An op-ed on today's Washington Post does a good job skewering the "logic" supply-side economics, and specifically, Romney's tax plan. It is something that has been covered extensively, but I feel the dangers of this thinking need to be hammered again and again.
The author breaks it down into "3 fallacies and 2 dangers."
The first is the argument that cutting personal income tax rates would lead to economic growth robust enough to help pay for a big chunk of the cuts. The second, related, fallacy is the contention that raising rates on top earners would hurt growth. The third is that raising capital-gains rates would be even more harmful.
There is scant reliable evidence for any of the above, yet Romney and fellow Republicans hitch their entire economic argument to them. And their rabid pursuit of lower taxes leads to two dangers: further ballooning the national debt and further increasing income inequality.
The rest after the squiggly.
The heart of their argument is that lower taxes inspire growth. There's been no evidence of it.
First, would lower rates, as Romney claims, produce economic growth? “Past changes in tax rates have had no large clear effect on economic growth,” the nonpartisan Congressional Research Service (CRS) concluded in a December review.
Consider: The economy grew at 3.9 percent from 1950 to 1970, when the average top marginal income tax rate was 84.8 percent. From 1987 to 2010, when the average rate was less than half that (36.4 percent), economic growth was far less robust, 2.9 percent.
This comparison might be misleading because multiple factors affect the economy, so the CRS looked at a shorter, more recent time span.
From 1987 through 1992, the top average marginal income tax rate was 33.3 percent. Economic growth averaged 2.3 percent.
From 1993 through 2002, after taxes increased under President Clinton, the average top marginal rate was 39.5 percent. Economic growth averaged 3.7 percent.
Finally, from 2003 through 2007, after the Bush tax cuts, the average top marginal rate was 35 percent. Economic growth averaged 2.8 percent.
To me it seems obvious, taxes (or lack thereof) do not inspire growth, demand does. I work with my family in a small business. If our taxes were cut in half, we aren't going out and hiring more people, we don't need to. However if our business doubles, we certainly are going to need the extra help.
Continuing onto the Bush tax cuts:
Second, and this is at the heart of the current debate over letting the Bush tax cuts expire, would raising rates on upper-income taxpayers threaten growth?
A new CRS report suggests not — but it underscores the risk of the other danger, increasing income inequality. Lower top rates do not correlate with increased savings, investment or productivity, the CRS found. Top tax rates, it concludes, “appear to have little or no relation to the size of the economic pie.”
But lower top rates do help the rich serve themselves a heftier slice of that pie. Reducing top rates, the CRS noted, appears “associated with the increasing concentration of income at the top.”
Finally, capital gains:
Which leads to the final question: whether lower capital-gains rates, whose benefits flow overwhelmingly to the wealthiest, are justified.
Romney told CBS News’ “60 Minutes” that his own 14 percent effective income tax rate in 2011 was fair because lower taxes on investment are, repeat after me, “the right way to encourage economic growth.”
Evidence, please? Leonard Burman of Syracuse University’s Maxwell School looked at capital-gains rates over six decades and found no correlation with economic growth. Look at his graph and you’ll see: The two lines — capital-gains rates and growth — bear no relation to each other.
Burman tried adjusting for time lags, of up to five years, and looking at moving averages of tax rates and growth. Still no correlation. “There is no apparent relationship,” Burman told the Senate Finance Committee last week. “Cutting capital gains taxes will not turbocharge the economy, and raising them would not usher in a depression.”
At a moment that demands seriousness about the debt, the country is trapped in a tax debate premised on unproven assertions and flawed history. It risks producing fiscal chaos and social instability. You’d think a numbers guy would at least look at the numbers before taking this dangerous tax leap.
The logic behind this seems to be nothing more than "it'll work because I really really want it!" I've had lots of discussions with Republican friends, family and acquaintances. Every single time, their argument devolved to the fact they hate that their money goes to lazy welfare queens, rather than worrying about the actual deficit. It's extremely frustrating, because no amount of facts, or even mathematics, will get them to to see the error of their ways. The craziness of it is what drove me to this site in an effort to cope.