From: pjm@anegada.sps.mot.com (Patrick J. McGuinness)
Subject: Supply-side economics (Re: ==> Rhetoric Vs. Reality ..)
Organization: Motorola Inc., Austin TX
Date: Fri, 16 Oct 1992 23:47:00 GMT

In article <7G8-Rp_@engin.umich.edu> jwh@citi.umich.edu writes:
>In article <lds0vaINNo3i@spim.mti.sgi.com>, mpolen@suntory.mti.sgi.com (Mike Polen) writes:
>|> Jim Howe) writes:
>|> |> 
>|> |> I don't have a study that I can refer to but I would like to make two
>|> |> points.  First, it does not seem at all unreasonable to me that when
>|> |> the marginal tax rate hits 70% that someone may decide to spend time
>|> |> doing other things than economic activity.  In addition, the higher
>|> |> tax rates are, the more people can afford to spend finding tax shelters
>|> |> to shelter the income they do have.  Reducing the rate increases
>|> |> the costs of finding and maintaining a shelter relative to the benefits
>|> |> received.  Second, I believe the results of the 80's give a reasonable
>|> |> empirical basis for Bruce's claim.  Marginal tax rates were cut

The evidence does indeed support the claim that lowering rates
below 70% garnered more tax revenue.

When we reduced the top tax rates in 1964 from 75-90% down to 62-70%,
revenues increased. For taxpayers earning over 500,000 in income,
it leaped 30%.
Reagan's '81 tax cut included a provision to cut the top rate
from 70% to 50%. The Government made *more* in revenues at the 50% rate
in '83 than they made at the 70% rate in '81. 
In addition, cuts from the 50% range to the 
30-40% range lost very little revenue, even over the short term
of a few years. Over the long run, it probably worked to be a net plus.
Source: Lawrence Lindsay, "The Growth Experiment".

Recently Mexico found this out too with their tax cuts:
        "We reduced tax rates and we increased the tax base. ..
We've reduced tax rates and strengthened enforcement, and now we are
getting more revenue out of lower tax rates."
        -President Carlos Salinas, of Mexico
        quoted in Forbes magazine, Aug 17, 1992

>|> |> significantly and the income earned by those effected by those cuts
>|> |> rose.  We're talking pre-tax earnings.  When rates were cut pretax
>|> |> earnings rose substantially.  I believe this represents the increased
>|> |> economic activity and reduced sheltering of income done by those in
>|> |> higher brackets.
>|> |> 
>|> 2. The second only may say that by cutting their taxes, they had more to
>|>    invest and therefor invested more and earned more.  But if you believe
>|>    that, they why not cut everyones tax.  What is the magic of giving
>|>    the extra to the already rich?

Bingo! Cut *everyone's* taxes when the rates are too high. You are belaboring
under the mistaken notion, fostered by those who have always been
against lower tax rates, that somehow these cuts only affected the wealthy
or supply-side is about somehow giving a class of people extra money
to invest.  This is hogwash. It is really about changing the marginal
incentives, so that investment, savings and work are adequately rewarded.

It is based on two simple classical economics notions:
1. Raising the "price" of the reward for (investment,savings, work)
and you will see more of those items. (simple supply and demand curve).
2. Supply creates it's own demand (Say's Law).
Specifically, the demand for investment/savings monies and
for work will match the increased supply.

There is *nothing* about rich vs. poor in this; it is *all* about 
re-incentivizing the economy to increase work, savings and investment.
And guess what? IT WORKS!

Right now, the major incentive blocks are in the
welfare class, not the wealthy. Unless, (sigh) Clinton stupidly
goes ahead with his "millionaire surtax" that will send the HRPerot's
into municipal bonds.

We could save billions and add new people to the
work force if we changed the marginal incentives in welfare.
Sadly, again, Clinton's increase in the earned income tax credit
will do more harm than good (*unless* the marginal negative rate
is reduced significantly). 

>The effects of the Laffer curver are only going to be felt by those
>facing high marginal rates.  It's the marginal rate that matters.

Right. But even tax rates as low as 10-20% have an effect on investment
and buying decisions. Just look at how Canada's GST has spurred
border crossings and lifted the Buffalo retail trade.

>This is one reason why it is so hard to work your way off welfare.
>The marginal rates can be greater than 100%.  You also have to 
>remember that the Reagan tax plan raised the zero bracket, thereby
>eliminating many people from pay taxes at all.  In addition, brackets
>were adjusted for inflation, preventing bracket creep.  These were
>all things which benefited low and middle income tax payers.  Also
>your comment about giving extra to the rich isn't correct IMHO.  To
>believe that someones actions aren't affected by incentives and 
>disincentives is foolish.  When Britain had confiscatory taxes, many
>of its wealth simply left the country.  You can't tell me that high
>marginal rates wont have an effect on a persons behavior.  I
>fully believe that the lowering of rates encouraged productive behavior
>which would not have happened had the rates remained the same.  As
>such, I don't see cutting rates as giving 'extra' to the already
>rich.  If anything, I see it as making the system more 'fair'.

The portion of the income tax paid by the wealthy increased during the
1980s.  Nobody was harmed, and we were all helped (directly or
indirectly) by the across the board tax cuts of Reagan,
because of the increased economic activity that resulted from the
tax rate cuts.

>|>    We seem to be talking about priveledge, or special treatment.  Of
>|>    course the argument could be made that the wealthy were the best
>|>    people to give it to because they had already proved they knew
>|>    how to invest it properly.  But that would fly in the face of
>|>    the initial premise that the rich were sitting idly about doing
>|>    nothing because they got such a small piece of incremental income.

Your premises are false on several counts.
1. Tax cuts such as Reagan's attacked marginal rates across the board
- rich or poor, it doesn't matter. There was no "special treatment".
2. Evidence shows that there was a large increase in investment spending
for most of the 80's compared to the previous decade, confirming the
view that the cuts would spur investment.
3. People allocate their personal resources based on expected return,
whether it be time, money or whatever. Money *was* sitting "idly" by
in marginal investments. When the incentives changed, the value
of relative investments changed. That's why in the inflationary
Carter years, we had $800 dollar an ounce gold - it was the best
investment during inflation. Under Reagan, gold fell and the stock market
rose - in fact it more than tripled. 

>I don't know, using cost/benefit analysis seems like a perfectly
>rational thing for a person to do.  The rich were sitting 'idly'
>because they had better things to do than work extra for very
>little gain.  Ignoring all the supply side arguments, however, I
>feel that Reagan's tax cuts helped make the system fairer.  It
>still isn't 'fair' in my book.  A fair income tax would have a
>high zero-bracket amount and a flat rate applied to any income
>beyond that amount.  So, ignoring any economic benefits from
>the tax cuts (of which I believe there were many), the cuts helped
>move from a very unfair system to one which is closer to being fair.

Well said. It is sheer sadism to argue that "fairness" requires
that we tax anyone, rich or poor, more than economically (viz.
Laffer curve) desirable. To tax on the "downslope" side
of the Laffer curve serves no purpose except to punish
and destroy wealth. It has no place in a free and civil society.

Pat
	For a good read on the economic history of the 1980's,
"Reaganomics", and "supply-side" neoclassical economics
and how it can apply to our current economy,
check out " The seven Fat Years" by Robert Bartley. 
Newsgroups: alt.politics.clinton