Questioning supply side economics

This NY Times piece is brutally dense, but since we're talking about tax reform in Georgia with a heavy does of supply-side economics, an article poking holes in the theory seems relevant.

The writer, Austan Goolsbee, is a University of Chicago professor and is advising Sen. Barack Obama's campaign, according to The Times.

The parts I almost grasped and nearly found useful:

First, the impact of high-income tax cuts depends on how much additional income a person can keep. When President John F. Kennedy cut top marginal rates to 70 percent from 91 percent, take-home pay more than tripled for these taxpayers, to 30 percent from 9 percent. That is a big difference. By contrast, letting the Bush tax cuts expire so top rates rise to 39.6 percent in 2011 from 35 percent, cutting the take-home share to 60.4 percent from 65 percent, hardly seems the stuff of tax revolution.

Second, other research has shown that the new supply-side movement missed a fundamental shift over the last 30 years — the dramatic, disproportionate rise in the compensation of high-income people. The new supply-siders have confused this shift with the impact of tax cuts.

An example illustrates the point: Emmanuel Saez, a professor of economics at the University of California, Berkeley, has compiled data on the incomes of the very rich from 1913 to 2006. Using his data, my calculations show that in the four years after top marginal rates were cut in 1981 and 1986, and in the three years after the rate cut of 2003, average real salaries (subtracting inflation) for the top 1 percent of earners grew 18.8 percent, 22.5 percent and 17.4 percent. But for the bottom 90 percent of earners over those periods, the average salary changes were 2.6 percent, minus 0.3 percent and minus 0.1 percent. A supply-sider might see this as evidence of the growth power of cutting top rates.

But the data also show that incomes at the top have been growing rapidly regardless of what happened to tax rates. In the four years after the increase in top marginal rates in 1993, average salaries grew 18.7 percent among the top 1 percent of earners and less than 0.1 percent for the bottom 90 percent.

Seeing the same pattern when taxes rose as when they fell indicates that tax cuts weren’t responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces.

Third, recent research has documented that much of what the new supply-side economics attributed to tax cuts was really just the relabeling of income. Sometimes the increase in personal income was matched by an equal and opposite decrease in corporate income. At other times, increases in personal income turned out to be a result of corporate executives shifting the timing of their year-end compensation from a high-tax year to a low-tax year.

Shifts like these have nothing to do with supply-side economics. The academic debate continues, but thus far, the new Laffer curve has looked more like a fleeting figment of economic imagination.

That is sad, because it would be great if we could cut taxes and raise revenue at one stroke. Alas, the research suggests that we will have to pay for high-income tax cuts the old-fashioned way — by actually cutting spending or just busting the budget.

I'm emailing Dr. Arthur Laffer's chief of staff to see if Dr. Laffer would like to share his opinion on this matter. Dr. Laffer, aka the father of the Laffer curve, Reagonomics, etc., handled most of the research that Speaker of the House Glenn Richardson's tax reform proposal(s) was based on.

UPDATE: Dr. Laffer did respond, but it's quite long and contained in this post here.