Thursday, June 15, 2017

on tax cuts: JFK and Reagan vs. Bush II and Kansas (and Obama) OR do you know what "supply-side" is?

Schlesinger is confused on at least two things here. (This Slate piece looks similar.) One can be a K on spending *and* a SS'er on tax cuts; it's not necessarily either/or. I haven't studied JFK's record on spending and his thoughts on that. (His spending approach is not particularly novel.) But when you cut marginal tax rates (MTR's), you're *automatically* (by definition) a SS'er.

So, let's cover some "principles of macro" here. The "SS" nickname is a reflection of the impact of MTR cuts on investment *supply* in general and labor *supply* in particular. To note: When the govt takes 91% or 70% or 28% of the last $1,000 you make, it changes the incentives to work harder. (In class, I use an example where my MTR went from 15% to 60%+ for playing string quartets, when I moved to IUS from grad school.)

(As an aside, this also changes the incentives to use tax avoidance [through accts and lawyers] and tax evasion. Note also that the JFK and Reagan MTR cuts are dramatic [and much-more-likely-to-be-positive] departures, compared to the Bush II and Kansas MTR cuts {which were smaller and much nearer the peak of the "Laffer Curve"-- the broad and *necessary* relationship between tax rates and tax revenues.)

A SS tax cut has demand-side (D) implications as well-- by putting more money in people's pockets. But a K tax cut *only* sends money back to people, without reducing MTR"s and impacting the "supply side". You get an impact on D, as people have more money in their pockets, but you haven't changed the incentive to be more productive-- e.g., to *supply* more labor.

Obama did K cuts; Bush II did a good bit of it too. (For 40 years, the profession has understood that K tax cuts can only succeed-- if at all-- by moving prosperity from the future to the present.) Bush II is particularly instructive here: he cut MTR's slightly *and* sent people checks-- a dog's breakfast of tax policies that reflects his nasty dog's breakfast approach to fiscal policy. (His massive increases in spending were at least implicitly K.)

Any questions?


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