Why higher taxes (on the wealthy) won't slow growth: the proof is in the history.

• Author: Peterson, Wallace C.

Steve Forbes's flat-tax candidacy vaulted him to the covers of Time and Newsweek--and will almost certainly affect the tenor of the debate between President Clinton and Bob Dole in the fall. But Forbes's tax scheme is really just new packaging for an old Republican idea: large tax cuts heralded as a panacea to all the economy's ills. Remember Ronald Reagan's promise in 1981 that massive tax cuts would eliminate the federal deficit by 1984 and yield a surplus of $29.9 billion two years later? Instead, by 1984, the deficit had reached $185.4 billion. By 1988, the federal debt had swollen to $2.6 trillion.

And yet, the belief that tax cuts stimulate production--and thus flood the Treasury with revenue--remains an article of faith among supply-siders such as Forbes, Jack Kemp, and Delaware Senator William Roth. The most resolute champion of supply-side economics is Jude Wanniski, a fon-ner editorial writer for The Wall Street Journal and the force behind Forbes's candidacy. Wanniski, in fact, is the theory's progenitor, having used economist Arthur Laffer's famous curve as its theoretical underpinning. The Laffer curve shows that at some level of taxes (never specified) any further increase in taxes is counterproductive-decreasing rather than increasing the government's revenue--because it provides a disincentive to work and productivity.

In short, the supply-side theory is this: People work and invest because they are motivated to maximize their income and wealth. But taxes detract from both income and wealth, and therefore discourage work and investment. Consequently, cutting taxes stimulates work and investment, leading to more output, a healthier economy, and a better lot for everyone-including the tax collector.

Why, you might ask, do supply-siders focus on cutting taxes on the wealthiest Americans, through reductions in capital gains taxes and in the marginal tax rate for the top income bracket? They believe that savings is the key to new investment and greater output. And upper-income families, they point out, do the most saving. This is the rational for "trickle-down economics," which John Kenneth Galbraith once called the principle of giving horses more hay to feed the sparrows.

There is no laboratory in which economic theories can be tested. We can only look, in the words of John Stuart Mill, to experiments "cast up by history." And so, in the spirit of historical inquiry, I set out to compare a century's worth of data on economic...