As the economy continues to improve and grow, some folks are searching high and low for something, anything, to credit besides Bush’s tax cuts. The people looking most feverishly for such a scapegoat are the Demand-Side Economists.
Jerry Bower, a NRO Financial columnist, published a guest column at TownHall.com a few days ago entitled The Great Supply Side Experiment of 2003. It makes a tremendously strong case for Supply Side economics in comparing the Bush Tax cuts of 2001 and 2003. You should really read this article, especially if you’re not familiar with the differences between supply-side and demand-side economics.
The basic reality, though, is that tax cuts for the lower and middle classes (demand side) don’t stimulate the economy nearly as well as when the rich are also included (supply side).
On the most basic level, the principle is that if the tax rate is above the optimal level, lowering it will increase receipts. If it’s below optimal, raising it raises receipts. Bower’s example illustrates this well at the extremes — the the tax rate were 150% (for every dollar you made, the Government took a dollar from your paycheck and 50 cents from your savings) nobody would work, thereby reducing the income to nothing. As the tax rate goes lower, people would begin working and receipts would increase. On the other extreme, with a tax rate of 0%, all the work in the world wouldn’t raise a penny, but increase that number and the income starts to go up. The only legitimate question, as Bower points out, is “are American tax rates above or below the point of optimization?”
Essentially, however, Bower provides a nice comparison between the 2001 Tax Cut, which provided only a very weak recovery and the 2003 Tax Cuts which are already showing signs of strong economic stimulus.
When it comes right down to it, Bush’s tax cuts are one of the primary reasons that the country is recovering so well and quickly from Clinton’s so terribly inflated Bubble Economy. You don’t have to believe it if you don’t want to… but it’s the truth anyway.
[Link via Blogs for Bush.]
If and when someone finally solves the question of the optimal tax rate, that person not only will win the Nobel Prize, they will shut down the prize forever, for no one can outdo that!