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Home Runs at the WSJ

Posted By Don Boudreaux On September 27, 2010 @ 10:04 am In Cuba,FDA,Myths and Fallacies,Regulation,Risk and Safety,Seen and Unseen,Taxes | Comments Disabled

Here are three especially good items from the last two issues (Saturday’s and today’s) of the Wall Street Journal.

The first is Richard Rahn’s eloquent explanation of supply-side economics; in it, Richard debunks several myths peddled by the likes of Paul Krugman [1].  A large slice:

Those of us who argued in the late 1970s and early 1980s for lower tax rates were often characterized as “radical supply-siders” and criticized for claiming that all tax-rate reductions lead to higher tax revenues. This was untrue; none of the principal advocates of Reagan’s 1981 tax cuts made this claim.

The Reagan tax cuts reduced rates for all income classes, even though it was well understood that cutting the lower rates would result in substantial revenue losses. Low tax rates (below 20%) do not cause much of a disincentive for working, saving or investing, and hence there is little supply-side effect. We did argue, however, that reducing the high marginal rates (up to 70% on high-income earners) would cause little, if any, revenue loss, because of the large, positive supply-side effects. Were we right?

Since most of the Reagan tax cuts applied to lower- and middle-income earners, there was close to a dollar lost in tax revenue for each “dollar” of tax cut for these groups. Still, CBO figures show that total tax revenue only fell from 19.2% of gross domestic product (GDP) in 1982, before most of Reagan’s tax-rate reductions were put in place, to 18.4% of GDP in 1989, the year he left office. This happened because the U.S. economy grew by more than one-third in real terms (34.3%), much faster than the 24.3% rate expected even by economists within the Reagan administration. Thus, by the time President Reagan left office, the economy was generating more tax revenue at a maximum 28% rate than many on the left forecast it to generate at a maximum 70% rate.

The Reagan tax-rate reductions did, in fact, pay for themselves—but it took about seven years.

The Obama administration wants to extend the Bush tax cuts only for those making less than $200,000 a year. This will significantly reduce federal revenues. But the rate cuts it does not want to extend would be more likely to increase tax revenues.

The reason is simple: Those who earn more than $200,000 annually are among the ones who create most of the new jobs and fund new investment—the engines of economic growth. Without these jobs and new investment, the economy will be smaller and throw off less tax revenue.

Recently, the liberal blogger Dylan Matthews asked several economists, “What is the revenue maximizing income tax rate?” Estimates ranged from 19% to 70%. The problem with the question was that no time period was specified.

If Congress decides to increase tax rates to 70% next week on this year’s income, tax revenues will increase for this year because most people will not be able to respond. People will go to great lengths to avoid paying high tax rates, including reducing work effort and taxable savings and investments, or even finding illegal means to avoid the tax collector. But it takes time for them to do so. A big tax increase on the job-creating and investing class this year will almost certainly kill economic growth and job creation next year, resulting in less tax revenue.

In the 30-year period from 1970 to 2000, the maximum tax rate on individual income ranged from 28% to 70%, yet individual tax revenue as a percentage of GDP ranged from a low of 7.6% (when the maximum rate was 70%) to a high of 9.6%. Total tax revenues ranged from a low of 17.1% of GDP to a high of 19.8% during that same 30 years. Over the long run (seven years or more), individual federal tax rates not exceeding 25% or so would probably maximize federal tax revenues (remember that state and local income tax rates must be added to the federal rate so many people would still face marginal tax rates of well over 30%).

Next is John Graham’s letter to the editor on the Food and Drug Administration [2]; here ’tis in full:

Jay Lefkowitz and Michael Shumsky (“Obama Embraces the ‘Pre-Emption’ Doctrine [3],” op-ed, Sept. 14) make some valid arguments applicable to legal trade-offs between states’ product-liability laws and the Food and Drug Administration’s labeling regulations. However, they are off-base in describing the FDA as “cash-strapped.” The FDA’s spending on the regulation of human drugs in 2009 was $802 million, and the president’s 2011 budget demands $1 billion, an increase of 20% over two years. The number of personnel conducting drug reviews has doubled from 1,300 to 2,600 between 1992 and 2007. The agency as a whole exceeded its hiring targets last year.

This money and manpower, unfortunately, have not increased the FDA’s productivity—for which patients pay the price. My recent review concluded that even a one-year delay in legal access to the many new medicines available costs about 200,000 American patients their lives annually.

The FDA is not a cash-strapped crusader for public health, but a bloated government bureaucracy that interferes with the choices of doctors and patients alike.

John R. Graham

Pacific Research Institute

San Francisco

Finally, don’t miss Mary Anastasia O’Grady’s smack-down of an American journalist serving as one of Fidel Castro’s useful idiots [4].  Here are Mary’s opening paragraphs:

At most marine parks in the world the animals provide the entertainment. But at the Havana aquarium last month, Fidel Castro had a couple of humans eating out of his hand and clapping like trained seals.

I refer here to the Atlantic Monthly’s Jeffrey Goldberg, who traveled recently to Cuba at Castro’s invitation with his friend Julia Sweig of the Council on Foreign Relations. Mr. Goldberg has posted a two-part report from his lengthy conversations with the dictator online for the magazine. One part includes details of a day at the aquarium, where Mr. Goldberg, accompanied by Ms. Sweig, seems to have experienced more than one “thrill going up [his] leg” in the presence of Fidel.

The reporter “hope[s] to be publishing a more comprehensive article about the subject in a forthcoming print edition of the Atlantic.” I’m guessing that anyone who actually knows something about Castro’s Cuba is not the target audience.

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URLs in this post:

[1] The first is Richard Rahn’s eloquent explanation of supply-side economics; in it, Richard debunks several myths peddled by the likes of Paul Krugman: http://online.wsj.com/article/SB10001424052748703989304575504192870395162.html?KEYWORDS=Rahn

[2] Next is John Graham’s letter to the editor on the Food and Drug Administration: http://online.wsj.com/article/SB10001424052748703384204575510713400162210.html?KEYWORDS=john+graham

[3] Obama Embraces the ‘Pre-Emption’ Doctrine: http://online.wsj.com/article/SB10001424052748703466704575489571017923434.html

[4] Finally, don’t miss Mary Anastasia O’Grady’s smack-down of an American journalist serving as one of Fidel Castro’s useful idiots: http://online.wsj.com/article/SB10001424052748703499604575512352291352646.html?mod=WSJ_Opinion_LEADTop

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