It’s time to bury supply-side economics


NEW YORK (MarketWatch) — It’s been the prevailing economic philosophy of the Republican Party since Ronald Reagan was elected president in 1980.

Supply-side economics held that reducing marginal tax rates would spur economic growth, create jobs and even generate tax revenue for the government.

A statue of former U.S. President Ronald Reagan near the American Embassy in Budapest, Hungary.

And it makes sense in theory: If people keep more of what they make, they would logically work harder, spend more and hire more people, right?

When you listen to supply-siders like Arthur Laffer, Stephen Moore and Larry Kudlow, they always extol the Kennedy-Johnson tax cut of the 1960s and especially President Reagan’s tax cuts of the 1980s.

But they rarely mention the 1990s or the 2000s.

Maybe that’s because those two decades were almost a perfect controlled experiment that shattered their pet theories: President Bill Clinton raised marginal tax rates and the economy boomed and jobs were plentiful. President George W. Bush cut them and we got only modest job growth.

In fact, there’s more and more evidence suggesting that lowering marginal tax rates doesn’t create many jobs at all.

For years I’ve tried to find any economist — left, right, or center — who could estimate the number of jobs created by the Bush tax cuts, but without success.

So, I’m taking a crack at it myself.

Tax hikes vs. tax cuts

Using data from the Bureau of Labor Statistics CES survey, I compared the number of jobs created in the years following the balanced budget bill signed by President Clinton in August 1993 and after the second round of Bush tax cuts, which went into effect in May 2003. (Supply-siders think that was the real deal, not the earlier 2001 cuts.)

Nearly 20 million private sector jobs were created from the August 1993 tax increase until the end of the Clinton administration in December 2000. The number following the Bush tax cuts, in a shorter time period (May 2003 to December 2007, when the Great Recession began), was above seven million.

But when I actually counted the jobs created in various industries and eliminated those that clearly had nothing to do with lower marginal tax rates, I was left with a much smaller number: two million at most, a dreadful performance by any measurement.

This isn’t an academic exercise. A 20% cut in marginal tax rates, including reducing the top tax rate to 28% from 35%, is a key plank of Republican presidential candidate Mitt Romney’s economic growth plan (along with cuts in business taxes and reduced regulation, which I won’t cover in this column).

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