Supply-side revival unlikely

[stpioc]

Voodoo economics doesn't work. The experience with tax cuts for top incomes doesn't suggest there is a huge windfall, if any. Moreover, conditions today in the US are even less likely to be conducive for such policies to revive growth. 

US experience

In the US, there are at least four periods where changes in top tax rates have been tried. Cuts have failed to clearly boost the economic growth, raises in top tax rates haven't brought the disasters that the supply-siders predicted. Here is Krugman:

Since the 1970s there have been four big changes in the effective tax rate on the top 1 percent: the Reagan cut, the Clinton hike, the Bush cut, and the Obama hike. Republicans are fixated on the boom that followed the 1981 tax cut (which had much more to do with monetary policy, but never mind). But they predicted dire effects from the Clinton hike; instead we had a boom that eclipsed Reagan's. They predicted wonderful things from the Bush tax cuts; instead we got an unimpressive expansion followed by a devastating crash. And they predicted terrible things from the tax rise after Obama's reelection; instead we got the best job growth since 1999.

The Reagan boom

A special place in right-wingers hearts is reserved for the Reagan boom, supposedly caused by deep tax cuts at the top which were then invested to accelerate growth. There are a number of objections possible.

Growth in fact didn't accelerate. Here is Bruce Bartlet:

Even compared to the 1970s, the era of stagflation, when real GDP grew 37.9%, the 1980s did not show an acceleration as real GDP growth was 36.1% for the decade.

The tax cuts (and deregulation) are supposedly a boost for business investment, but there wasn't any sustained increase here either (Moneynews):

Since 1980, U.S. investment as a percentage of GDP was sliced in half, from nearly 24 percent to 12 percent, leaving the United States 174th in the world. The result was a dearth of real value added products and productivity.

What's more, the strong recovery from the recession in the early 1980s might very well have more to do with the steep fall in interest rates and the Keynesian part of budgetary policy. Let's not forget that the tax cuts at the top were not met with cuts in public expenditures, quite the contrary, military expenditures rose considerably. 

Scientific studies generally don't find much effects

Systematic studies show little support. Not for tax cuts (CBS):

As Nobel Prize-winning economist Peter Diamond and John Bates Clark medalist Emmanuel Saez have noted, since the 1970s no clear correlation exists between economic growth and top tax-rate cuts across Organization for Economic Cooperation and Development countries.

And neither for the size of the public sector (Bernstein):

In the century and a half since then, government expenditures as a share of GDP have risen sharply in these countries. Yet they didn't experience a slowdown in their longrun economic growth rates. The fact that economic growth has been so stable over this lengthy period, despite huge increases in the size of government, suggests that government size probably has had little or no impact on growth.

Rise in inequality

Whilst growth hasn't accelerated since the early 1980s, inequality has ratcheted up. According to Bivens, the result has been that this is a zero-sum solution, most of the gains at the top have come from the bottom. He calculates that the average annual growth rates of cash, market-based incomes of the bottom 90 percent slowed from 2.1 percent in the 1947-1979 period to 0.2 percent in the 1979-2007 period.

There are some reasons to think that lowering top tax rates has contributed to the rise in inequality. Economic research has found a strong negative correlation between top tax rates and the top 1% income shares, but an increase in the latter doesn't correlate with higher economic growth. The same research shows a strong negative correlation between CEO pay and top tax rates.

The rise in inequality itself could actually reduce growth, as it potentially decreases growth of demand. This was first masked by the rise in two family incomes, and later by a large rise in credit. But since the financial crisis these factors do not mitigate the demand reducing effect of a shift in income from low to high savers. 

Different this time?

Tax cuts at the top could be expected to have some positive effect when these tax rates are especially onerous. Top income tax rates aren't high in the US, compared to other advanced countries. 

Some argument can be made for the high US corporate tax rate, which is indeed high (35%). But there are so many loopholes that few companies actually pay as much. This is reflected in the steady decline of corporate tax as a share of GDP since the 1950s, and internationally corporate tax/GDP compared to other advanced nations isn't high in the US: 



Also, corporations aren't exactly lacking funds. Profits and cash balances are at record highs whilst interest rates are at centuries lows. Yet there isn't an investment boom to speak off, rather, companies pay out over 90% of profits back to shareholders in the form of dividends and share buybacks. 

This strongly suggest the problem lies in corporate governance, rather than tax rates. We have discussed these problems in another thread.

[Martin K]

Neatly summarized, but are there still people who believe in this stuff anyway, apart from Larry Kudlow?

[stpioc]

Well, there are still true believers besides Larry Kudlow..

Donald Trump outlined his tax and economic plan in Detroit on August 8. He returned to it last week for the first time in five weeks. In between, he mentioned bits of it. But concentrate on it? Nope. His neglect of this issue has been a mystery. Why would he sideline an issue on which he has an enormous advantage over Hillary Clinton?

Trump would provide incentives for private investment, economic growth, and job creation, a policy that worked brilliantly for Presidents Kennedy and Reagan. Hillary would provide zero incentives for growth and rely on government spending to generate jobs, a policy that has never produced a robust economy. The contrast, so favorable to Trump, begged for him to harp on it in speech after speech. But he held back, talking about everything from terrorism to child care and driving some of his closest allies crazy.

He's poised to drive home his plans for the economy in the final weeks of the campaign. His ideas seem fresh and appealing, all the more so given Trump's gift for salesmanship. He says things that Reagan would have balked at and Kennedy would never have considered. Like this in last week's speech at the New York Economic Club: "Everything that is broken today can be fixed, and every failure can be turned into a great success. .  .  . It's time to start thinking big once again."

Trumponomics | The Weekly Standard

This is just simply funny. The evidence that this stuff will work is simply assumed, it's not there in reality and the ideas are by no means fresh. Romney had a similar plan, which was basically cut and pasted from McCain, etc.

[stpioc]

I have argued many times (most directly here) that, contrary to the claims of nearly all Irish policymakers, low taxes are not what makes the Irish economy tick. The country experienced 30 years of low taxes with no gain on average European income; it was only after 1987 that other policy changes (education, EU-funded infrastructure, and Social Partnership) led to gains on the EU average. Thanks to a Tax Justice Network blog post, I now have a great illustration to show this in living color.

Middle Class Political Economist: That's what I'm talkin' about! (Ireland)

Quite so. And this graph, which we’ve used several times before, underline his point. Ireland’s big attractions lie elsewhere. Make the most of them.


[img=719x0]http://www.taxjustice.net/wp-content/uploads/2016/09/Ireland-GNP-graph.jpg[/img]

And this is bolstered by what was happening on the ground. Consider the chronology here:

“Apple first arrived in Ireland in 1980 when it launched a manufacturing plant in Holyhill, above Cork. Steve Jobs announced £7 million in investment in the country, along with 700 new jobs.
10 years later, after employing hundreds of people, Apple met with the Irish government to talk tax.”

Apple's tax affairs: a symptom of the robber-baron culture - Tax Justice Network

[stpioc]

When asked, Trump adviser Stephen Moore argues he doesn't care whether Trump's tax plans worsen public finances (as independent studies say they do):

Trump has mused before about how he enjoys playing with debt. And to wit, when I questioned Trump economic adviser Stephen Moore about the plan's red ink during a radio interview, he replied, "Whether it's going to pay for itself, I don't really care." The Congressional Budget Office is less sanguine, however, warning America's debt trajectory risks weaker economic growth going forward.

Donald Trump's economic plan is a complete and utter joke

This reminds us of Reagan's famous "the deficit is so large it will take care of itself" or something to that effect. 

But at least it should be obvious that supply-siders like Stephen Moore do not care at all about public finances, keep that in mind when they pretend to do so when they criticize Democrats plans.

[stpioc]

Trickle down economics is unlikely to work:

The average income of the top 1 percent of people in the Bridgeport-Stamford-Norwalk metropolitan area, which consists of all of Fairfield County plus a few towns in neighboring New Haven County, is $6 million dollars—73 times the average of the bottom 99 percent—according to a report released by the Economic Policy Institute (EPI) in June. This makes the area one of the most unequal in the country; nationally, the top 1 percent makes 25 times more than the average of the bottom 99 percent.

In some ways, this is a mathematical artifact: Any place where rich people live will have greater inequality, since incomes can go up practically infinitely but they can only fall so low. Yet what’s troubling is that the well-off’s rise seems to be providing no upward pull for those at the bottom. From 2009 to 2013, the incomes of the top 1 percent in Connecticut grew 17.2 percent, while the incomes of everyone else dropped 1.6 percent. As wealth grows in Connecticut, the state’s biggest city, Bridgeport, is left behind. The poverty rate in Bridgeport has increased from 18 percent to 20 percent from 2007 to 2015, according to a report from the nonprofit Connecticut Voices for Children.

Connecticut shows how finance is ruining America - Business Insider

[stpioc]

Hey, but we could always do another tax cut..

Since 1952, corporate profits as a share of the economy have risen dramatically (from 5.5 percent to 8.5 percent), while corporate tax revenues as a share of the economy have plummeted (from 5.9 percent to just 1.9 percent).

This trend has worsened since the end of the Great Recession. Between 2010 and 2015, corporate profits averaged 9.2 percent of gross domestic product, while corporate income tax revenue averaged just 1.6 percent.
ECONOMIC SNAPSHOT



Source: Corporate tax chartbook: How corporations rig the rules to dodge the taxes they owe, Economic Policy Institute and Americans for Tax Fairness, 2016

The driving force behind the recent erosion of the corporate income tax base is the largest corporate loophole— deferral of taxes paid on profits booked abroad. Deferral allows corporations to stash billions of dollars offshore to avoid paying taxes on them. As outlined in a new Americans for Tax Fairness and EPI Chartbook, deferral will drain the U.S. Treasury of about $1.3 trillion in tax revenue over ten years. 

The crucial point is, however, that these profits have not actually been earned abroad. They are, in fact, offshore only on paper. Reed College professor of economics Kimberly Clausing estimates that seven tax havens are responsible for 50 percent of all foreign profits, but account for only 5 percent of their foreign employment.

Corporate profits are way up, corporate taxes are way down | Economic Policy Institute