Supply-siders take some lumps

But the main charges in Chait's book – that the Bush tax cuts failed to boost the economy enough to rocket revenues higher, and that supply-side economics has taken over the Republican Party – are serious.

While I was writing this column, a reader called and then e-mailed seven pages that he had compiled of quotes from major economists – mostly conservatives, none liberal – who challenged the view that tax cuts pay for themselves.

For example, Gregory Mankiw, former chairman of Bush's Council of Economic Advisors (CEA), now at Harvard University and an adviser to Republican presidential candidate Mitt Romney, cowrote a paper declaring, "The consensus view is that tax cuts indeed influence national income, but not to the extent that they are fully self-financing." In the long run, the paper concluded, a capital-gains tax cut might stimulate the economy enough to bring in half the original cut in revenues.

Martin Feldstein, former chairman of President Reagan's CEA, in 1999 saw a favorable revenue feedback of about one-third for the lost revenues that resulted from Reagan cutting the top income-tax rate from 39.6 percent to 33 percent.

In the end, most economists don't believe tax cuts pay for themselves. In a telephone interview, Chait calls it "a preposterous belief."

But did the Bush tax cuts at least cover some of their revenue cost?

Bush thinks so. A supply-side economist regularly on CNBC, Lawrence Kudlow, writes in a commentary that Bush told him and other conservative economists at a White House meeting Sept. 19 that "Supply-side economics has worked." Then Mr. Kudlow notes that since the mid-2003 tax cuts, revenues have grown by 45 percent, almost 10 percent per year since 2003. But his calculation does not account for inflation or population growth.

With an economic recession depressing federal revenues at the start of this decade, revenues would normally bounce back with a recovery. In fact, the economic expansion has been below average relative to previous postwar expansions, calculates economist Aviv Aron-Dine at the Center on Budget and Policy Priorities in Washington.

Growth in nonresidential (business) investment has only matched the historic norm. Revenues have grown at below-average rates for the current business cycle, from 2001 to an estimate of revenues for fiscal 2007, which ended Sept. 30. That calculation does take population growth and inflation into account.

Harvard economist Benjamin Friedman says financial incentives do matter. But tax cuts across the entire population paying for themselves? "Surely not."

Page: 1 | 2