letter to the editor of the C-J on "trickle-down economics"
In his recent op-ed piece, Matt Erwin uses the phrase "trickle-down economics" and then mischaracterizes "supply-side economics".
"Trickle-down" may be useful as political rhetoric. But it is does not aptly describe the related concepts and it is not a term that economists or proponents have ever used. We usually allow other groups the dignity to choose their own labels. For example, we let people call themselves "pro-choice" (on abortion) rather than "pro-abortion". And we let people say they support "a living wage", instead of noting that they want to make it much more painful to hire less-skilled labor. Perhaps we should do the same on tax policy.
"Supply-side economics" simply recognizes the incentive effects of reducing marginal tax rates. For example, if the government plans to take 90% or 60% or 20% of the last $10,000 you earn, this changes your incentives to earn (and to report) income. Depending on the change in tax rates, it is possible that work effort would increase enough to offset the lost tax revenue from lower tax rates. But it is certainly not guaranteed. Of course, this becomes more likely when marginal tax rates are quite high. This explains why JFK cut the top rate from 91% to 70% in the 1960s and why Reagan (with a strongly Democratic House) cut the top rate to 28% in the 1980s.
As Erwin points out, Kentucky has struggled for some time. So, why not look forward to some new experiments with economic policy? It was the last GOP governor who took most of the working poor off of the state income tax rolls. Hopefully, Governor Bevin and the legislature will finish the task. Perhaps Kentucky can move to the 21st century on K-12 education reform, embracing public charter schools and "backpack funding". Maybe Kentucky can lead the way on innovative public sector pension reform. I look forward to the changing of the guard and some policy innovation out of Frankfurt.