The Big Con

The title of Jonathan Chait’s book, The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, tells more about its style than its content. Americans live in an age of multiple big cons: ethanol, weapons of mass destruction in Iraq, the Federal Emergency Management Agency (the failure of the organization in the aftermath of Hurricane Katrina), and the countless media-created “crises” in health care, housing, globalization, and the environment. Chait focuses on “crackpot economics,” specifically targeting supply-side economics (SSE), with special emphasis on the tax-cutting preoccupation of the administration of President George W. Bush. Chait provides a chilling description of such SSE fanatics as Jude Wanniski, Arthur Laffer, and George Gilder, aided and abetted by Dick Cheney and by only-slightly-less-dubious authorities such as Larry Lindsey, Jack Kemp, Grover Norquist, and Robert L. Bartley of The Wall Street Journal. A central feature is the “Laffer curve,” which shows that a tax rate may be so high that it reduces revenue, in which case a rate reduction could actually generate more income for the government, as well as stimulate the economy. The idea is not absurd, but its applications frequently were. In Chait’s view, “the basic supply-side view [has been] that tax rates, more or less alone, determine the fate of the economy.”

SSE gives great attention to incentives to work, save, and invest. Tax reductions would improve the incentives for these worthy activities and stimulate production and employment. A booming economy could generate increased tax revenues, even at lower rates.

SSE had its first policy incarnation in the administration of Ronald Reagan, where it provided the rationale for reducing tax rates on incomes and profits. However, the oft-promised surge of tax revenues did not occur. The federal deficit ballooned, rising from $74 billion in fiscal 1981 to $128 billion in 1982 and $208 billion in 1983. Chait appears to blame most of this on the tax cuts. However, federal spending increased from 21.7 percent of gross domestic product (GDP) in 1980 to 23.6 percent in 1983 and appears to account for more than half of the deficit increase.

The deficit increase was sufficiently alarming to persuade President Reagan to accept what Chait calls the largest tax increase in American history in 1982, followed by another major increase in 1983. These statements seem exaggerated. Federal revenues as a percent of GDP fell from 19.2 in 1982 to 17.6 in 1983 and were at that same level in 1986.

The obsession with tax cuts came to the fore again in the presidency of George W. Bush. The Bush tax cuts reduced federal revenues to 16.3 percent of GDP in 2004the lowest in forty years. Government surpluses gave way to large deficits, but again, rapid expenditure growth was a major contributor. However, the SSE claim that lower tax rates could increase tax revenues was borne out by the response to the cut in capital gains and dividend tax rates. Federal revenues rose to 17.6 percent of GDP in fiscal 2005 and 18.4 percent in 2006. As a result, the share of high-income taxpayers in income tax payments increased. The top ten percent of earners paid 68 percent of income tax revenue in 2004, compared with only 49 percent in 1980.

Chait has fixed his attention on the ten percent of SSE that is, indeed, a big con, and neglected the other 90 percent. SSE has become a powerful influence for prosperity and growth in many countries. Former Soviet dependencies have found that adopting low tax rates on high incomes and corporate profits has helped them attract capital, enterprise, and talented individuals in the international economy. Individual states in the United States are making the same discovery.

However, despite the title, most of Chait’s book is not about SSE. The other parts are far more important and worthy of attention. The two sections of the book are headed “The Transformation of the Republican Party” and “The Corruption of American Politics.” The main thesis is that “over the last thirty-five years American business has grown both vastly more politically powerful and vastly more...

(The entire section is 1728 words.)