Mr Drum also appears to easily reject supply-side economics. There seems to be a temptation lately to label anyone who even dares mention supply-side economics, without immediately deeming it the silliest idea born to a napkin, an economic heretic. That's unfortunate. True, with the exception of very high marginal tax rates, a tax cut will generally not pay for itself. But there exists ample empirical evidence that cutting income taxes does increase growth. Thus, the long-run impact of a permanent tax cut is still up for debate. The effect of lower-income tax rates on labour supply is mixed. But it does seem, at the very least, lower tax rates decrease the amount of tax evasion. Writing off supply-side economics as a blatant fallacy is as much of a 1990s relic as wearing a goatee.
Exuberant Rationality has one objection:
it seems wrong-headed to keep taxes this low when government debt is ridiculously high and growing faster than ever, our infrastructure is in dire need of maintenance, and fee-based services (such as publicly-provided higher education) are becoming more expensive.
Let me suggest another. The claim that tax cuts lead to more output via incentive effects presumes that we are talking about fiscally neutral reductions in taxes and government spending. What we got from the Reagan and Bush 43 administrations – and what is proposed by McCain – is a reduction in taxes that is much larger than any proposed reduction in government spending (government spending as a share of GDP actually rose under Bush43). The impact of this fiscal stimulus was a reduction in the national savings rate, which lowers long-term growth.
As Exuberant Rationality notes, fiscal restraint might entails less public investment in infrastructure and education. As a pro-growth liberal, I’m in favor of more public investment in infrastructure and education as less investment likely would hurt long-term growth.