Alan Reynolds has a really good post on National Review’s website today. If you are a conservative or a Republican you probably read National Review often and you are likely to have read, and enjoyed Kevin Williamson. Kevin is a great writer and a big thinker. He recently stepped into the lion’s den with a piece called “Goodbye Supply Side” and Alan Reynolds has properly stepped in to administer justice and set the record straight.
Williamson says “tax cuts aren’t really the problem” — but the real problem is the threat of European-style tax increases. If we accepted his advice to ignore all the evidence behind supply-side tax reforms, we would be left with no credible defense against Obama’s plans to pile surtaxes on top of surtaxes for investors and high-income families, or against a VAT. If lower tax rates in the 1980s were useless, then higher tax rates in the next year or two must likewise be harmless.
Williamson claims the “proper perspective” looks only at federal spending, treating spending and taxing as synonymous, regardless of tax rates or even tax revenues. This leads him to define money-losing “tax cuts” as a “poorly applied supply-side analysis.” On the contrary, George W. Bush’s advocacy of tax credits and rebates to “put money in peoples’ pockets” was demand-side, Keynesian analysis.
Supply-side economics in 1971–87 was largely about a policy mix to end stagflation: Using monetary policy to reduce the growth of nominal GDP while using tax incentives and deregulation to raise the growth of real GDP. The tax side was always focused on microeconomics — the incentive effects of marginal tax rates.
– – – – –
Federal spending is indeed approaching crisis proportions, but Williamson may not entirely right that “nobody wants to touch it.” Wisconsin congressman Paul Ryan, a favorite supply-side ally of our good friend Jack Kemp, is not shy about proposing large and specific federal spending cuts. Neither is Indiana governor Mitch Daniels, who once recruited me to the Hudson Institute.
If cutting top tax rates from 70 percent to 28 percent under President Reagan did not constitute a tax cut because defense spending went up for a few years, then raising top tax rates under President Obama would be equally irrelevant if spending were unchanged. The only “real” tax cut, in this view, was the post-Soviet peace dividend under Bill Clinton. If that is “the stuff that a broad-based political movement is going to put at the center of its campaigns,” it doesn’t sound too promising.
Read the entire column here.