October 30, 2007

NY Sun Refutes Chait and Surowiecki

In the last 50 years, every federal tax cut has produced increased revenue for the federal government. Repeated observation has shown that the connection exists, as surely as the connection between cigarettes and lung cancer, or consumption of alcohol and intoxication. That’s why it is almost inexplicable that certain liberal writers have been out to debunk the connection between tax cuts and increased revenue.

As the Democrats prepare to attempt one of the largest tax increases in American history, their allies in the press corps are softening the ground with a campaign against the ideological underpinnings of the Bush tax cuts. People can debate any particular tax increase or tax cut. But the left-wing side of this debate is rolling out a new argument. In publicity material for a new book, "The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked By Crackpot Economics," the author, Jonathan Chait, puts it this way: "The notion that tax cuts can cause revenue to rise, though now embraced by every leading Republican politician, is rejected by even the most conservative economists."

On the Web site of the New Yorker, the magazine's financial page columnist, James Surowiecki, writes, "The supply-side argument that, in the United States, tax-rate cuts pay for themselves — that, after cutting taxes, the government actually ends up with more revenue — has little or no support within the mainstream economic profession, and no hard empirical data to back it up." He likens it to "saying that the best way to treat sick people is to bleed them to let out the evil spirits."

Messrs. Chait and Surowiecki are playing fast and loose with the facts. The first few pages of Mr. Chait's book are packed with the names of economists who back supply side ideas — Arthur Laffer of the Laffer Curve, who has been on the faculties of Pepperdine, the Southern California, and Chicago; Robert Mundell, the 1999 Nobel Laureate who is a professor of economics at Columbia; Martin Feldstein of Harvard; Lawrence Lindsey, who was an associate professor at Harvard from 1984 to 1989; and Glenn Hubbard of Columbia.

Now the two authors are correct in their statement that not every tax cut will increase revenue. There is a point, which I do not see us as having reached yet, at which revenue will decline – otherwise a tax rate of 0% would produce infinite revenue. But to dismiss the idea that tax cuts produce more revenue as flawed is fundamentally wrong. But much like Al Gore does on the global warming issue, the two writers seek to define anyone who disagrees with them as being “outside the mainstream”, despite the fact that it is demonstrably untrue and also irrelevant. After all, truth is rarely determined by a majority vote.

The Sun then goes on to point out that the various GOP tax cuts have invariably been accompanied by increased revenues. That is empirical data, which the pro-tax Left attempts to explain away as the vagaries of the business cycle. Interestingly enough, though, the two phenomena seem to correlate so strongly that it is impossible to ignore the connection and dismiss it as mere coincidence.

But it is the conclusion that interests me the most.

Even framing the issue as primarily about government revenue, however, concedes the terms of the debate to the left-wingers — as The Great Bartley comprehended. No doubt crucial government activities need to be funded. But as the political season wears on, the candidates — and the journalists who follow them — will come into contact with more and more voters who when they think of "revenue" don't first think of the government's bottom line, but of their own household's. You don't need a Ph.D. or a seat on the faculty of an Ivy League university to know that tax cuts let individuals keep more of the money they have earned, allowing them to spend it as they see fit, rather than as some bureaucrat or lobbyist-influenced politician wants to spend it.

The right way for politicians to approach these issues is by putting the individual's wallet ahead of Washington's, an approach that puts property rights and incentives for hard work and growth ahead of government revenues. Understanding incentives has always been a key to the supply-side argument. It's good politics and good economics. While the Party's deep thinkers of today may dismiss it as hoodwinking, hijacking, crackpottery, or evil spirits, there was a time the Democrats were on the right side of the issue. Ask JFK. Our own prediction is that to the extent the tax issue drives the debate in 2008 — and we think it will be a big factor, though not the only one — the key point won't be which candidate wins the votes of the economics faculties, but which one can show voters he or she understands it's their money, and Washington should take as little as it possibly can.

Indeed, the assumption of Chait, Surowiecki and their ilk is that they begin with the assumption that your income is a government resource, and that the government should get first dibs on it. The reality, however, is different – we have a moral right to every penny of our income, though we relinquish a portion of it for NECESSARY government programs. That does not mean every idea proposed by the latest pandering politician seeking votes.

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