Roadwork, and a Shout Out to the Peeps at Oberlin

October 10th, 2013 at 6:18 pm

In the last two days, I’ve been in Cleveland, Philly, DC, and Baltimore.  I’ll have more to say about these travels in a later post, as I had many telling interactions with folks about all the stuff I write about up here, from recent government dysfunction to broader economic trends.

Actually, not quite Cleveland but 30 miles west at Oberlin College, where I debated my old friend Art Laffer.  Like I say: love the man, hate the curve.  Well, not “hate,” but strongly disbelieve, because there’s no evidence to support it.  To the contrary, as I noted in the debate, there’s lots of evidence that goes the other way.  Art’s great—trickle down is bunk.

Anyway, I promised to post some of that evidence as well as some data on factual disagreements between me and Art.

First, I cited the Clinton era as a “data point” against supply side as Clinton raised top tax rates from 31% in 1992 to 39.6% in 1993 and things economic unfolded in precisely the opposite way supply-siders would predict, i.e., the economy boomed.  To be clear, the boom didn’t happened because of the tax increases, but neither did they prevent it.

A counter-example is the GW Bush years, where large tax-rate reductions were followed by uniquely lackluster economic results.

The supply-siders bob and weave on this stuff.  Art, for example, claimed the Clinton cut spending a lot and that’s what made the difference.  First off, that’s non-responsive: in Art’s world, tax-rate increases reduce labor supply, productivity, jobs, growth, and incomes—all of which did very well in the 1990s.  Secondly, it’s wrong.

As I noted in the debate, spending under Clinton went up.  It went up in nominal terms ($380bn) and in real terms ($145bn, 2012 $’s), 1993-2000—the eight years Clinton was in office.  It went up when you exclude net interest payments, by $164bn, in real dollars (since, arguably, such spending relates to debt acquired before an administration was on the scene).


Source: CBO, BLS (for CPI deflator); dollars in billions.

Spending did, as I also pointed out, decline as a share of GDP, but that’s because GDP grew faster than spending.  In nominal terms, GDP grew 49%; spending, 25%.  Take that, trickle downers!

The other figures I said I’d post come from the work of the noted inequality analysts Saez and Piketty.  Then I remembered I’d already posted them a few years ago.  So see the figures at the bottom of this post.  Here’s what I wrote back then:

1) do lower marginal tax rates on the rich result in higher income inequality, and 2) do higher taxes on the rich result in lower economic growth?

Answers: yes and no.

Panel A in the figure below shows a strong negative correlation between reductions in the top marginal rate and the increase in the share of income held by the top 1% of households.

Panel B, on the other hand, shows no correlation between such changes and the growth of GDP per capita.

Note that these income shares are pretax, so the correlation in the top panel is not simply induced by the rich keeping more or less of their earnings. You lower tax rates and you just end up with a lot more concentration of the growth in earnings and assets. And what do you get for that in terms of growth for everybody else? According to the bottom panel, nothing.

I’ve long asserted that trickle-down tax policy—cut taxes on the rich and unchain the economic activity that will enrich everyone else—doesn’t lead to faster growth. It just redistributes income upwards. My views on this were strengthened by the very different outcomes in terms of growth, jobs, middle-class incomes, poverty reduction, and our fiscal health during the Clinton vs the GW Bush years. Based on that natural experiment of supply-side trickle down, these findings shouldn’t surprise you at all.


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2 comments in reply to "Roadwork, and a Shout Out to the Peeps at Oberlin"

  1. smith says:

    Saez and Piketty have shown that lower corporate tax rates provide a huge contribution to the current historically low effective rates of taxation of the rich. This exacerbates inequality, gobbles up a large share of the economic pie, leaving less for labor, an incentive to further shortchange labor, and robbing the government of needed revenue. Yet Obama wants to lower rates, and said so during the 2012 campaign. So despite the fact corporations are sitting on a ton of money, that they are experiencing record profits, that higher tax rates would provide incentive to reward labor, reinvest in expansion and research, and that low tax rates are a prime factor in rising inequality, Democrats are heading in the wrong direction. It’s just like liberal Bill Bradley destroying progressive tax rates in the ’80s.

  2. David A. Spitzley says:

    While the tax increases may not have directly caused a boom, given that the budget surpluses that followed are the first time since I was born that the government wasn’t running deficits during a healthy economy, and was thus not crowding out productive investment via the interest rate channel, one might be justified in giving the tax increases at least some credit for the subsequent boom. I’m not comfortable enough with the models to try to estimate the magnitude of any effect, though…