I have to admit to a bit of private hilarity at the multiple accusations that I couldn't possibly have read Jon Chait's book because a mere thirty six hours before I posted my review of it, I complained of not having a copy. I hadn't realized that so many people considered reading a 250-page book, set in the EZ Reader Xtra Large typeface popular among political polemics, such a heroic feat. I'm sorry to disappoint, but shortly after that post, I borrowed a copy from my colleague Matt Yglesias, then sat down and read the book.
At any rate, in order to clear any lingering doubts that I am incapable of finding passages to critique unless some smarter guy such as Will Wilkinson discovers them for me, let me offer one of my early favorites:
Next, conservatives insist that tax revenues actually did rise under Reagan. And in a literal sense this is true: as the Wall Street Journal editorial page writer and supply-side propagandist Stephen Moore triumphantly declared: "From 1982 to 1989 income tax receipts climbed from $298 billion to $446 billion -- a 50 percent increase." But this is like saying that your policy of feeding your children nothing but marshmallows for six months has been proven correct and healthful because your children have continued to grow. It's a meaningless measure. In any growing economy, tax revenues will tend to rise in nominal dollars -- from inflation alone, if nothing else. The more accurage measure of revenue growth is as a percentage of the economy, and by that count revenues dropped under Reagan. [Emphasis mine]
This is where the book totally went off the rails for me--on page 34, for those following along at home. This is a huh? moment so profound that one really doesn't know where to look. This passage seems to indicate that Jonathan Chait has completely failed to understand the supply side arguments that he is trying to take apart. It's hard to comprehend how he could make such an error, for the supply side argument just isn't that sophisticated. Learning to tie your shoes is considerably harder and more time consuming.
The whole point of the supply side argument is that if you lower the fraction of the economy that the government consumes, you will spur economic growth, which will raise the absolute amount of revenues that the government collects, allowing them to do more spending with lower marginal tax rates. It is definitionally true that under supply side policies, tax revenues will fall as a share of GDP. Saying "tax revenues grew in absolute terms, but fell as a share of GDP" is not a rebuttal of the supply-siders; it's support. Yet Mr Chait seems blissfully unaware of this. He has not only scored an own-goal; he is doing a victory dance in his side's end-zone.
To be sure, what Mr Chait is trying to say is correct: the Reagan tax cuts did not increase revenues in the way that Stephen Moore is claiming. In the first place, there was a little bit of inflation between 1982 and 1989; the 1989 equivalent of $298 billion was about $382 billion, meaning that most of that growth in tax revenues came from the falling purchasing power of each individual dollar. The rest could be accounted for by even relatively meager economic growth rates of the 1970's. And even if that weren't the case, it conveniently ignores the rather large tax hikes and base broadening that took place later in Reagan's term. Finally, to the extent that growth did improve, deregulation, falling oil prices, tax simplification, and better monetary policy all seem like better conservative explanations of the change than do the rather ephemeral tax cuts.
With all that armor at his disposal, I am mystified by Mr Chait's decision to borrow a simplistic argument from other liberal/conservative arguments about taxes, and employ it where it is not merely inappropriate, but actively counterproductive. It's not as if arguments against tax cuts are all just interchangeable parts. The good arguments tend to be somewhat theory specific, not general panaceas against the bad vapors of tax cuttery. It's particularly unfortunate that he should be so indiscriminate in a book that is supposed to take on the broad-spectrum economic snake oil sold by the hard-core supply siders.
Not hard to read even a 400 page book in one afternoon/evening (did that recently with Sandworms of Dune, a terrible book, however).
If you score an own goal you don't celebrate in and end zone! Sheesh! I bet Will Wilkinson, or some other smart GUY, would have nailed that analogy. OK, I just couldn't resist that one. Sorry, back to the serious stuff.
And wait, I don't get your point about increases in absolute revenue. If revenue is X, and after cutting income taxes by 20% and growing the economy by Y your revenue is X+1, this is considered a success? Whereas if you left taxes well enough alone the economy would have grown by less than Y but revenue would be higher than X+1. Liberals, and I'm betting most people, would take the later scenario.
Chait describes this poorly but I don't think this is a debate supply siders want to have or would win if presented honestly.
More evidence that such books only serve to attack whomever is the political target of the writer. I've no doubt he was sincere about the topic, but his desire to dis' supply-siders turned into the purpose.
I don't care for the current crop of executive branch occupants, but I've no need for bad arguments to do so. I recall very clearly reading David Stockman in the 80s call-out the 'conservatives' for lying about the budget, and also recall many people saying "so what?". I guess that's my response to Chait's book now.
But then, God help us, Laura Ingraham is #11 on Amazon.....oh well....this stuff does sell...
Jeeze, that's really pretty bad.
Finally, to the extent that growth did improve, deregulation, falling oil prices, tax simplification, and better monetary policy all seem like better conservative explanations of the change than do the rather ephemeral tax cuts.
Nonsense, either Milton Friedman and Robert Eisner are right or they are wrong when measuring government revenues.
If you devalue the base instrument of debt the U.S. dollar, you devalue a $1,000 bond denominated in those dollars, you also devalue the national debt denominated in those dollars.
Counting interest payments to bond holders as outlays without counting the amount by which you have devalued their bonds is WRONG!
Reagan gave back some of the governments REAL SURPLUSES and as Robert Barro commented at the time reduced the after tax effective interest rate for investment. Which led to an investment boom.
It's lingering suspicions that you want to clear, isn't it?
Ouch. How embarrassing for Chait.
And that’s a bet you’d lose. If I’m out of work during a recession, I want the economy to grow as quickly as possible so I can find a new job. If the government has to take a little less than it otherwise would have so that the private sector can grow faster so I can pay my bills and support my family, then that’s a tradeoff I’m willing to accept.
Not hard to read even a 400 page book in one afternoon/evening (did that recently with Sandworms of Dune
I bow to your intellectual prowess. You're auditioning for a part on Stephen Colbert, right Yancey? This is freaking hilarious.
Sheesh, don't authors have editors anymore, or is it more of a matter that the editors don't know anything?
Isn't the concept of evaluating tax policy in terms of "revenue as a percentage of the economy" a self-proving justification for higher taxes?
If you raise taxes in a growing economy, revenue as a percentage of the economy should go up and high taxes wins. In a shrinking economy, you'll want to raise taxes to pump up that percentage as well. Again, high taxes win.
Thorley,
Bet. I'd love to see a conservative politician frame tax cuts in the way I just did. Won't happen. Because they would lose.
Henry and Thorley,
The reason why just increasing revenue in absolute terms by a little bit is not a success is, at the very least a function of inflation. We have a set of relatively fixed costs, payment on debt, entitlements, and the military, that grow at or above the level of inflation. We need revenue to grow at more than a slight absolute increase to pay for this basic level of services (if your argument involves a radical revision to entitlements or gashing the military let me know, we can add that to the bet). So, an increase in revenue closer to (maybe not as much as) the level of growth in the overall economy is going to be needed to maintain roughly the same government we've got.
If your argument is we can cut taxes, slightly grow revenue in absolute terms, and we will pay for the necessary growth with radical reforms to entitlements, please be my guest. But, as I say, any honest argument with those parameters loses for your side.
Tax receipts are largely a function of nominal gdp growth but in a graduated system as the economy grows people shift into higher tax brackets -- known as bracket creep. Much of the growth in tax receipts after a tax cut is due to bracket creep rather than the beneficial impact of supply side tax cuts. The GAO recently estimated that over 100% of the growth in tax revenues since the Bush tax cuts is due to bracket creep. Although inflation and nominal GDP growth is lower now we now have the ATM that creates the same development as bracket creep. Back in the old days reporters and analysts knew that tax rates had to be adjusted every few years to offset the impact of bracket creep. But what the supply-side propaganda machine has managed to do is take bracket creep and rename it as a benefit of supply-side tax cuts.
By the way nominal GDP growth was stronger in the 1970s than in the 1980s and this impacts tax receipts more. But even if you look at real gdp growth there was no significant difference in real gdp growth between the 1970s and the 1980s.
Megan's post was good up until she wrote this:
This passage is, frankly, bizarre. Megan's argument seems to be that cutting marginal tax rates from 70% to 28% has no effect on incentives, so that whatever impact the rate reductions had was of the "ephemeral" Keynesian sort. I wonder what her justification is for claiming that the labor supply is perfectly (or almost perfectly) inelastic.
Ed Prescott, at least, strongly disagrees with her. As he has argued:
But then what does Prescott know? He only won a Nobel Prize... Those who are interested in this topic can find his paper here.
Megan's argument seems to be that cutting marginal tax rates from 70% to 28% has no effect on incentives, so that whatever impact the rate reductions had was of the "ephemeral" Keynesian sort. I wonder what her justification is for claiming that the labor supply is perfectly (or almost perfectly) inelastic.
The 70% marginal tax rate applied to an extremely small class of taxpayers. One question is how much extra economic growth is plausibly ascribed to increased revenue-earning labor performed by those taxpayers due to lower tax rates at the margin. We know, for example, that the multiplier effect is greater for increases in earning by large numbers of middle-class people than for increases in earning by small numbers of extremely rich people. So there are at least two questions to address here. One is: how much will a fabulously rich person do for an extra $200 million that he won't do for an extra $60 million (especially if his starting-point income in the latter case is already lower due to progressively higher rates throughout the spectrum)? Another is: what will that fabulously rich person do with that extra $140 million and how significant will it be relative to what the government might have done with it (reducing the deficit, investing in infrastructure and education, etc.)?
Complicated questions, but the middle of the road position appears to be that cuts on marginal tax rates have a perceptible but modest effect on growth, one which can be outweighed by negative effects of lower government revenues (i.e. higher interest rates due to increases in the national debt or lower investment in needed public goods).
Count in with those who would like to see the economy grow faster and government tax revenue grow slower. While we do have some fixed expenditures and/or somewhat fixed expenditures, there are many many things that the government spends money on that we don't need. We have plenty of room to cut spending to accomodate a decrease in government revenue. Unfortunately, short of credible threats of violence, I don't see Congress ever really reducing spending.
EI
I have to admit to a bit of private hilarity at the multiple accusations that I couldn't possibly have read Jon Chait's book because a mere thirty six hours before I posted my review of it, I complained of not having a copy. I hadn't realized that so many people considered reading a 250-page book, set in the EZ Reader Xtra Large typeface popular among political polemics, such a heroic feat.
Maybe you're getting a larger share of readers these days being sent over here from Ezra Klein.
Truly, we have been put in our places. In the future we'll all need to remember that directly responding to a text in a book chat can take up to 9 days, and end up on a different website than the one hosting the chat.
Well done.
You seem to have a mistaken understanding of how inflation factors in. The other responses were assuming that the values were real not nominal (real means adjusted for inflation in this context). Inflation is not equal to the level of growth - growth is actually derived by taking the changes in inflation-adjusted values. While growth can be a factor in inflation, changes in the money supply will primarily determine inflation, and there is certainly not a reliable linear relationship between the two.
Your scenario actually does correctly reflect how real values would behave in a case where the rate being cut was high enough to be self-financing. And the former case would generally be prefered, since the gov't would be capable of providing the same bundle of services and people would have more money than they would without the cut.
If revenue is X, and after cutting income taxes by 20% and growing the economy by Y your revenue is X+1, this is considered a success? Whereas if you left taxes well enough alone the economy would have grown by less than Y but revenue would be higher than X+1. Liberals, and I'm betting most people, would take the later scenario.
I'm not a rabid anti-governmenter but why would I take the latter scenario? Y-X-1 is going into our pockets and it's not like the government needs to grow at the same rate as the economy does.
Poor Yancy. That was a gawdawful book of the first sort.
Blogspot is more peeved at style than substance, a sure sign of not having anything important to say...like this comment pointing out his pointlessness.
So according to the hypothetical, not only is the economy larger and government revenues are increased but your personal tax rate is 20% lower. Now perhaps there are people who choose to have 20% less income in a overall smaller economy in exchange for the government having more revenue than it otherwise would have had. Not me, but perhaps those people do exist. Do you really believe this is a winning argument?
In fact, we can test this hypothesis: Since the treasury accepts remittances above and beyond your personal tax liability, the number of people who would choose to have lower personal income in exchange for larger government revenues is the same as the number of people who've paid above and beyond their tax liability to the treasury. Does anyone know how to find out the number of taxpayers who pay more than they are required? I bet it's pretty small...
Actually, I guess this would be a wining argument with those who don't pay any income tax, and that maybe close to 50% of the population. It still doesn't seem like good policy, though.
As an aside, one thing that always strikes me in these discussions is how government revenue and spending are almost always treated as independent. I wish I could run my life that way...
It might be added that not only did government tax receipts rise under Reagan, the deficit as a per cent of GDP actually declined under Reagan. Of course, Reagan did raise taxes multiple times (e.g., social security and medicare).
Wow. That Chait passage is more head-smackingly stupid than the infamous NYT headline "Number in Prison Grows Despite Crime Reduction".
To paraphrase Chait's argument: "Supply-siders claim that decreasing government's share will increase it's revenue. Not true, because while government revenue did increase in the '80s, it's share decreased." Logic errors don't come any less subtle.
Anyway, if Chait's measure of successful tax policy is revenue growth as a % of the economy, why not just set rates at 100% and be done with it?
Gene: That's just flat-out wrong. Like, blatant lie wrong.
I'm also kind of curious what error everyone's seeing here - supply siders do two things, both of which are massive logical errors that you all seem to be supporting.
The first error is supply siders taking credit for an invariable effect of economic growth - barring massive contraction, tax revenues will always grow. The supply side argument (the one that Chait refuted) is simply that tax cuts don't cause massive contraction. Well, a great number of things also don't cause massive contraction that don't become the standing economic policy of a major political party.
The second error is classifying "growth" in tax revenues as a simple absolute dollar measurement. You're right that the argument supply siders make is the absolute dollar one...it's just a really, really bad argument, and generally contradictory to the idea that supply side policies grow revenue faster than any other method.
The basic promise of supply side economics isn't just more tax revenue, it's more tax revenue than we possibly could have had any other way. We already know that the current editorial viewpoint here on supply-side economics has little, if anything, to do with what supply side economics are, but it truly helps if there's the slightest bit of intellectual rigor and honesty involved...at some point.
Starscream is technically correct, the deficit as a percentage of GDP was higher when Reagan left office than when he began. But there are reasons to look beyond the ordinary deficit figures. The eminent economist Laurence Kotlikoff proposes using "generational accounting" to look at the present value of future revenues and expenditures:
So, viewed from this perspective, the Reagan administration was much more fiscally prudent that its predecessors, and the underlying point that Gene was making stands.
Henry most clearly shows what is wrong with Chait's analysis.
Chait should be very embarrassed at such an elementary error. One suspects, however, that he would not even understand it as an error.
I believe the deficit was larger when Reagan left office because of the horse-trading he did with the Democrats to finance the military.
Sure, revenues were higher in the Reagan years. Let's take it one step at a time:
1. Reagan borrowed 4 trillion dollars;
2. This money (mostly) translated into incomes for government and contractor employees (regrettably on largely unproductive things like the Star Wars boondoggle);
3. Taxes were paid on those incomes - i.e. a proportion of the immense borrowing came back to the treasury;
4. So revenues went up;
5. Taxes were a minor factor.
What's so hard to understand?
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