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Monday, June 02, 2008

"Supply-Side Fairy Tales"

Steve Waldman weighs in on Greg Mankiw's proposal to cut corporate taxes:

Supply side fairy tales, by Steve Waldman: Greg Mankiw offers a strong endorsement of a proposal to cut the corporate income tax from 35 to 25 percent, claiming "It is perhaps the best simple recipe for promoting long-run growth in American living standards." ... A good case can be made for cutting or even eliminating the corporate income tax. But Mankiw's argument does not cohere.

Let's start positive. Mankiw is right to point out that the "incidence" of the corporate income tax might not in fact be as progressive as its proponents would wish. He quotes studies suggesting that workers end up paying 70% to 92% of the taxes in the form of lower wages. I'm skeptical of those numbers, but it is surely true that some fraction, perhaps even a large fraction, of the corporate tax burden falls on workers and customers rather than presumptively wealthier investors. Mankiw does us all a service by reminding us of this.

Then he tells us a fairy tale ... [...continue reading...]

He concludes:

Supply side economics is a nice story, a hopeful story. It offers a clean, plausible policy framework: encourage investment, always and everywhere, and prosperity is sure to follow. But this decade has been about a pure a test of that idea as we could hope for. Capital in the United States was incredibly cheap, and what did we do? We destroyed a lot of wealth. We don't need more capital (although we might soon, if our foreign backers get skittish). We need more discriminating capital. In the meantime, the only thing I'm sure "works" about the supply side story is that it shifts the tax burden from richer to poorer. I'd rather that stop working so well.

    Posted by on Monday, June 2, 2008 at 12:42 PM in Economics, Taxes | Permalink  TrackBack (0)  Comments (37)

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