Matt has argued that Republican supply-side tax arguments are as if
. . . Hillary Clinton got up at the next presidential debate and said "I believe a policy of 'Medicare for all' could save enough money to pay for a universal preschool program and more generous Social Security benefits,"
Ezra says:
If Clinton said that, heads would nod. A very strong argument could be made that administrative and bargaining savings -- i.e, the government saying they're going to pay 20 percent less for Lipitor, and Pfizer will just have to deal -- from a Medicare-for-All system would save enormous amounts of money. Obama wouldn't dare attack it, he'd just argue that he doesn't think it politically possible, and the sort of policies required for those savings have tradeoffs Americans may not want to make. (Incidentally, I don't think Medicare-for-All would create those savings, but not because it couldn't, only because we wouldn't want to implement the necessary regulations.)
The problem with supply siders is that they are arguing that they can make the government money by lowering tax rates, not that they can make the economy money. Arguably single payer health care will save the economy money, but the government will be out a whole lot more cash. Government health programs already enjoy all the administrative cost savings that Ezra promises, and even really vigorous price controls bargaining on drug prices is not going to save enough from Medicare Part D to put the 247 million people currently not enjoying government insurance on the rolls.
Arguments like this are exactly why I have a hard time debating this topic: it's not clear what the people on the other side understand supply-sidism to be. If you want to frame a supply-side argument on the terms that Ezra has framed the health care debate--that "we" as a nation can save money by cutting taxes--then the supply-siders could be right; the tax cuts might make the economy grow by more than the size of the tax cut. Probably will, in fact.
The problem is a fiscal one: the government only takes in a little less than one-fifth of any extra growth that tax cut produces. So the extra growth has to be quite massive in order to overcome the lost revenue from the tax cut. Say you've got an economy worth $100, growing 10% a year with a tax rate of 25%. In year one, with no tax cut, the government will take in ($110 X .25=$27.50). If you cut taxes to 20%, the economy has to grow to $137.50 in order to make the same revenue, which means that a 5% tax cut has to more than triple the rate of economic growth. This is not likely. Although you should note that this means that supply-side claims are more likely to be right the farther out you go, since small changes in the rate of economic growth compound.
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But the supply siders yell and scream when the evidence of respectable economists shows that the growth effects of tax cuts are tiny. Remember when "dynamic scoring" was the new "spotted owl" -- the thing guaranteed to get them foaming at the mouth. Well, serious people like Doug Holtz-Eakin did the dynamic scoring and it didn't produce the results the supply sides wanted. Doubtless Jim Nussle will make another run at it at OMB.
So with the tiny growth effects, you'd be waiting a very long time for the size of the economy to expand by more than the size of the tax cut. And remember, which is not clear from your example, the government is out the revenue of a tax cut each year that it cuts taxes. It's not enough to say that there's one end year where the economy will be bigger as a result of the tax cut, because the debt will have piled up in between -- with corresponding restrictive effects on growth that must be offset against any gains.
Posted by P O'Neill | September 6, 2007 2:42 PM