Apr 03 2008

Obama – probably not a “supply-sider”

Wednesday’s class this week was one of my favorite of the year. Why? We got to talk taxes. Oh my goodness, you say, what’s wrong with Welker? How could he actually enjoy talking about taxes? As I said at the beginning of class, there are only two certainties in life: death and taxes.

For most people, taxes are a dismal subject, to say the least. But for teachers of economics, especially in this presidential election year, taxes make for an exciting economic, political and philosophical debate.

The premise of our discussion in class was the idea put forth by Arthur Laffer nearly 30 years ago towards the beginning of the Regan administration: that if the government would cut taxes on businesses and households, the incentive to invest and work would increase so much that gains in total output and income would be such that the government’s tax revenue might actually increase, despite the tax cut! Cutting taxes on the wealthy would have the greatest positive effect, however, since it’s the wealthy who do most of the investing and much of the spending in the economy.

This basic philosophy underpinned the tax cuts the wealthy enjoyed during Regan’s presidency, and again during George W. Bush’s term in 2001 and 2003. The debate about whether taxes cuts made by the current president is one at the heart of the Democratic/Republican divide today.

Watch the videos below, then answer the questions that follow:

First, the Democratic view:

[youtube 4iFiOtgiVFk]

Then the Republican view:

[youtube rHMNl_P1-UQ]

Discussion questions:

  1. Why do Obama and Clinton promise that if they’re elected we’ll “go back to the tax rates we had before President Bush”?
  2. What is McCain’s criticism of Obama’s view on taxes?
  3. What do you think about the “supply-side” argument that lower taxes will stimulate spending, growth, employment, and possibly even the amount of tax revenue collected by the government? Do you buy it?
  4. Are you a “supply-sider” or more of a Keynesian when it comes to the role of government in the economy? What’s the difference?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

4 responses so far

4 Responses to “Obama – probably not a “supply-sider””

  1. optional.xuon 06 Apr 2008 at 9:16 pm

    1. They need to increase taxes so that the government can get out of the deficit spending that it is in. The rich do not need the tax cut, and they had benefited the most from Bush's tax cuts so moving back to the old progressive tax rates would mean only the rich would be largely affected.

    2. Everybody benefited from the tax cuts and by going back to the previous tax rates you are hurting everyone, even IF the rich benefited the most.

    3. I think lowering taxes would have a positive effect but maybe not that large of an impact. If lowering taxes increases investment and productivity all the time, then it would make sense to lower taxes all the time but thats not the case. I'm slightly skeptical of exactly how big of an impact lowering taxes can make in the supply-side.

    4. I think that if there can be, there needs to be a combination (which means no deficit). I think that supply-side can bring larger and more beneficial and lasting changes to the economy if its done right. But I am skeptical as to whether it is able to be done. I think keynesian tactics have a higher chance of bringing about its desired effect although I don't think they have that lasting impact.

  2. ElaineLungon 07 Apr 2008 at 10:50 pm

    1. Obama and Clinton want to increase taxes because "people did really well" before Bush cut the taxes — that is to say, when there wasn't an additional several trillion dollars of national debt through efforts to combine YAYTAXCUTS with OMGWAR.

    2. McCain quite simply says that everybody loves tax cuts, and that they help everybody because they increase disposable income; his argument is that, regardless of personal level of wealth, tax cuts are universally beneficial.

    3./4. The supply-side argument seems to make sense. Perhaps lower taxes will create incentives for people to work, and perhaps increased productivity and growth will come with it — but this all hinges on our position on the Laffer Curve. It's difficult to determine where exactly we are, and whether tax cuts will ultimately increase or decrease tax revenues and happiness and puppies and butterflies. I'm not completely swayed. It all seems very up in the air. I suppose for that reason, I'm more of a Keynesian.

  3. Margaret Liuon 10 Apr 2008 at 10:11 pm

    Tax cuts on the wealthy aren't only beneficial to the economy since they are the greatest investors and spenders, but they benefit the tax revenue as well. They buy expensive goods that if taxed correctly, could benefit the nation as a whole.

    1. They both want to increase taxes, since it was obviously beneficial when implemented pre-Bush mess up.

    2. McCain criticizes that tax cuts are beneficial to everyone. Probably due to where we are on the Laffer Curve.

  4. kevinmaon 12 Apr 2008 at 11:32 pm

    They want to increase taxes, so that America can get out of debt. That debt clock always scares me.

    McCain thinks that tax cuts help everyone because they will have more money. But if the government is in so much debt, probably won't be that helpful in some ways.

    I agree that people may work harder with lower taxes and would increase productivity. It is hard to say whether or not this supply-side argument would work or not, there is no garuntee that the people will work harder with lower tax rates. Decreasing taxes would mean the government would have less money to get out of the mess they're in. Having econ growth may be better for the long run i guess but it would get them out of the mess they're in slower.