The Big Con, Indeed

As the Democrats prepare to attempt one of the largest tax increases in American history, their allies in the press corps are softening the ground with a campaign against the ideological underpinnings of the Bush tax cuts. People can debate any particular tax increase or tax cut. But the left-wing side of this debate is rolling out a new argument. In publicity material for a new book, "The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked By Crackpot Economics," the author, Jonathan Chait, puts it this way: "The notion that tax cuts can cause revenue to rise, though now embraced by every leading Republican politician, is rejected by even the most conservative economists."

On the Web site of the New Yorker, the magazine's financial page columnist, James Surowiecki, writes, "The supply-side argument that, in the United States, tax-rate cuts pay for themselves — that, after cutting taxes, the government actually ends up with more revenue — has little or no support within the mainstream economic profession, and no hard empirical data to back it up." He likens it to "saying that the best way to treat sick people is to bleed them to let out the evil spirits."

Messrs. Chait and Surowiecki are playing fast and loose with the facts. The first few pages of Mr. Chait's book are packed with the names of economists who back supply side ideas — Arthur Laffer of the Laffer Curve, who has been on the faculties of Pepperdine, the Southern California, and Chicago; Robert Mundell, the 1999 Nobel Laureate who is a professor of economics at Columbia; Martin Feldstein of Harvard; Lawrence Lindsey, who was an associate professor at Harvard from 1984 to 1989; and Glenn Hubbard of Columbia.

Not mentioned is Robert Inman of the Wharton School, who is quoted on the Wharton Web site as saying, "If tax rates are very high, it is certainly possible that lowering the rates would actually increase the revenues of the government." Nor Edward Prescott, a professor at Arizona State who wrote in the Wall Street Journal on October 21, 2004, "We should roll back the 1993 tax rate increases and re-establish those from the 1986 Tax Reform Act. Just as they did in the late 1980s, and just as they would in Europe, these lower rates would increase the labor supply, output would grow and tax revenues would increase."

Also not mentioned is Robert Barro, who is Warburg professor of economics at Harvard and was vice president of the American Economic Association and who wrote in a presentation at a conference on tax reform and economic growth, "Some tax-rate cuts can be self-financing (as suggested by Laffer curve)." One could go on and on. It is untrue that even the most conservative economists reject the notion that tax cuts at the top margin — meaning on the next dollar earned — can have supply-side impact, including revenue increases.

The argument that supply-siders are outside the mainstream of economics would not be a strong argument even if it were true. Copernicus and Newton were outside the mainstream of physics. What matters is whether the ideas are true, not whether they are popular. Critics of supply-side economics tend to attack a straw man, claiming that all supply-siders claim all tax cuts increase revenue, when in fact just some tax cuts will. In other cases, the increased government revenue owing to growth will offset some of the lost revenue from the rate reductions, but not all of it. As the editor of the Wall Street Journal during the Reagan years, Robert Bartley, put it in his book "The Seven Fat Years," the Laffer Curve, on its face, "is not an assertion that all tax cuts will produce more revenue, only that some tax cuts might."

That is an assertion that indeed has empirical support. The first example is the Taxpayer Relief Act of 1997, which lowered the top statutory rate on long-term capital gains to 20% from 28%, effective in May 1997. Federal receipts from the capital gains tax grew to $84 billion in 1998 from $54 billion in 1996, according to a February 23, 2006, letter from the Congressional Budget Office to Senator Grassley. The Tax Foundation has slightly different data that show a similar trend — capital gains tax receipts growing to $89 billion in 1998 from $66 billion in 1996.

The second example also involves the long-term capital gains tax rate. When the tax rate was cut again, to 15% from 20%, effective in May 2003, government revenues from the tax soared to $73 billion in 2004 from $49 billion in 2002, according to the Tax Foundation. The same applies to the Bush income tax cuts, which are a third example. The top federal individual income tax rate was reduced to 35% in 2003 from 39.1% in 2001. Federal individual income tax receipts again increased, ballooning to $935 billion in 2005 from $888 billion in 2001, according to the Tax Foundation.

Left-wingers attribute the revenue gains to the business cycle rather than the tax cuts, as if it were a sheer coincidence that tax cuts take effect just as the American economy would have been about to take off on a growth spurt. If Messrs. Chait and Surowiecki believe that, we can get them a terrific deal on the Brooklyn Bridge. Denying the revenue increasing effects of correctly constructed supply-side tax cuts is precisely the kind of con of which Mr. Chait accuses the Republicans.

Even framing the issue as primarily about government revenue, however, concedes the terms of the debate to the left-wingers — as The Great Bartley comprehended. No doubt crucial government activities need to be funded. But as the political season wears on, the candidates — and the journalists who follow them — will come into contact with more and more voters who when they think of "revenue" don't first think of the government's bottom line, but of their own household's. You don't need a Ph.D. or a seat on the faculty of an Ivy League university to know that tax cuts let individuals keep more of the money they have earned, allowing them to spend it as they see fit, rather than as some bureaucrat or lobbyist-influenced politician wants to spend it.

The right way for politicians to approach these issues is by putting the individual's wallet ahead of Washington's, an approach that puts property rights and incentives for hard work and growth ahead of government revenues. Understanding incentives has always been a key to the supply-side argument. It's good politics and good economics. While the Party's deep thinkers of today may dismiss it as hoodwinking, hijacking, crackpottery, or evil spirits, there was a time the Democrats were on the right side of the issue. Ask JFK. Our own prediction is that to the extent the tax issue drives the debate in 2008 — and we think it will be a big factor, though not the only one — the key point won't be which candidate wins the votes of the economics faculties, but which one can show voters he or she understands it's their money, and Washington should take as little as it possibly can.