Wednesday, October 14, 2015

Deficits, the Laffer Curve, and Jeb's 'Deja Voodoo'

There was a time when Republicans were known as the frugal party that obsessed over deficits and balanced budgets. As the sociologist Mark Mizruchi writes, in his outstanding historical study of the corporate elite during what he believes was the period of corporate moderation and pragmatism from the post-WWII period into the 1960s, “The interesting feature here is the groups willingness to acknowledge that spending cuts could not be viewed as the sole solution to the deficit without at least some level of tax increase…this contrasts with the American business community of the post-2000 period, which has been unwilling to even raise the possibility of a tax increase, despite a deficit far greater in magnitude than that experienced during the 1960s.”

But one can pre-date the shift in ideology back to the 1980s when Reagan proposed sharp tax cuts for the rich. These proposed tax cuts posed a serious dilemma for Republicans who, on the one hand, loved low taxes, particularly in the upper brackets and on corporate profits but, on the other hand, were concerned with deficits.  At that time there was recognition of the positive relationship between tax rates and tax revenue (the laft-hand half of the curve below).

The Laffer (laugher?) curve, presumably originally drafted on a cocktail napkin, was designed to show that the Republicans could have their cake and eat it too. The purely hypothetical curve showed how lower tax rates could actually increase revenue on the assumption that it would stimulate such an outburst of new investment that the resulting increase in growth, and the taxes that this growth would yield, would more than compensate for the lower tax rates.  This was famously described by GHW Bush as “voodoo economics.” But it today remains the foundation for the logic of supply-side economics and the trickle-down/rising-tide-lifts-all-boats fraud.

Every time it has been tried, during the Reagan years, during the GW Bush years, and most recently by Governor Brownback in Kansas, it has produced exactly what one would logically expect – massive budget deficits.

This brings us to Presidential candidate Bush III (aka Jeb!). He has recently proposed a tax plan that is nothing more than warmed over supply-side doctrine with lower tax rates for the top bracket and corporations as the presumed solution to slow growth.  In an interview, Jeb was told that economists, who had evaluated his tax plan, predicted a loss of revenue into the trillions. In response, Jeb simply parroted the bankrupt and empirically unsubstantiated supply side mantra based on the Laffer Curve :
“Lower taxes will create a renaissance of investment in our country…the dynamic effect of growth will create far more revenue than any of the exotic tax plans that are being proposed by the left…the dynamic effect of tax policy creates economic growth that narrows the deficit.”

Yes -- in the words of the economist Robert Kuttner --  another case of deja voodoo!

1 comment:

  1. Conservative politics, particularly when it comes to the economy, tend to rely on the assumption that wealth has some correlation to morality, success, or interest in society's wellbeing. The myth that wealth is generated by individual hard work rather than systematic, self-perpetuating class privilege sustains the illusion that, somehow, the wealthy continuing to be wealthy is necessary for the economy to function. The same logic was applied in 2007 and 2008 to pay for banks that were "too big to fail". The simple fact is, the wealthy have a long history of using their wealth irresponsibly and unsustainably, and continuing to systematically funnel the wealth of American society to the same people who have mismanaged it for decades only shows a quasi-religious faith in an operational model that has no factual or critical analysis favoring it. Luckily for the Republican Party, it's much easier to show people a made up theoretical graph than to ask them to think critically.