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Learning From Six-Year-Olds

07/14/2012

Recently, I had dinner with a six-year-old boy and his parents.  Watching his attitude toward desserts, I saw the problem with Supply-Side economics . . . please stay with me on this!

Supply-Side economics is a relatively new belief that the economy will grow if the highest marginal tax rates are decreased.  It started with the realization that there is a point (the Laffer point) when the level of taxation becomes oppressive and begins to crush the economy.  Any increase in the tax rate after reaching that point will actually result in decreased revenue received by the government.  Nobody argues with that.  The question is where is that point?  How will we know if we are there?

The theory was developed by Arthur Laffer in the 1970s.  I had lunch with him in Dallas back in 1979 and immediately understood the need for a decrease in the highest marginal tax rate, i.e., cutting taxes for the “rich.”  When Reagan took office in 1981, he also announced his acceptance of Supply-Side economics and set in motion his famous tax cuts, which I fully supported.  As projected, the economy improved nicely, and government receipts went up.

At that time, there was no quantitative method to determine if we had actually reached that turning point, that Laffer point, where taxes were about to become crushing.  I just felt it!  I knew it in my bones.

My dinner with the six-year-old was as instructive as my lunch with Laffer.  As soon as the boy spied his dessert sitting there, he asked his mother if he could eat it immediately.  As mothers have said for generations, he couldn’t have his dessert until he ate his dinner.  As kids have promised for generations, he promised he would still eat his healthy dinner after eating his unhealthy dessert.  Of course, the mother finally relented — to shut the kid up, so the grown-ups could talk.  And, you guessed it — when dinner was served, the boy was not hungry and didn’t eat his healthy dinner.

That’s the problem with Supply-Side economists, they want to cut taxes first but then don’t cut entitlements later. They instead argue the nation can afford the existing entitlements later, AFTER the economy grows.  However, history shows us the level of entitlements just increases even more when the economy improves.  The flaw in this perfectly good economic theory (like others) is the lack of discipline in politics.

Today, there is still no quantitative method to determine if we have reached that turning point, that Laffer point, where taxes are becoming crushing.  I just feel it is NOT!  I know it in my bones.

Just as kids have to eat their dinner before eating their dessert, we have to cut our entitlements before cutting our taxes.  We don’t need to decrease Medicare and Social Security much for current recipients, but we have to start weaning off future generations . . . like the six-year-old boy who must learn to eat his broccoli and, unfortunately, pay for our excessive entitlements.

Of course, it is not fair to the boy, but the alternative of doing nothing now will only make it worse for him later.  Without a decrease in benefits to future generations, no amount of growth caused by tax cuts now will save the boy.  At least, we should apologize to him . . . for spending HIS inheritance and eating HIS dessert! 

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