Miles Kimball Answers My Open Letter

       Finally, success! LOL My question to him was basically why is he a "Supply Side Liberal" I mean I too am a liberal. but of course I'm not Supply Side as I read that as largely about tax cuts for the rich. I tend to be skeptical about supply side arguments-what about the demand side.

      One thing he points out is that I use the term "demand side" in something of a different way by calling myself a "demand sider."

      Usually, as he says, the term refers to the issue of generating jobs by raising consumer demands. What I mean by saying I'm a Demand Sider is just that I'd like to cut taxes for the nonrich and I imagine these tax cuts would create jobs by raising demand. Here is the meat of Miles' reply:

      "Mike is absolutely right that the poor and middle class pay substantial amounts of sales taxes and taxes on earnings such as Social Security taxes. When people want to argue that the tax system is unfair to the rich, they often skew things by only talking about the income tax. But a key point to make here is that almost all countries that devote a higher fraction of GDP to government spending than the U.S. tax the middle-class a lot through a national sales tax or a value added tax (VAT) which is a lot like a sales tax except that it is harder to evade because much of the tax is collected from companies long before the good gets to the final consumer. The European model, in particular, is to tax the middle-class heavily in order to give benefits to the middle class. I believe that the resultant tax distortions are why so many Europeans work many fewer hours per year than Americans. They used to work roughly the same amount as Americans when they had lower tax rates. (These are facts that Ed Prescott has made much of.)" 

     "Why not just tax the rich to pay for benefits for the middle class? The basic problem is that there aren’t enough rich people. I found this video by Tyler Durden etertaining and revealing on this topic. I can’t verify what he says exactly, though I think the basic point is right. You have to include at least the upper middle class in your tax in a big way, or you can’t get enough extra revenue to do a big expansion of social programs."

     "So the “demand side” is a big source of potential revenue, if by that you mean some kind of sales tax of VAT tax. But to get a lot of revenue, you have to include people who don’t think of themselves as rich, and whose acquaintances might not even think of them as rich. Maybe we should do it anyway, but it won’t feel like what people imagine a tax on the rich would feel"

       http://blog.supplysideliberal.com/post/26987558050/reply-to-mike-saxs-question-but-what-about-the-demand#disqus_thread

       He certainly gives some decent answers-one of my frustrations is that most Supply Siders aren't good at explaining their dislike of taxes on the rich and indifference to taxes on the nonrich.

       Europe as a paradigm is problematic. I myself don't really want to raise taxes on the middle class even the upper middle class don't seem to me to be undertaxed. I do think that the rich and corporations are-if you go by the effective tax rate. If you were to raise the top MTR back to 39.6% and raise both the capital gains and dividends tax back to that level it would raise significant revenue. Whether it would raise enough revenue by itself, it would be a start.

      I do wonder if these tax distortions in Europe explain France's high unemployment rate. Of course, the Europeans are richer than us in another sense-leisure. Are they better off? It's not an easy question. I'm not really advocating it-what the Argentina experience with their version of the Job Guarantee seems to suggest is that most people would rather work for adequate income than sit home for that same income.

     I'd say at best that if Europe isn't optimum we aren't either. I do think the President's desire to raise taxes on the rich and the millionaire's tax is a start.

     As to his point on demand stimulus Miles thinks monetary policy should do most of the heavy lifting:

     "What about the demand side as a source of jobs? (This is a more typical meaning of “demand-side.”) Here, my answer is that, despite the floundering of policy makers lately, it is fundamentally easy to get enough aggregate demand. On this, just click the sidebar link on the June+ 2012 table of contents and look at all the posts on monetary policy and short-run fiscal policy, together with the recent post on evidence that Federal Lines of Credit should work: “Brad DeLong and Joshua Hausman on Federal Lines of Credit.” (My post “Dissertation Topic 1: Federal Lines of Credit (FLOC’s)” is also useful, but is pretty heavy.) The bottom line is that monetary policy can provide plenty of aggregate demand, and if the Fed won’t do what it takes, we can use Federal Lines of Credit and the change in the timing of Federal payments to the states for Medicare that I talk about in “Leading States in the Fiscal Two-Step” to get enough aggregate demand without adding too much to the national debt. So, you wouldn’t know it from the news or from big chunks of discussion in the blogosphere, but getting enough aggregate demand is the easy problem. Raising aggregate supply while getting the revenue we need is the hard problem."

      I'm still fairly skeptical of monetary policy as solution to most of our problems. I think that monetary policy is more about providing the system with liquidity than being a direct stimulus for the real economy. But will check out some of his proposals.