The Spectacle Blog

But You Taught Me About the Laffer Curve!

By on 3.9.08 | 1:54PM

I love Ben Stein, but I sure hope John McCain doesn't take his advice on taxes. Though if there is a Republican presidential candidate so inclined, McCain is probably the guy.

Stein writes that economic conservatives are wrong to believe "that tax cuts pay for themselves by generating so much economic growth that they replace the sums lost by tax cutting." Some misguided economic conservatives have indeed argued that, but that is not what supply-side economics actually teaches. In both theory and practice, supply-side holds that reductions in marginal tax rates, by increasing the after-tax rate of return on productive economic activity, enhances incentives for work and investment. This leads to more income being earned, increasing output and enlarging the tax base. This will to some extent, over time, offset the revenue losses created by the lower tax rates. And in very limited circumstances, when marginal tax rates are high enough to be in the prohibitive range, these tax cuts may "pay for themselves." But only under those very limited circumstances. Tax credits and other neat stimulus package gimmicks don't enhance incentives in this way and are definite revenue losers.

All that being said, Stein's New York Times column does illustrate the mess big government conservatism has made for Republicans. With marginal tax rates well below where they stood in the Reagan era, you don't get much Laffer Curve effect from further tax cuts. Middle-class tax cuts will probably be significant revenue losers. If the GOP is wedded to big government on the spending side, it cannot win the battle on taxes.

UPDATE: Grover Norquist offers different advice.

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