Tuesday, November 06, 2007

Kudlow & Company's Supply-Side Debate

The following is an unofficial transcript from Friday night’s Kudlow & Company supply-side debate between supply-side founder/mentor Art Laffer and James Surowiecki, financial columnist at The New Yorker. (Incidentally, if you haven’t already read Art’s recent supply-side counter-offensive, you really ought to check it out. Click here to read it.)

KUDLOW: Supply-side economics is under attack from various liberals and lefties. And the next guest is at the center of the controversy. James, we haven’t seen you in awhile. I loved you when you were talking about the wisdom of the markets. But now you’re whacking away at supply-side economics. What’s your big beef here?

SUROWIECKI: The beef is pretty simple. It’s just that, I think in the United States today, saying that tax cuts grow tax revenues—which is essentially what President Bush, Vice President Cheney, and every Republican presidential candidate has been saying—is simply false. Tax cuts leave government with less money than it would otherwise have. And that’s basically continuing to perpetuate the myth or the lies of supply-side economics. I think it’s just deceiving voters.

KUDLOW: Alright Art, your response?

LAFFER: Well, in some areas it’s clear that tax cuts don’t increase revenues. But it’s clear that in other areas they do, James. I mean, for example, capital gains. That’s very clear that tax cuts there have increased revenue. On the very upper income groups, it’s very clear. They’re paying a far larger share of all taxes and have been for the last twenty-five years. That rate’s been going up. But let me just push you right to the point, James. The thing that bothered me about your editorial is even if tax cuts didn’t provide more revenues, they still do an enormous amount of good. They reduce poverty, unemployment, despair. They increase output, production, productivity. You know, you cannot tax an economy into prosperity, James. I don’t know where you got your economics from, but if you tax people who work, and pay people that don’t work, don’t be surprised if you find a lot of people end up not working.

SUROWIECKI: Can I say a couple things on that? The first is I would have no problem if candidates were going out there and making the case Professor Laffer just did. Just saying this is what tax cuts are going to do, they’re going to leave the government with less revenue, so we’re gonna have to, you know, cut spending or whatever. That would be totally fine. That’s not what these candidates are doing.

LAFFER: Well why didn’t you say that [in your article]? I mean you started attacking supply-siders. You called it a big lie. Which is not true. Supply-side economics has never argued that every tax cut raises revenue. That’s just misrepresentation. And [Jonathan] Chait’s book is just awful in that regard. And you know it…

KUDLOW: Jonathan Chait from The New Republic wrote a very nasty book, in my opinion bereft of logic, I’m afraid…James Surowiecki though, let me read what you’ve said: “The absurd idea that tax cuts pay for themselves, based on an idea that is not all absurd, which is tax rates can have an impact on people’s behavior." In other words you say, increase taxes too much and people may work less since they get less of the income that they earn and they may invest less since their gains will be taxed more heavily. So the economy will grow more slowly. Now James, that is textbook supply-side.

LAFFER: It is.

SUROWIECKI: But that’s why I don’t understand why Mr. Laffer is saying that I didn’t make or sort of recognize, acknowledge that part of the argument. I acknowledge that part of the argument. What I was talking about when I talk about the myth or the lies of supply-side economics is the idea that tax cuts increase government revenue.

LAFFER: But they do in certain cases James! I mean, come on. They surely do in capital gains. They surely do in the upper income group. They did during the Kennedy period.

SUROWIECKI: That’s simply not true.


LAFFER: Oh come on.

KUDLOW: We have a chart. Let’s put the cap gains chart up on the full screen again…The capital gains tax cut has actually doubled, I mean doubled James, I got the data here. The Congressional Budget Office projections have been doubled in every year since they went into place—’04, ’05, ’06, ’07. It has raised a fortune. It is the single biggest reason why the budget deficit has come down. Just as the capital gains rise after Bill Clinton’s cap gains tax cut was the single biggest reason for the balanced budget in the late ‘90s.

LAFFER: Exactly. And in the international arena Larry too. A number of these countries that were really oppressed by high taxes. When they cut their taxes they found their economies bursting with growth. I’m going over to Iceland next week where they have had a huge response in their taxes, from their horrible tax code…

KUDLOW: But Art, let me ask you this. I want to play both ends. I’m going to ask a question that James should ask. If you reduce the middle-income tax rates, let’s say you take those rates down from 28 to 15 percent. Will you gain revenues or will you lose revenues?

LAFFER: Oh you’ll probably lose revenues on that one Larry. I mean, I would perfectly expect to lose revenues. Because all tax cuts don’t lead to revenue increases.

SUROWIECKI: Laffer is talking about the upper-income taxes. Just look at what happened in the wake of the Bush tax cuts of 2001. Individual income tax receipts were lower in 2006 than they were in 2000 in real terms.

KUDLOW: Yes, but they weren’t supply side tax cuts. You don’t understand, they were not supply-side. Art, I thought those were demand-side…We’re out of time. I don’t think the ’01 tax cuts were supply-side. James Surowiecki I still enjoy reading your stuff.

[End of interview]