arthur Laffer, with his Laffer Curve.

Second, the supply-side economists’ focus on incentives made unprecedentedly prominent the harmful effects of high marginal tax rates. As a result, in the early to mid-1980s, the supply siders’ views caused a fair number of mainstream members of an elitist economics profession to examine the importance of high marginal tax rates. Third, supply siders had a substantial effect on thinking about taxation in the policy world and on actual policy results, the main result being a drop in marginal tax rates in the United States and, subsequently, in many parts of the world.

Unfortunately, there were two minuses. The most prominent followers and adherents of the supply-side school typically gave short shrift, often bordering on outright hostility, to the importance of reining in government spending. Second, and related to the first: because supply-side thinking was centered in the Republican Party, many members of that party–which had long expressed concern about high government spending and high government deficits–downplayed the importance of cutting (or even reducing the growth of) government spending.

This is from David R. Henderson, “The Balance Sheet of Supply Side Economics,” Defining Ideas, September 17, 2019.

If you want to bother to comment, please bother to read the whole thing.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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