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All Da King's Men

A Very Brief Supply Side Defense

By Da King Published: November 2, 2011

The United States has been reducing tax rates for the last 40-50 years. Here's a chart of the top marginal tax rates over time:

As you can see, individual income tax rates, corporate income tax rates, and capital gains tax rates have dropped sharply through the years. All these rates are much lower than they were in the 1950's and 1960's.

Now let's bring supply side economic theory into the discussion:

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economics are lower marginal tax rates and less regulation.

Supply siders, mainly conservatives, argue that lower tax rates result in economic growth, and that economic growth will actually RAISE tax revenue, despite the lower tax rates. Opponents of supply side theory, mainly liberals, say that's the craziest thing they've ever heard.

Now look at the above tax rate chart above. If the supply siders are right, federal tax revenue should be going up over time despite the lower tax rates. If supply side opponents are right, federal tax revenue should be dropping, because virtually all federal tax rates have been reduced.

Now for the answer. Here are federal tax revenues over time:

Federal tax revenues have gone up, despite the lower tax rates.

And the winners are - supply siders.

I know some other factors come into play, such as inflation and population growth, but...federal revenue has gone up...way the same time tax rates were going down...way down. I'm sure there's some point on the Laffer curve where taxes would be too low to produce revenue increases, but it doesn't appear we've reached it.

The verdict of history is in. Tax cuts lead to economic growth. I only wonder why some people keep trying to deny it. The correlation is pretty obvious.



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