by Drew J Jones
Fri Jan 6th, 2006 at 12:14:05 PM EST
You know, you've really got to wonder sometimes. National Review's Jerry Bowyer has a column up, claiming another victory for the fabled Laffer Curve. And, with the combination of NRO's sheer stupidity and nicotine withdrawals (I'm trying to quit smoking), I am, shall we say, made angry more easily than usual. To his credit, Jerry picks up on an astonishing trend: Tax revenues increase when the economy grows. Amazing, "innit"? What Jerry fails to mention, of course, is that revenue fell even after the recession had ended.
Let's discuss the Laffer Curve.
The story goes something like this:
The argument, put forward by scholars as far back as Ibn Khaldun in the 14th Century states that there is a point at which an increase in the tax rate will lead to a fall in government revenues. (Laffer, in recent years, has attributed the idea to Khaldun and -- irony of ironies, given conservative hatred of him -- John Maynard Keynes.) Not incredibly difficult to believe. We can surely imagine a tax level where the government maximizes its revenue.
The name Laffer Curve comes from Jude Wanniski of The Wall Street Journal, who sat in on a 1974 meeting with Laffer and Dick Cheney -- yes, that Dick Cheney -- in which Laffer apparently sketched the curve out on a napkin to illustrate the concept. The fact that Cheney and Wanniski were so taken with a concept that is, frankly, relatively simple tells you all you need to know about the level of economic intelligence in Washington and in the mainstream media. Cheney and Wanniski were astounded at the level of "brilliance".
And my friends wonder why I hate listening to idiot reporters and politicians talking about economics.
Which brings us back to Jerry Bowyer and the Laffer Curve's twenty-five-year political legacy. The theory has been used to justify Supple-Side economic policies under Reagan, Bush I and Bush II, and the results provide little or no support for the view. In 1981, the year Ronald Reagan entered office, the US national debt stood at roughly $950 billion. Today, the national debt is almost $8.2 trllion. $1.5 trllion of it came under the Clinton administration (about the same as under Bush I, though Bush was able to run it in only four years). In other words, about $5.7 trillion -- about 70% -- of debt has been run up under the last three Republican presidents.
About $4.2 trillion (over half our total debt!) of that came under Reagan and Bush II -- the Supply-Side presidents. These charts from the CBO show government revenues from 1962 to 2004, and, knowing when Reagan and Bush's tax cuts were implemented, we can see very clearly that tax revenue, in fact, fell dramatically in each president's case. In Bush's case, revenue has still not recovered to its 2001, pre-tax-cut high, despite an economy that, while very short on job growth, has been growing at reasonably strong rates. As a percentage of GDP, revenues today are lower than they were in 1962.
Reagan closed some of the gap by consistently raising taxes -- most notably the payroll tax that pays for Social Security and Medicare (but that is also used to cover deficits run on the general budget) -- on working people, thereby shifting the overall tax burden down the pay scale. How Bush intends to make any progress on the deficit, if he has any such intention, is anybody's guess, but one thing is for sure: Supply-Side economics -- the bastard son of Keynesian fiscal policy -- is, and has always been, bullshit.
It's time for the snake-oil peddlers to go. And it's time the press stopped giving them air time.