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Today's WSJ Supply-Side Nonsense

The Wall Street Journal's editorial today plumping for higher economic growth through -- you'll never guess -- regressive tax cuts exposes the largest current logical problem at the heart of the anti-tax argument: a failure to acknowledge that the Bush tax cuts are currently in place. Here's the Journal insisting that Bush tax cuts in 2003 -- the really regressive ones, the ones that didn't waste any precious dollars on the middle class -- produced big revenue gains:

After the Bush investment tax cuts of 2003, tax revenues were $786 billion higher in 2007 ($2.568 trillion) than they were in 2003 ($1.782 trillion), the biggest four-year increase in U.S. history. So as flawed as it is, the current tax code with a top personal income tax rate of 35% is clearly capable of generating big revenue gains.

And here's the Journal insisting that the problem with the budget right now is that we're growing too slowly:

Mr. Obama has a point that tax receipts are near historic lows, but the cause isn't tax rates that are too low. As the nearby table shows, as recently as 2007 the current tax structure raised 18.5% of GDP in revenue, which is slightly above the modern historical average. Even in 2008, when the economy grew not at all, federal tax receipts still came in at 17.5% of the economy.
Today's revenue problem is the result of the mediocre economic recovery. Tax collections in 2009 fell below 15% of GDP, the lowest level since 1950. But remarkably, tax receipts stayed that low even in the recovery year of 2010. So far this fiscal year tax receipts are growing at a healthy 10% clip, so the Congressional Budget Office (CBO) January estimate of 14.8% of GDP is probably low. We suspect revenues will be closer to 16%, but even that would be the weakest revenue rebound from any recession in 50 years, and far below the average tax take since 1970 of 18.2%.

Right. We're growing really slowly even though the Bush tax cuts have been in place since 2001, and the beloved super-regressive second round of Bush tax cuts since 2003. That would suggest that the Bush tax cuts are not the cure for slow economic growth.

Indeed, that conclusion is so obvious the Journal concocts a convoluted rationale to get around it. The structure of the editorial is that it begins with the second point -- revenues are really low because of growth -- and then works to the first point -- the Bush tax cuts produced big revenue gains! -- before arriving at the conclusion: "A tax increase won't help growth—or revenues." That way the Journal can treat the 2003 tax cuts as some distant historical aspiration rather than current tax policy.

What about the revenue gains after 2003? Revenue tends to fluctuate wildly during upturns or downturns in the economy -- fluctuations that dwarf any secular effect from tax cuts. After 2003, supply-siders endlessly hyped the revenue gains -- not mentioning the massive revenue collapse that followed the 2001 tax cuts -- as evidence of the success of the tax cuts. It wasn't just that we happened to cut taxes at the trough of the business cycle, they argued. We were experiencing the "Bush boom." It was a miracle! Then things kind of went bad and revenue collapsed. To buy into the Journal's logic, you have to assume that the 2003 Bush tax cuts had an enormous effect on growth right away, and then zero effect on growth ever since.

The more plausible interpretation is that tax rates at current levels have a trivial impact on economic growth. Otherwise we're stuck with the Journal's claim that we're experiencing slow growth due to sub-optimal tax policy, and the solution to this is to keep current tax rates in effect.