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In March 1976, Jude Wanniski penned
a rather wonderful op-ed called "Taxes and the Two Santa Claus
Theory." This helped turn around Republican thinking, and is still
influential today. Apparently some conservative types have been referencing
it recently, and Bruce Bartlett even rescued it from the library archives by
typing it in by hand and posting it in its entirety.
http://wallstreetpit.com/26546-jude-wanniski-taxes-and-a-two-santa-theory
The "supply side revolution" was all somewhat theoretical in those
days. So what were
the results?
Here is a graph of Federal
revenues and expenditures since 1940. As I mentioned previously, the revenues
are remarkably flat as a percentage of GDP throughout the postwar period,
hovering around 18% of GDP.
January 17, 2010: The Futility of Raising Taxes
There was a little rise around
1980-1981, which was apparently the effect of rampant bracket creep (income
tax brackets weren't adjusted for inflation in those days) at a time when the
CPI was rising at over 10% per year. Then, there was a rise into 2000, which
was heavily influenced by capital gains-related tax income (note that the
capital gains tax was reduced in 1997).
After the Bush tax cuts of 2003, revenue rose right back to its long-term
average around 18%, and even rose slightly above to 19%.
It appears that revenue, as a percent of GDP, is about the most predictable
thing you'll ever find in economics. Note that the future projections of
revenue past 2010 show a return to 19%.
Now how about that red line? That's expenditures. Expenditures rose steadily
from 1950 to 1990, and during the 1980s averaged about 22% of GDP. If you
have a ten-year-old around, you can ask him or her what happens when your
revenues are 18% of GDP on average and your expenditures are 22% of GDP on
average. Do you think that might lead to a budget deficit of 4% of GDP, on
average? If your ten-year-old came to this conclusion, they probably already
know more about what happened in those years than your typical
Nobel-Prize-winning newspaper columnist.
Congress sets the budget for the most part, and Democrats controlled Congress
in the 1980s, as they had since the 1950s. Of course, Democrats like to spend
money on all their social programs, and also their "economic"
programs which usually amount to "more government jobs."
Republicans have their spending-reduction wing, but the party as a whole also
has a lot of people eager to spend money on military adventures, pork,
thickly padded government contracts handed out to cronies, and of course the
occasional bank bailout. (There were a lot of bank bailouts going on in the
1980s due to their huge losses on Latin American debt.)
Spending declined in the 1990s, at first because of the reduction of military
spending after 1990. Republicans took control of Congress in 1994, with Newt
Gingrich and his spending-reduction fixation. I think the reduction in
spending during that time can also be traced in part to the general economic
success of that period, which tends to lead to fewer demands on government
for welfare or counter-recession-type spending. In a healthy economy the
political balance shifts slightly, so the ever-present spending-reduction
wing gains enough of an advantage on the ever-present spending-increase wing
that the government as a whole reduces its outlays somewhat. Combined with
the rise in tax revenues in the late 1990s, the result was a momentary
surplus.
Stable money also helped:
April 25, 2010: Greenspan, Summers, Tungsten Fakes, and the Secret
Gold Standard
What did reduced taxes do for the economy? I think you would have to tie
yourself into an intellectual pretzel to argue that Reagan's tax cuts were
bad for the economy. That leaves you with a) no effect, or b) a
healthier, expanding economy.
Sometimes, the correct answer is a) no effect. There is always some
politician who has some corny little tax cut plan -- like increasing the
per-child tax deduction by $200 -- and they want to claim that this
irrelevant little nothing is going to have some kind of world-changing
effect. You saw this in the discussion around the 2003 Bush tax cut for
example. The reductions in capital gains and dividend taxation were
significant, but the change in income tax rates was rather minor. The top
rate fell from 38.6% to 35%. Ummmm ... whoop de doo. And yet, advocates and
critics of the plan both called it the "largest tax cut in
history."
Reagan cut the top income tax rate from 70% to 28%. Now that is a tax cut. It
is certainly not the kind of meaningless twiddle that has no effect. That
leaves us with b) a healthier, expanding economy, which translates
into higher GDP. Certainly, that is the message the stock market was giving.
Go get your ten-year-old again. If he or she is getting tired from all this
heavy thinking, give them a Snickers bar to recharge their tired brain. Then
ask:
If revenues as a percent of GDP
are stable, and GDP increases, then what happens to tax
revenue?
Admittedly, this is a tough one for a ten year old. And well-nigh impossible
for an academic economist.
The answer, of course, is that revenue goes up. The tax cut led to more
revenue than would have been the case if taxes were left unchanged.
This is all extremely simple and obvious, which is why I am amused that very
few people -- I would include a lot of tax-cutting Republicans in this group
-- seem to grasp it, even twenty or thirty years later.
Here is a typical recent critique of the "supply side revolution" and
the "two Santa theory."
Two
Santa Clauses or How The Republican Party Has Conned America for Thirty Years
One of the reasons is partisan politics. Someday I will write something about
that, but what it amounts to is that if a person doesn't like a certain
aspect of another political group's ambitions or actions, then they
criticize all of that group's actions.
For example, we could say that Republican leadership in Congress and the
executive branch, over the past thirty years, has generally led to:
1) Foreign wars propped up by lies and motivated by the desire to steal
resources.
2) Attempts to reduce many government welfare-type programs which are
genuinely beneficial.
3) A tendency to encourage/allow increased environmental destruction.
4) An alliance with the Christian conservatives which can have some
unpleasant results.
5) Collusion with big business/ultra-rich to loot the taxpayer via vastly
bloated government contracts.
6) Deregulation and even encouragement of certain business practices with
negative overall results, for example predatory consumer lending.
7) Expansion of the fascist police state, exemplified by the Patriot Act.
8) Economic exploitation of other countries, especially emerging markets, via
the IMF and other underhanded tactics (see John Perkins' Confessions of an Economic Hit Man or Naomi
Klein's Shock Doctrine.)
9) This often leads to or is accompanied by various incursions into national
politics, up to and including assassination of political leaders. See for
example the various color-coded "Revolutions" throughout the former
Soviet states, or the U.S.'s long history of meddling in Latin America:
10) Aggressive attempts to disadvantage U.S. working classes via lax
immigration policies and promotion of "outsourcing" to foreign
countries.
11) The phony "War on Drugs" (the CIA
is the U.S.'s largest drug importer), combined with a vast
expansion of the prison-industrial complex, providing a huge resource of prison slave labor for U.S. companies.
12) Bank bailouts and other outright looting on the vastest scale.
You could add a few more I'm sure. The point is, there is a lot to criticize
about Republican leadership. Some might argue that it is not really a
Republican thing, but rather the goals of a certain oligarch class, who
influence and control whichever party is momentarily in power. Democrats have
supported the same policies. (The airport at Mena,
Arkansas, was a major drug import point while Clinton was
governor.) However, I would say that Republican leadership (think Bush and
Cheney) have supported these things with a certain enthusiasm and gusto,
while Democrats have mostly acquiesced grudgingly.
June 15, 2009: Bashing "Supply Side Economics" 2: Maybe
We Don't Want Growth?
June 5, 2009: Bashing "Supply Side
Economics"
I don't have much interest in U.S. politics these days. It is mostly just a
chronicle of decline. Just look at the level of discussion regarding these
tax issues. Why wade into that swamp of stupidity? Let people suffer the
consequences of their action. The real progress is taking place elsewhere,
with governments that are able to figure out these simple principles and put
them into practice. I'm thinking of Russia, China, Brazil, several FSU
countries, and maybe some smaller locales here and there.
I'll finish here with just a brief clip regarding Greece:
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