Supply-Side Democrats

The only significant difference between the Republican and Democratic parties is their rhetoric. When it comes to policies actually enacted, a much better metric, they are remarkably similar. Despite their similarities, the parties will still reliably oppose whatever the other team is proposing.

A case in point is how tax cuts affect total revenues. Reagan-era supply-side economists argued that tax cuts, by sparking economic growth and aggregate spending, could actually increase tax revenues under certain conditions. Their basic insight that tax revenue has dynamic economic effects was, and is, correct. But the dynamic effects were too small to counteract the lower marginal rates, let alone Reagan’s spending hikes in defense and other areas; the deficit grew. Democrats have sneered at supply-side tax ideas ever since.

Of course, twenty years before that, Democrats were proposing exactly the same policy, and for the same reason. In chapter 16 of Passage of Power, the fourth volume of Robert Caro’s Lyndon Johnson biography, Johnson has just assumed the presidency, and is figuring out how to pass as much of the late John F. Kennedy’s legislative program as possible, beginning with the FY 1965 budget. His thinking was this would improve his chances of winning the 1964 election. Caro explains how progressives (he misuses the word “liberal”) and conservatives butted heads in that year’s budget battle:

Liberals wanted a larger role for government, wanted bigger, and new, government social welfare programs and therefore a larger budget. They believed the $11 billion tax cut [proposed by Kennedy] would, by putting more money into people’s pockets, stimulate the economy and thereby increase tax revenues, and the money the government would have available for these programs. Conservatives, uneasy about an expansion in government’s role and about the proposed new programs, were opposed to the higher spending, and believed the deficits would be increased by the tax budgets.

Somewhere, Art Laffer is either smiling or scowling. Not sure which.


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