In the Tax Foundation’s Weekly Tax Update, an analysis was done on the revenue and economic growth implications of the Romney tax plan.

Among other things, the update addresses alleged discrepancies levied against the tax plan, specifically the Tax Policy Center’s (TPC) claim that for the plan to stay revenue neutral, taxes would have to rise on middle-income earners.  The analysis states that although the TPC report may have credibility “among Washington score keepers,” it has “no credibility among academic economists.”  According to the analysis, the report lacks credibility because of its assumption that tax rates have no impact on economic growth. The assumption made is contrary to economists’ belief that taxes significantly affect consumer and investor behavior:

“Economists recognize that there is more to a tax cut than the immediate increase in wealth of the recipient. There is a change in incentives because there is a change in the law. If investment taxes are lowered, investment increases, because investors expect to keep more of their after-tax returns, and more people become investors. If taxes on wages are lowered, more people work and more people work harder. The benefits from these things spill over beyond the immediate actors. Businesses invest in equipment and new hires, leading to more productive workers, higher wages, and ultimately satisfied customers. If this is “trickle down” economics, as the president contends,[4] this is also economics according to every major textbook and treatise since Adam Smith” – Tax Foundation Weekly Update.

As noted above, supply-side economics or “classical economics”, as it is better known, is part of economic theory and is not exclusively an idea backed by fiscal conservatives. In spite of this fact, the TPC and Obama campaign continues to contend that if taxes are lowered then revenue inevitably drops; however, history has proven this belief to be short-sighted and lacking validity.

For instance, President Reagan experienced revenue increases during his administration after lowering taxes.  As shown in the table below, tax revenue when adjusted for inflation was $1,197.3 at the end of the Carter administration and then bottomed out at 1,113.4 in 1983.  Then, after Reagan cut taxes from 1981-1983, there was a gradual increase and peak of $1,420.7 in 1988, a 15% increase. 

For democrats to disregard supply-side economics as being conservative fantasy is disingenuous and defies economic theory.


Fiscal Year

Tax Revenue Adjusted for Inflation(in Billions)