View source for A graphical assault on supply-side tax cuts

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[[Category:Jared Bernstein]]
[[Category:Arthur Laffer]]
[[Category:Supply-Side Economics]]
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{{DES | des = "But the fact that the simple empirical record is uniformly hostile to the supply-side story should put the burden of proof squarely on those arguing that supply-side tax cuts will be pro-growth." | show=}}
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Later this afternoon, I’ll be testifying before the Joint Economic Committee, where the star Republican witness is my old friend Art Laffer. Art is widely known as one of the main brains behind “supply-side” tax cuts: the idea that if you cut taxes on labor and capital, the extra economic activity you’d engender would make up some share of the lost revenue. The fabled “Laffer curve” plots this theoretical trade-off.

I and many others have spent years debunking this unfortunate yet highly influential theory, but let’s begin by noting that reasonable people make the reasonable argument that, under certain conditions, a tax cut that raises the after-tax wage or lowers the after-tax cost of capital could boost the supply of these critical variables, increase growth, and spin off some revenues. That said, such reasonable people stop far short of claiming tax cuts will come anywhere close to offsetting the revenue losses they cause.

In real life, there are just too many slips between that cup and the lip. My testimony, to which I’ll provide a link later, explains how and why the conditions alluded to above rarely exist. Here, I’d like to barrage you with scatterplots showing the pervasive lack of evidence for any of the links in the supply side chain.

Each dot in each plot shows the intersection of the top marginal tax rate and an outcome variable associated with Art’s supply-side story, using data from 1947-2015. What supply-siders should expect, shown in the first MADE-UP chart — the only way we* could get the expected inverse relationship was to cook it up — is a bunch of dots that start in the upper left-hand corner and cascade down to the bottom right, showing low top rates associated with strong growth outcomes and high top rates associated with weak growth outcomes.

 01-Taxes and Growth-4-15-16-RC_300
Instead, you get random plots.

The first two figures plot jobs and investment, the two supply-side variables that this magic is supposed to go to work on. The third plots productivity growth, another key target of supply-side cuts. Next, real per-capita GDP and median family income. Finally, government revenues.

 03-Taxes and Growth-4-15-16-RC_300
 08-Taxes and Growth-4-19-16_300
 05-Taxes and Growth-4-15-16-RC_300
 02-Taxes and Growth-4-15-16-RC_300
 06-Taxes and Growth-4-15-16-RC_300
 07-Taxes and Growth-4-19-16_300
In no case is the relationship negative, as predicted by supply-side theory. To the contrary, the slope of the “best-fit” lines tends to be positive, though its rise is too mild to be statistically significant (with the exception of median family income).

To be clear, these graphs do not prove that higher tax rates promote investment, growth and jobs. The impact of tax cuts on growth is conditional on numerous factors, including how the cuts are financed and broader economic conditions (for example, temporary tax cuts for low- and middle-income people are likely to be growth-inducing during recessions but through demand-side, not supply-side, impacts).

Second, the factors that determine growth and its supply-side inputs are many and varied, including demographics, innovation, monetary policy, other fiscal policies and much more, including intangibles such as “animal spirits” and consumer confidence.

But the fact that the simple empirical record is uniformly hostile to the supply-side story should put the burden of proof squarely on those arguing that supply-side tax cuts will be pro-growth.

I’ll close with one more picture of a different sort. Governor Brownback of Kansas made the mistake of listening to Art and leading a willing legislature to aggressively cut state taxes. Those cuts, which took effect in 2013, have now blown a $400 million hole in the state’s budget. Not only have the cuts caused serious underfunding of the state’s education system, they’ve also coincided with weak job and GDP growth. The figure below plots Kansas’ job growth since the cuts against that of neighboring states.

 Kansas_job_growth
Source: BLS
If facts could kill the supply-side myth, it would be dead already, so I’m not saying that this or any other presentation will be the last word. Irresponsible politicians love to cut taxes without regard for the consequences, and if they can find an economist to tell them, “Don’t worry, this will work out fine!” that’s all they need to hear. If the data contradict the theory, they reason, then the data must be wrong.

But the data are correct. It’s the theory that’s wrong, and in a country with growing revenue needs, it’s past time we face that fact.

*Thanks to Ben Spielberg and Rob Cady for help with the graphs.
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