For three decades we have conducted a massive economic
experiment, testing a theory known as supply-side economics. The theory
goes like this: Lower tax rates will encourage more investment, which in
turn will mean more jobs and greater prosperity -- so much so that tax
revenues will go up, despite lower rates. The late Milton Friedman, the
libertarian economist who wanted to shut down public parks because he
considered them socialism, promoted this strategy. Ronald Reagan
embraced Friedman's ideas and made them into policy when he was elected
president in 1980.
For the past decade, we have doubled down on this theory of supply-side
economics with the tax cuts sponsored by President George W Bush in 2001
and 2003, which President Obama has agreed to continue for two years.
You would think that whether this grand experiment worked would be
settled after three decades. You would think the practitioners of the
dismal science of economics would look at their demand curves and the
data on incomes and taxes and pronounce a verdict, the way Galileo and
Copernicus did when they showed that geocentrism was a fantasy because
Earth revolves around the sun (known as heliocentrism). But economics is
not like that. It is not like physics with its laws and arithmetic with
its absolute values.
Tax policy is something the Framers left to politics. And in politics,
the facts often matter less then who has the biggest bullhorn.
The Mad Men who once ran campaigns featuring doctors extolling the
health benefits of smoking are now busy marketing the dogma that tax
cuts mean broad prosperity, no matter what the facts show.
As millions of Americans prepare to file their annual taxes, they do so
in an environment of media-perpetuated tax myths. Here are a few points
about taxes and the economy that you may not know... (All figures are inflation adjusted.)