Chait’s dime-store economics
Re “It just doesn’t add up,” Opinion, Oct. 22
One of Nobel economics laureate Edmund Phelps’ major contributions was to determine the proper amount of saving needed to maximize consumption in the future. A similar relationship exists between taxation and tax receipts. What is the tax rate that will maximize future revenues? Jonathan Chait’s trivial observation that lowering tax rates today lowers revenues today ignores Phelps’ thinking.
What should tax rates be to maximize both economic growth and tax revenues over 10 or 20 years? That should be Chait’s question.
Chait oversimplifies when he says that there is consensus among economists that cutting tax rates will cause tax revenue to drop. While earning a master’s in economics at USC, I distinctly remember going through a proof that demonstrated how, under a very narrow set of conditions, a small cut in marginal tax rates could lead to an increase in tax revenue. For such a result to occur, however, the percentage of income that households and firms devote to savings and investment would have to far outstrip current levels.
I encountered this curiosity in a course taught by Richard Day, a pioneer in economic dynamics and certainly not one of the supply-side fanatics Chait rightly castigates.