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Regonomics (aka Supply Side economics, formerly known as Trickle Down) was pushed by Jack Kemp and later David Stockman. It was based on the "theory" of Professor Art Laffer. Laffer said that, as income taxes were increased, the incentive to produce would decrease and the total tax revenue would decrease. The Laffer Curve shown below says no more than that. No proof or mathematical rigor was ever offered.
The Laffer Curve:
t* represents the rate of taxation at which maximal revenue is generated. Note: t* could theoretically be anywhere, not necessarily at 50% as shown here.
As a Congressman and then as Reagan's Director of the Office of Management and Budget (OMB), David Stockman developed the legislative program which was Reaganomics. At the OMB, Stockman merged the Laffer "theory" and long-time Republican/Conservative politics. Tax reductions would be in the form of tax breaks for the conservative base (the rich). The high personal income tax rate was reduced from 70% to 30%. While this tax reduction was billed as a break for all Americans, it applied only to those with incomes above $215,000. Stockman's plan was to inflict massive cuts on all "entitlement" programs (particularly Social Security benefits) to offset the giveaway to the rich. The Laffer curve was a sham. The Stockman plan was to give to the rich and take from the poor.
The projected deficit just based on lost revenue was $200 Billion. The actual deficit was $200 Billion. The Laffer curve effect of increased revenue due to the tax cut was zero. G. W. Bush cited the same Laffer "theory" for more tax cuts for the rich. The result was higher deficits. In total, these deficits have increased our debt from $1 trillion to $9 trillion and counting.
In 1981 Stockman was interviewed by William Greider for an Atlantic Monthly article. Greider quoted him as follows: He (Stockman) admitted that the 1981 tax cut "was always a Trojan horse to bring down the top [tax] rate" for the wealthy. Cutting taxes for the rich had long ago been coined "trickle down economics" - and it was an unpopular concept with the middle class. "It's kind of hard to sell 'trickle down,'" Stockman told the interviewer. "So the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."
In his book The Triumph of Politics -Why the Reagan Revolution Failed Stockman blasts Reagan and his other advisors for the lack of the political will to inflict the massive cuts on "entitlements". Stockman had no illusion that the Laffer curve had any real validity.
Other Related Thoughts on the Economy
Note: The income tax policy discussed here relates to personal income tax. Corporate income tax is another matter and more complex. Productivity is accomplished primarily by corporations. Corporations must have the capability to apply resources to potentially productive courses. Their activities need to be monitored but we must be careful not to unduly hamper their ability to compete.
Logic does suggest that, if you tax someone too heavily, you will decrease his incentive to gather income. However, incentive to increase personal income is not the same as incentive to produce benefit for society. In our history, the counter-competitive actions of the robber barons hurt the country. (The actions of Henry Ford in paying a living wage helped.) In recent years, the activities of the corporate raiders have been profitable to them personally but very destructive to the corporations involved and their workers (including stolen pension funds). Warren Buffett has made an immense fortune from stock trading which contributed nothing to society. Recently, hedge fund manipulators have had personal yearly incomes exceeding $500 million with only negative effects on society. American CEOs (including those who have bankrupted their corporations) have pulled in hundreds of millions in yearly income. Decreasing the incentives for non-productive income will be beneficial to the economy since much, if not all, of that money will be freed to fuel productive effort.
For others who have had very large incomes and may have actually been productive, higher personal income taxes will not be much of a disincentive. Productivity in and of itself is a major incentive. They don't have the insatiable greed of the non-productive rich. Pre tax income may be largely just a way of keeping score. (Unfortunately, it will also not be a disincentive for the corporate thieves because it is a score keeping thing for them also.)
In 2004, Bush pushed the idea that higher personal income tax rates would hurt small businesses and their creation of new jobs. Actually, higher personal income tax rates will encourage small business owners to keep the money in the business by hiring more workers and making investments in new equipment. Only when they pull the money out of the business will they be taxed.
Warren Buffett apparently amassed his fortune without any desire to live in great luxury, limiting his annual personal expenses to $100,000. Now he is trying to give it away. He recently challenged a group of millionaires and billionaires to show him that they are paying income tax at a rate greater than that of their secretaries. He had no takers. In November 2007, in testimony before a Congressional committee, Buffet said that a much higher progressive income tax should be levied on the rich.
Classic economic theory says to let market forces control the economy. That is analogous to saying we should let natural forces control crime on the streets, abolish the SEC and let the stock market be manipulated by the craftiest thieves, abolish the Federal Reserve Board, etc. Keynesian economic theory says that the government must be involved to nudge the economy in directions benefiting society. Keynes would recognize that there are natural forces in the economy which must be recognized. But, we can't let "rule of the jungle" prevail.
I agree with David Stockman on some matters. Price controls can be very dangerous. Incentives for producers of specific commodities can change the industry in undesirable ways. Welfare programs can make people dependent and unproductive. These and other similar matters must be recognized in the development and updating of economic policy. Office holders must deal with these forces with intelligence and the single intent of benefiting society as a whole. They must be immune from the influence of self serving individuals and groups.