By D. Eric Schansberg
Larry Kudlow and Brian Domitrovic have written “JFK and the Reagan Revolution” — a helpful history on their dramatic “supply-side” reductions in marginal tax rates.
Bringing President John F. Kennedy into this discussion is particularly helpful in dealing with partisans (dramatic tax cuts have not simply been a GOP thing), folks who are focused on income inequality (given the policy’s supposed contributions to income inequality and inequity) and statist ideologues (who prefer higher income taxes as both a means and an end).
Today, President Ronald Reagan gets far more attention for his tax cuts than JFK, probably because his policy move was more recent (1980s versus 1960s), more dramatic in terms of the numbers (dropping the top rate by 60 percent versus 30) and more important for our economy (especially in light of the contemporary economic woes). Still, JFK’s effort was far closer to Reagan’s than the tax-rate tweaks of other post-WWII presidents.
Likewise, the effects of the JFK tax cuts are more difficult to assess. His economy was not nearly as rough as what Reagan inherited from Carter. And the rise of the 1960s saw a range of contradictory economic policies that would have mitigated the effects of the tax cut — whereas Reagan’s overall economic policy legacy was cleaner.
Kudlow and Domitrovic’s book also affords an opportunity to promote some Econ101 literacy. Tax cuts come in two basic varieties: “Keynesian” and “supply-side.” The former are named after the school of thought that became dominant in the 1930s but was decimated in the late 1960s (by economic theory) and the 1970s (by the data). For the macroeconomy, Keynesians emphasize the primacy of consumption (over investment).
They embrace government activism in terms of (expansionary) fiscal policy. They have relatively little faith in market processes and relatively great faith in the knowledge and motives of government agents.
For Keynesians, tax cuts are seen merely as a vehicle for increasing consumption to stimulate the economy. If I reduce your taxes, you will buy more stuff, increasing consumer demand and boosting the economy. Supply-siders acknowledge the consumption angle, but they also recognize the implications for the “supply side” of the economy. If tax cuts reduce marginal tax rates, then people will be allowed to keep a higher proportion of the fruits of their labor. Beyond more consumption, this incentivizes them to be more productive, work harder, be more entrepreneurial, engage in less tax avoidance and tax evasion — all good stuff for people and an economy.
The modest tax-rate changes of other presidents should cause modest results. But JFK and Reagan made dramatic changes that would be expected to yield dramatic results. JFK reduced the top marginal tax rate from 91 percent to 70 percent. Reagan and a strongly Democratic House reduced the top rate to 28 percent. (The 1986 tax cuts passed the Senate 97-3) Reagan used to talk about movie stars in 1950s Hollywood who only made one movie per year. Much of their income was taxed at the various marginal tax rates (tax brackets) before the last dollars were taxed at 91 percent. But if they made a second movie, all of their income would have been taxed at 91 percent. Who would do that?
Arthur Laffer came up with the Laffer Curve, famously drawing it on the back of a napkin. It illustrates the necessarily U-shaped relation between tax rates and tax revenues. To note, if tax rates are 0 percent or 100 percent, you’ll collect no revenue. It follows that for rates up to a certain amount, higher rates will yield higher revenue. Beyond that point, higher rates will yield lower revenues. In contemporary terms, it’s difficult to imagine that the Bush I, Clinton and Obama increases were helpful or even all that relevant. Supply-side arguments can be exaggerated and abused. It’s unlikely that the relatively modest tax cuts of Bush II and Trump are a big deal either.
So, we might debate the size of supply-side effects, but their existence is not debatable. Often, “supply-side” is used as a term of derision, as if it’s ridiculous. Instead, what’s ridiculous is to deny their existence. (Perhaps we should call these people “supply-side deniers.”)
Finally, supply-side tax cuts are often referred to as “trickle-down.” No economist will use that term: it’s too vague and too colorful. When you hear it, you can trust that you’re listening to a rube or a demagogue.
D. Eric Schansberg is a professor of economics at Indiana University Southeast (New Albany) and an adjunct scholar of the Indiana Policy Review. Send comments to [email protected].
