My supply side world is crumbling. A post by Harvard professor Jeff Frankel is getting quite a bit of play in the blogosphere. Frankel points to glaring contradictions in the Laffer theory that – while not new – are particularly relevant in this election year; reductions in tax rates can’t simultaneously increase and decrease tax revenues.
“Politicians have always faced the temptation to give their constituents tax cuts. But in recent decades ‘conservative’ presidents have enacted large tax cuts that have been anything but conservative fiscally, and have justified them by appealing to theory. In particular, they have appealed to two theories: the Laffer Proposition, which says that cuts in tax rates will pay for themselves via higher economic activity, and the Starve the Beast Hypothesis, which says that tax cuts will increase the budget deficit and put downward pressure on federal spending. It is insufficiently remarked that the two propositions are inconsistent with each other.”