In the article linked below by Nancy, Paul Krugman gives a definition of supply side economics which itself could never pass peer review. He refers to supply side economics as, “a doctrine whose central claim [is] that tax cuts have such miraculous positive effects on the economy that they pay for themselves.” Here we have an “economist” who knows nothing more about supply side economics than what he has heard on the nightly news (or is it the case that the reporters on the nightly news know no more about supply side economics than what they’ve heard from Paul Krugman?)
The fact is that the idea that tax cuts “will pay for themselves” is not the definition of supply side economics. It is not even a defining characteristic of supply side economics. First let me point out that I was an economist at the Institute for Research on the Economics of Taxation, IRET, the leading supply side think tank in Washington, for 6 years. The President of IRET, the late Dr. Norman Ture, was an early architect of supply side economics and well known Chicago school economist. None of the economists at IRET ever concerned themselves in the least with the idea that tax cuts needed to or would pay for themselves.
The defining characteristic of supply side tax analysis is the recognition that all forms of taxations have incentive effects. That is, they discourage some activities while rewarding others. Dr. Ture used to some it up by saying that “people aren’t taxed, activities are.” All supply side tax analysis starts from this basic premise. It is a premise that was never recognized by the Keynesian “demand side” economists. In applying this premise to the income tax it is quickly realized that what is taxed is income-generating activity (work, investment, entrepreneurship, etc), which in a capitalist system is the engine of economic growth and prosperity. In doing this, it implicitly rewards non-income generating activity, leisure and consumption.
An implication of all this may be a situation where the economic growth generated by a marginal tax rate cut will expand the tax base to such an extent that tax revenues actually increase. But clearly this is not a hard and fast rule and is certainly not why supply side economists favor tax cuts. For me, if tax revenues grew after a tax rate cut it would simply be evidence that the rates were not cut enough.
