Bush's reversion to supply-side economics :(

Anybody else think Bush is trying to drive us over a cliff? His tax cut eliminated all surplus that we might have used to temporarily increase gov't spending in order to slow the recessionary slide.

Now he's proposing a cap gains tax cut as a "solution" to the now-larger predicament!! The obvious questions this brings up are:

1) Exactly where are we going to get the $$$ to pay for this? More deficit?

2) Didn't we learn our lesson (that supply-side doesn't work) in the 80s?

He got his tax cut through in the honeymoon period, but I'll bet there are a lot of members on both sides of the aisle that would retract their vote if they could. Let's hope these same members stop Bush's insanity

[Griffin 1]

"Anybody else think Bush is trying to drive us over a cliff?"

Nope.

"His tax cut eliminated all surplus that we might have used to temporarily increase gov't spending in order to slow the recessionary slide."

If it is true that the tax cut stopped a temporary increase in government spending, then that is a good thing.


"Exactly where are we going to get the $$$ to pay for this? More deficit?"

Long-term capital gains should not be taxed at all. Cut spending to "pay" for this.

"Didn't we learn our lesson (that supply-side doesn't work) in the 80s?"

I thought the lesson we learned was that supply-side economics does work.

The worst part about this is that by the time the next election comes around, the economy will be out of recession and the stupid general public will have forgotten and the re-elect the idiot.

Incremental funds to "stimulate the economy" can come from several sources:
[list=1][*] Surplus; have the government spend it.[*] Surplus; reduce taxes, let the taxpayer pay it. (Alternate: directed rebates; let the government decide which taxpayers get to spend how much.)[*] Surplus; pay down the national debt; change the supply/demand in the credit markets. Let the T-bond holder spend it.[*] Deficit; reduce government spending and borrowing; let someone else borrow the money and spend it.[*] Deficit; let the government borrow even more and spend even more. Change the supply/demand in the credit markets to make it harder for non-government borrowers to get loans.[*] Inflation; print money - completely change credit markets and people's expectations.

These options can be grouped as follows: Those options where the government decides how the money is spent, and those options where private individuals decide how the money is spent.

The telling point in favor of supply-side economics is this: Where have we seen government given the responsibility for making the decisions to stimulate and grow the economy? How successful were those economies? The answer, of course, is the centrally-planned economies of the various communist nations, all of whom have failed miserably. East Germany would have been the best example, given the contrast to West Germany.

I thought supply side had to do with the laffer curve, and where we were on it, if the slope is negative, we'll increase revenue by lowering tax. if it's positive, we'll decrease revenue when we lower tax. so, the argument boils down to the slope where we are right now. If we're very confident that we're on a downward slope, we'll lower tax and increase revenue. reagan believed this, he was wrong, and we had deficit spending due to reduced revenue. So, how do we tell where we are on the curve? and how confident are we about this?

and so some tax cuts promote more productivity than others?

The Laffer curve: If "WE" are the government, and we are trying to maximize government revenues, then the Laffer curve concept comes into play. At which point we can argue where we are on the curve.

However, the central issue of the posted topic was "stimulating the economy" and my point is giving more control to the government is a dubious proposition.

1. One.
2. Two.
3. Hope this works; forgot the endlist tag last time.

I'm a bit confused by the first post. If we believe that government spending can stimulate the economy (the classic Keynesian prescription), then it matters little whether it is done through tax reductions (reduce "T" in the standard 1st-year equations) or increases in government spending (an increase in "G" in the same equations. We might argue from a microeconomic point of view that reductions in taxes are "better" than increases in government spending (reduces the excess burden of taxes), but from a macro perspective, these two can be made equivalent.

Supply-side economics, on the other hand, is predicated on the idea that Keynes' "The General Theory of...(stuff)" was incomplete, because it assumes lots and lots of excess capacity, so there are no supply-side bottlenecks.

Then there is that wonderful bit of theory known as the Laffer Curve. Laffer focussed on the substitution effect of taxes, and downplayed the income effect. I recall reading some studies of this thing, most of which reduced it to questions of (wait for it) the wage-elasticity of labor supply.

If tax rate cuts are to result in total tax revenue increases, we need a whopping-great change in labor supply for each small change in the tax rate. This implies something about the afore-mentioned elasticity. At the very least, it must exceed ONE.

It doesn't.

The wage-elasticity of labor supply for secondary earners does exceed one, but the corresponding elasticity for primary earners is small, and negative (in all the studies I've heard about). The combined (primary and secondary earners) elasticity is positive, but very small.

So, empirically, the Laffer curve prescription of "reduce income tax rates, raise tax revenue" cannot work. Another example of a beautiful theory slain by an ugly fact.

[E. Blackadder]

No. Supply side economics is based on three pillars:

(1) at a 0% tax rate, government will get $0 revenue;

(2) at a 100% tax rate, government will get $0 revenue; (because no one will willingly work)

(3) Government revenue is non-negative.

if you assume that government revenue is a continuous function of the tax rate, then there is a maximum amount of tax that government can collect. For all other (lesser) amounts of collected tax, there are two tax rates that will do the job.

The issue of which tax rate to choose is an exercise for the politician.

EB: "The public may be uninformed, but they're more intelligent than you would like."

Then why do Democrats keep getting elected?