NCPA - National Center for Policy Analysis

Supply-Side Debate Not Over

June 5, 1997

Economists are debating supply-side theories, comparing the economic conditions of the Reagan years with those of the Clinton administration. Supply-siders believe tax cuts stimulate government revenues and economic activity. Those favoring Clintonomics says higher taxes mean greater revenues.

  • Supply-side opponents claim the present higher tax revenues vindicate President Clinton's tax increase of 1993, and that President Reagan's tax cuts resulted in an increase in the budget deficit.
  • Not so fast, say supply-siders: total tax collections from 1990 to the latest estimates for 1997 rose 21.6 percent -- from $1.03 trillion to $1.55 trillion annually.
  • But on the Reagan watch, from 1982 to 1989, tax collections increased 24.1 percent after inflation -- despite the deep recession of the early 1980s -- from $618 billion to $991 billion.

Supply-siders note tax rates began to rise in 1990, during the Bush administration. The top income tax rate on earned income rose from 28 percent to 31 percent after the 1990 budget deal and then to 42 percent in 1993 as part of Clinton's first budget.

The primary reason the deficit grew during the Reagan years was the Cold War military buildup. The chief reason for the decline in the deficit during the 1990s was the steady winding-down of the Pentagon budget since the fall of the Berlin Wall.

Just as interesting is the effect fluctuations in the capital-gains tax rates have had on revenue.

  • Between 1978 and 1981 the top rate was cut from 35 percent to 20 percent and revenues soared by 90 percent in real terms between 1978 and 1985.
  • After Congress lifted the rate to 28 percent in 1986, capital gains revenues declined by 20 percent by 1990.
  • The most recent data, for 1994, show they are no higher in real terms than before the rate hike.

Thus, a 40 percent hike in the capital gains tax rate produced zero new net revenue.

Source: Stephen Moore (Cato Institute), "Are Supply-Siders All Washed Up?" Wall Street Journal, June 5, 1997.


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