Making matters worse, the Republicans have a very successful PR offensive with the "supply-side" argument. They have essentially promised Americans they can have their cake and eat it too. You can cut taxes which will encourage people to work harder thereby increasing tax revenue. This is a very simple sales pitch, easily compressed to the world of 30-second soundbites. Those who oppose this simplistic view of policy have a daunting task of finding their own soundbites.
The main point Democrats are arguing against is Laffer Curve theory. Charles Wheelen wrote an article titled Debunking One of the Worst Ideas in Economics, which highlights the basic theory and problems of Laffer curve theory:
Economist Arthur Laffer made a very interesting supposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves. (In one of life's great coincidences, he first sketched a graph of this idea on Dick Cheney's cocktail napkin.) If the government cuts taxes, then Uncle Sam gets a smaller cut of all economic activity -- but reducing taxes also generates new economic activity. Laffer reasoned that, under some circumstances, a tax cut would stimulate so much new economic activity that the government would end up with more in its coffers -- by taking a smaller slice of a much larger pie.
In fairness to Mr. Laffer, there's nothing wrong with this theory. It's almost certainly true at very high rates of taxation. If you consider the extreme, say a 99 percent marginal tax rate, then the government will probably not be collecting a lot of revenue. To begin with, citizens are going to hide as much income as possible. (The more honest ones will turn to barter and avoid the tax system entirely.) And no one is going to rush out and take a second job or build a factory if they get to keep only $1 of every $100 that they earn.
But here's the problem when we take Laffer's theory and try to apply it in the U.S.: We don't have a 99 percent marginal tax rate. Or 70 percent. Or even 50 percent. We start with low marginal tax rates relative to the rest of the developed world. (Yes, I understand that it may not feel that way after the check you wrote last month.)
So cutting the tax rate from 36 percent to 33 percent is not going to give you the same kind of economic jolt as slashing a tax rate from 90 percent to 50 percent. There's no huge black market to be shut down, no big supply of skilled workers to be lured back into the labor market, and so on.
Wheelen makes a solid point. While lowering rates from a very high level to a lower level will have an effect, the probability of a significant increase in tax revenue from lowering rates from already low rates are far less. This is the case with Bush's policies.
Looking at the history of tax revenues in a non-Laffer world, we see the following. The 1970s saw no Laffer curve cuts and two expansions, the first from November 1970 to November 1973 and the second from March 1975 to January 1980. The first expansion saw tax revenues increased from $90 billion to $103 billion - an increase of 14% (a few percentage points shy of Bush's total increase from the lows of 2003) and the second expansion saw an increase from $122 to $217 billion or an increase of 77.86%. And this gain in revenue is dwarfed by the 1990s expansion, which saw revenues increase from 509 trillion in 1993 to 1 trillion in 2000 - an increase of 96%.
Compare this to the revenue increase in during Bush and Reagan. Under Reagan, tax revenues from individuals increased from $285 billion in 1981 to $445 billion in 1989, or a 56% increase. Under Bush, revenue from individual taxpayers has been near stagnant, decreasing from 994 billion in 2001 to 927 billion in 2005.
The Median rate of GDP growth was 3.9% for Reagan and Clinton and 3.4% for Bush. At the same time, Reagan increased total debt outstanding from $930 billion to $2.8 trillion. Clinton increased debt from $4 trillion to o$5.6 trillion. And Bush has increased total debt outstanding from $5.6 trillion to $8.4 trillion. The primary reason for Bush's and Reagan's increased debt issuance is deficits caused by excessive spending and tax cuts.
The short answer to the Laffer curve policy is simple: Overall economic growth has been comparable to periods of non-Laffer curve eras. At the same time, total debt outstanding has ballooned. Tax revenue from individuals has demonstrated a widely vacillating pattern, increasing fairly well under Reagan, but not at all under Bush. The central question this raises is, "is comparable growth to non-Laffer curve eras a good policy choice given the record amount of debt required?"
So what is the Democratic stance on tax policy? I have not seen a coherent statement from the party on this very important matter. So, it's up to you. What would you propose and why? What levels of marginal taxation do you think is fair? What about the estate tax? Keep it? Abolish it? How should Democrats sell the message? This is vitally important because the Republicans have a great sales pitch and we don't.