Supply-side economics -- the Reagan era notion that government tax revenue will go up when tax rates go down -- is trying to stage a comeback, even in this era of $150 billion federal deficits.
Yesterday, House Republicans released a study that contended that a Democratic proposal to raise marginal income tax rates to 33 percent for the 600,000 richest Americans would slow economic growth, mean 377,000 fewer jobs and lower the take-home pay of the average taxpayer.
"Those who hope to redistribute income to the poor by increasing tax progressivity may actually harm intended beneficiaries. In this case, average taxpayers end up worse off by over $500," said a study by the Institute for Policy Innovation, a Lewisville, Tex., foundation chaired by Rep. Richard Armey (R-Tex).
The foundation study said that Democrats had overestimated the revenue that the government would collect by raising the top income tax rate. It argued that people would work less because they would not get to keep as much of the fruits of their labors and therefore there would be less to tax.
"This study uses a 'dynamic' analysis which assumes that raising taxes on an activity leads to less of it, and that lowering taxes leads to more of it," said Rep. Bill Frenzel (R-Minn.) in an introduction to the report.
Robert McIntyre of Citizens for Tax Justice said the authors of the study were assuming "that rich people will become lazy good-for-nothings" just because of a change in tax rates. "They don't have a high enough opinion of their constituents," McIntyre said. "They put their program in place in the early 1980s and it failed, but they want to keep it in place."
House Republicans, concerned about the political impact if President Bush abandons his "no new taxes" pledge, have urged the administration to stick to its campaign commitment to oppose new taxes. The Institute for Policy Innovation said that if the top 28 percent tax rate for new earnings were raised to 33 percent, the average taxpayer would pay $534 a month more by the year 2000.
But McIntyre said a tax increase is needed to close the federal budget deficit and increase the pool of national savings, now being drained by borrowings to cover the deficit. He released his own study this week contending that tax cuts for the richest 1 million American families since 1978 have cost the Treasury $860 billion. He said that if the richest Americans were taxed at the old rate of 42.2 percent instead of 27.2 percent, they would have paid an additional $82,196 in taxes each. In other words, their tax savings resulting from tax cuts exceed the total incomes of 90 percent of American families.
"Now it's time to get America's money back," he said.