Economics: Thatcher and Reagan were wrong: Supply side economic does not work- it deepens the deficit and worsens inequality

Ronald Reagan

When you cut taxes on the wealthy, pretty much all you do is raise the after-tax income of the wealthy (and lose federal revenues).  In this simple sense, supply-side tax policies exacerbate market-driven increases in income inequality.

More recent, interesting scholarly analysis by economist Emmanuel Saez et al, discussed here, shows that by over time and across advanced economies, lower marginal tax rates are associated with greater income inequality but not with faster growth.  These researchers argue that “lower top tax rates induce top earners to bargain more aggressively for higher pay” and since they’re not adding more value—they’re just flexing their K-Street induced bargaining clout—it’s a zero sum proposition.   Their gain is somebody else’s loss.

Supply-siders can’t understand why you’d need stimulus spending to offset a demand contraction because demand doesn’t contract in their model..Supply-siders believe growth and revenue are always a tax cut away—the theory is always structured around marginal rate cuts.

In order to evaluate whether supply-side policies really delivered on their promise, we looked at the economic performance of the three eras, all beginning at equivalent points in the business cycle. Since the 1993 tax increases were passed 10 quarters into an economic expansion, we compared performance for all three eras starting 10 quarters into their respective expansions, and then going forward five years from that point, or—in the case of the 2000s—until the expansion ended in December of 2007.

We compared performance during these equivalent years along seven key economic measures. Here are the facts.

The critical link in supply-side theory’s chain is business investment. Proponents argue that lower taxes on the rich will spur more investment, and since investment is a key ingredient to growth, that will boost the overall economy. But investment growth during both supply-side eras lagged far behind that of the 1990s when taxes were higher.

Did the supply side policies of Presidents Ronald Reagan, Margaret Thatcher and George W. Bush work? Did they boost investment, spur growth, and cause prosperity to trickle down? The data says no. And when President Clinton raised taxes in 1993, did the economy suffer a slowdown, as was predicted by those who believe in supply-side economics? Again, the data says no.

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