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Location: Austin, Texas, United States

I'm a software engineer / partner working for a young company in Austin, Texas, USA. I spend most of my free time hanging out with friends and family, eating out, and partying in the Warehouse District. I should spend more time working on my house....

Monday, May 15, 2006

Republican Craponomics

For over two decades Republican politicians have argued that cutting taxes actually increases government revenues. As stupid as it sounds on its face this argument is based on supply-side economics theory, specifically the Laffer Curve. I call this a theory although, to the best of my knowledge, the evidence to back up the "theory" is so marginal it would more appropriately be called a hypothesis. Regardless, as this Washington Post editorial describes, some research has been done by conservative economists on just how much increase in revenue could be expected from giving a tax cut. The answer, not much:
... N. Gregory Mankiw of Harvard, a proponent of tax cuts who chaired the Council of Economic Advisers in the Bush White House. Mankiw is a top-notch economist hired by Bush and Cheney to advise them. And last year he published a paper on how far tax cuts pay for themselves, reporting enthusiastically that this self-financing effect is "surprisingly large."

How large, exactly? Mankiw reckons that over the long run (the long run being generous to his argument), cuts on capital taxes generate enough extra growth to pay for half of the lost revenue. Hello, Mr. President, that means that the other half of the lost revenue translates into bigger deficits. Mankiw also calculates that the comparable figure for cuts in taxes on wages is 17 percent. Yes, Mr. President, that means every $1 trillion in tax cuts is going to add $830 billion to the national debt.


But, wait there is more!

...Douglas Holtz-Eakin, another conservative economist who worked in the Bush White House and who went on to run the Congressional Budget Office.

In a study published under Holtz-Eakin's direction last December, the CBO estimated the extent to which a 10 percent reduction in personal taxes might pay for itself. The conclusions confirm that the free-lunch mantra is just plain wrong. On the most optimistic assumptions it could muster, the CBO found that tax cuts would stimulate enough economic growth to replace 22 percent of lost revenue in the first five years and 32 percent in the second five. On pessimistic assumptions, the growth effects of tax cuts did nothing to offset revenue loss.

So Mankiw isn't with them. Holtz-Eakin isn't with them. Which raises a question: When top Republicans go around claiming that tax cuts pay for themselves, which economic authorities are they relying on? None, is the answer. These people's approach to government is to make economics up.


Hat tip to Kevin Drum at Washington Monthly.

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