ARE WE ALL SUPPLY‐SIDERS NOW?

Abstract

The term “supply‐sider” has come to mean someone who believes that an x percent cut in tax rates walkthrough its effect on the incentive to work, to save and invest, and to avoid and evade taxes–lead to much less than an x percent cut, and perhaps even to an increase, in tax revenues. Not all economists are supply‐siders in this sense, but many more are now than were during the 1970s. The reason for the switch is the evidence that has accumulated on the incentive effects of taxes. Many studies have shown that cuts in tax rates for the highest‐income taxpayers actually have increased the government's revenue. A key reason for this effect is not a large elasticity of labor supply but rather a large elasticity of tax avoidance with respect to tax rates. The most important policy implication of this evidence is that the government cannot increase its revenue substantially without taxing the non‐rich.