I just saw an interview with Herman Cain on the O’Reilly program. In this interview Cain touted the now traditional Republican mantra about economic recovery; Tax cuts. When O’Reilly asked him about lowered government revenues while we are so deep in debt, he responded with the normal supply side response that the economy is not to be viewed with static, but rather dynamic analysis.
All that is standard, and it is historically true. But the questions to ask now are these: Will any further tax cuts right now actually spur economic growth? Or would other things be more effective? And, will tax cuts really increase revenues, or decrease them.
Unfortunately I am suspicious that many conservatives have a misunderstanding of supply side economics. Tax cuts, and supply side are not magic. They are not a cure all for whatever ails you. I ask you to witness the current economic environment. Right now, due to various tax cuts in the last two years we are at the lowest rate of both income taxes, and capital gains taxes that we have seen in thirty years. Yet the economy shows no signs of recovery.
Here is the way that supply side equations work. You have all, no doubt heard of the Laffer Curve, named for economist Art Laffer. According to supply side theory, if the tax rates are north of the Laffer Curve then increasing rates will so depress economic activity that you get less income than you had before. And if you lower the rate, then you actually increase tax income.
This is all absolutely true and can be seen to have worked several times in the past. However, What if your tax rates are already below the point of equilibrium on the Laffer curve? What happens then is that lower in rates further will not noticeably increase economic activity and will result in less revenue for the government.
Right now we have to ask this question, Are we at or below that equilibrium point? I think there is good reason to conclude that we are. As much as I like Tax cuts for their own sake, is it responsible to advocate further cutting when such huge deficits loom. DON’T GET ME WRONG! We can never lower our deficits with just tax increases, We must have real substantive spending cuts. But the simple truth is that we will probably have to have both. Just as a case of reality and political necessity.
Please do not take this the wrong way, I am a total believer in supply side economics and I have nothing against Herman Cain or any of the other candidates calling for tax cuts. But we have to be sober and not rely upon wishful thinking.
Why exactly is the economy so bad, and not responding to tax cuts? Well there are several likely reasons. A regime which is hostile to business, a huge increase in regulations, a spend thrift congress, huge deficits, and uncertainty about the future. But probably the biggest reason is the Federal Reserve and their manipulation of the currency. This has caused the Dollar to take a hard fall. That drives up commodity prices and causes us to have what amounts to a huge hidden TAX INCREASE, in the form of fuel, food, and commodity prices.