Friday, September 21, 2007

Bush the Supply-Sider

At his news conference yesterday, President Bush proclaimed that he’s a supply-sider. He added that he remains determined to keep tax rates low in the face of a large-scale tax hike threat from the Democratic Congress.

In a White House meeting this past Wednesday with a handful of other conservative journalists, I heard Mr. Bush make the same supply-side claim. He was responding to a question I had asked regarding tax hike vetoes. He said, “Supply-side economics has worked.”

At his news conference the President did not completely describe the incentive model that is central to supply side thinking. But he did point out that economic growth and budget revenues have responded favorably to lower marginal tax rates.

He's absolutely right. Total revenues have far surpassed the 2000 peak at lower marginal tax rates. In fact, since the mid-2003 tax cuts, revenues have grown by 45 percent. Revenue growth has averaged almost 10 percent per year since 2003 and has far surpassed the previous 2000 peak.

This sort of analysis drives liberal economists crazy. Too bad. The budget numbers are the budget numbers.

Meanwhile, the deficit has fallen substantially from about 4.5 percent of GDP to 1.5 percent of GDP under Mr. Bush’s tax cutting policies. The 2001 tax cuts were not supply-side, but the 2003 tax cuts that lowered the tax rate on incomes, capital gains, and dividends most certainly were.

Remember, the basic tenet of supply-side economics is keeping more of each extra dollar earned or invested. This makes it more profitable to work, save, invest or take risks. If it pays more, after tax, then people will respond to the incentives. As Nobel Prize winning economist Ed Prescott has put it, economic behavior responds to changing tax rates.

But give President Bush a lot of credit, even though his analysis may not be totally comprehensive.