Supply Side Taxes

This is from Henderson's Review of Melloan's new book, Free People, Free Markets:

Supply-side economics, as he [Barkley] and other Journal writers describe it, is the idea that high marginal tax rates discourage work, saving, and investment.

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Reagan and Congress cut the tax rate paid by the highest-income people from 70% to 28%. For that, those of us who believe in giving people incentives to produce and those of us who believe that people should keep more of their income should thank the Journal.

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But there was a downside to this advocacy. First, many of the Journal's unsigned editorials (under the heading "Review and Outlook") and guest op-eds during the Bartley era suggested that the economic growth sparked by tax cuts would result in higher federal tax revenues than if tax rates weren't cut. Reasonable back-of-the-envelope calculations showed that this was highly unlikely. As economist Lawrence Lindsey demonstrated with a careful examination of the data, more taxes were paid by the highest-income people, whose marginal tax rates were cut in the early 1980s from 70% to 50%. But it was not true for taxpayers overall.

Second, because the Journal's editors did not worry much about the revenue effects of large cuts in tax rates, they didn't put much emphasis on proposals for reining in federal government spending. Imagine, for example, that the editors had advocated in 1972 that federal spending rise by 0.5 percentage points less per year than it actually did rise. In 1972, federal government spending was $244.3 billion. In 2016, it was $3,852.6 billion. That's a compounded annual growth rate of 6.5%. If our imaginary editors had gotten their way and federal spending had instead risen by "only" 6% annually, it would have been $3,172.4 billion in 2016. The result, with taxes the same as they are, would have been a federal budget surplus of $95.6 billion rather than the actual budget deficit of $584.7 billion.