By Jessica Chau
Here is an interesting article about supply-side economics from the Boston Globe, as well as a piece from Fortune making the case for letting the Bush tax cuts and payroll tax reductions expire at the end of the year, but introducing a stimulus to help boost the economy.
Boston Globe, Christopher Rowland, 10/15/2012
The idea: Reduce taxes, especially for the wealthy and corporations, and America’s entrepreneurial fortunes will soar. The economy, unleashed from the drag of excess taxes, will grow. Government deficits will shrink.
Call it Supply-side Economics 101.
The trouble with the approach is that supply-side tax policy remains unproven and controversial more than three decades after George H.W. Bush branded it “voodoo economics’’ during a debate with Ronald Reagan. Even if it did kickstart an economic burst, predicting the size and its effect on government revenues is exceedingly difficult.
A report by the Congressional Research Service last month examined the historical relationship between top marginal tax rates and economic growth going back to 1945 and found none. “Top tax rates appear to have little or no relation to the size of the economic pie,’’ according to the report.
A nonpartisan group in Washington, the Tax Policy Center, has said Romney cannot deliver all the tax cuts he promised to the wealthy without raising taxes on the middle class.
A onetime proponent of supply-side economics and domestic policy adviser to Reagan, Bruce Bartlett, says Republicans have relied too heavily on it and the concept should be retired. He is harsh in his assessment of the motivations of wealthy individuals and corporations who back the doctrine through advocacy groups such as Club for Growth, a fiscally conservative political action committee that provides support for Tea Party candidates for Congress. “It is in the best interests of rich people to want to believe this,’’ he said in an interview. “It justifies cutting taxes, especially at the top.’’
Fortune, John Cassidy, 10/15/2012
The shock of more than half a trillion dollars in tax increases and spending cuts could send us into another recession. But with a little stimulus, it might be a blessing, not a curse.
With the election almost upon us, Wall Street is starting to focus on the possibility that, come Jan. 1, 2013, the economy could hurtle over a “fiscal cliff” consisting of $600 billion in tax increases and spending cuts. It’s hard not to be concerned. The Congressional Budget Office and Ben Bernanke have warned that this shock — a result of the Bush tax cuts and the Obama payroll tax reductions expiring at the same time that automatic spending cuts are imposed — could well plunge the economy into another recession. But before we all panic and agree to another meaningless short-term fix, such as the one that some senators from both parties are reportedly discussing, let’s consider another possibility. Crazy as it might sound, the expiration of the tax cuts could turn out to be a blessing in disguise.
Allowing the tax cuts to expire on schedule potentially provides a way out of the impasse. According to Bill Gale of the Brookings Institution, who supports the idea, it would raise about $2.8 trillion over the next 10 years — more than enough to help bring down the deficit and stabilize the ratio of federal debt to GDP, a key indicator of long-term financial stability. “Going over the cliff is the only way to get the economy on a good long-term budget path with a deficit-reduction package that balances revenue increases and spending cuts,” Gale wrote in a recent article for the nonpartisan Tax Policy Center.
Another cool thing about Gale’s approach: It wouldn’t require a single vote on Capitol Hill. If the lame-duck Congress does nothing at all when it meets after the election, the tax increases and spending cuts will go into effect on Jan. 1 — and the threat of the U.S. eventually encountering a Europe-style debt crisis will be greatly reduced.
Admittedly, the idea of increasing taxes at the end of December only to cut them again in February or March takes a bit of getting used to. But as long as the new stimulus is relatively modest and temporary, it would all make perfect sense. The long-term fiscal outlook would be transformed, and the threat of a recession would be greatly reduced. In a dysfunctional political system such as ours, it sometimes takes unorthodox tactics to get important things done. This is one of those times. Bring on the fiscal cliff!