Republicans Keep Repeating the Same Tax Mistake
For budget wonks, the saga of the Kansas budget will be reminiscent of the Reagan years, when supply-side tax cuts resulted in big deficits. The administration had hoped that the tax cuts could be paid for by a combination of faster economic growth unleashed by lower marginal rates, and the infamous “magic asterisk” (in which unidentified spending cuts were promised, details to come later).
.. Reagan was forced to do another tax reform a few years later, hiding the fact that he was increasing taxes by cutting marginal rates but doing away with the generous exemptions that had dramatically lessened what people actually paid. Nonetheless, it took two more tax hikes — under Bush the First, and Clinton — to get the budget into some semblance of structural balance.
The answer is, I think, that a lot of Republicans have a view of how taxes affect labor markets that is simple, intuitive, and wrong.
.. Many of you will recognize that I am describing the famous Laffer curve. And the Laffer curve is absolutely right — for some effective tax rates. It has not, however, turned out to be correct for the tax rates actually prevailing in the United States during the later postwar era. Relatively modest decreases from modest tax levels do not increase economic growth enough to offset the losses from the lower tax rate, at least not in the short or medium term. In fact, they may not increase economic growth at all.
.. People who expected great things from tax cuts were essentially hoping that labor supply was very elastic
.. Yes, as your hourly wage rises, each additional hour of leisure is more costly in terms of other stuff you could buy. On the other hand, it’s also more enjoyable.
.. If you have a yacht and can afford to cruise around the world staying in fine resorts, each hour of leisure lost is more painful.
.. I haven’t even gotten into complex effects, like the fact that many high-income, high-status people like working.
.. most of what happens in the economy will end up being determined by other factors,
- such as regulation,
- technological change,
- demographics,
- and the individual decisions made by millions of people about what they want to do with their lives.