0 OPINION Page 4 Sunday, April 12, 1981 The Michigan Daily Hocus pocus: It's Reagan economics 6 By Stewart Mandell Second in a two-part series Every show has its stars, and so it is with the administration's supple side magic show. The stars of this show are the Laffer Curve and the Kennedy Ad- ministration's personal income tax cuts. Allegedly, these are the reasons supply side economics will work. The Laffer Curve says that when tax rates are too high an inverse relation- ship develops between tax rates and tax revenue. At that point higher tax rates produce lower tax revenues and lower tax rates produce higher tax revenues. THE LAFFER CURVE'S premise is that when the government taxes exhor- bitant amounts of income taxpayers lose their incentive to work which causes national income and tax revenue to decline. Supply siders believe that present federal tax rates have reached the point where lower tax rates will increase tax revenue. But, there is no proof that today's tax rates have surpassed the point of maximum tax revenue. The Laffer Curve argument assumes the con- clusion. In a Newsweek interview Prof. Laffer conceded that there is more than a reasonable probability that he is wrong. Furthermore, Prof. Don Fullerton of Princeton University recently com- pleted a study which repudiates the Laffer Curve argument. Prof. Fullerton simulated the economy with higher and lower tax rates than presently exist. He found that higher tax rates provide higher revenue and that lower tax rates reduce federal revenue. SUPPLY SIDERS would argue that Fullerton is wrong because his model of the economy underestimated the in- crease in labor supply resulting from lower tax rates. Supply siders believe the increase in the supply of labor following lower taxes will be over ten. times what Fullerton predicts. In technical language, the response of labor supply to higher real wages is called the elasticity ,of labor supply. supply siders believe labor supply elasticity is ten times larger than the number Fullerton used. Fullerton's position is easily defen- ded. He carefully estimated the elasticity of labor supply using all of the empirical studies which analyzed this issue. He even gave the supply siders the benefit of the doubt by using an estimate which was higher than what the empirical evidence indicated. Sup- ply siders claim a responsiveness of labor supply to lower tax rates which is unproven by any of the empirical studies. THE ADMINISTRATION also claims that lower tax rates will increase government revenue because this oc- cured when the Kennedy ad- ministration reduced personal tax rates. Contrary to the Reagan Ad- ministration's assertions, the Kennedy administration's tax cuts did not, on balance, increase government revenue. In this respect, the administration is shamefully misrepresenting the truth to the public. Arthur Okun, chairman of President Johnson's Council of Economic Ad- visors, has provided the best estimate of the effect of this tax cut. Okun showed that the $13 billion dollar tax cut in- creased gross national product ap- proximately $36 billion. Edward Gramlich, a University economist, estimates that the federal government probably recaptured bet- ween 25 percent and 30 percent of this amount. Thus, as best the federal government regained $10.8 billion-$2.2 billion less than the $13 billion cut. THE FACT that the president himself and members of the Cabinet would federal revenue more than $13 billion is outrageous. Prof. Walter Heller ex- plained more than two years ago in The Wall Street Journal that there was no proof that the 1960's tax cuts had on balance increased federal tax revenues. In that article he explained that data, allegedly showing that the tax cuts had on blaanced increased federal revenue, had been manipulated. He condemned the guilty parties saying they had, "done them and the cause of rational debate a serious disservice." In relying on such data, the administration has shown it- self either inept or deceitful. When the supply side magic show opened in Congress many Congressional critics greeted it with scathing reviews. As the ad- ministration was caught making un- proven assumptions it shifted to a new justification for supply side magic: "The tax cut is a gamble, but one necessitated by economic conditions." The game is changing from magic to gambling. Unfortunately, the ad- ministration's personal income tax proposal is not even a gamble. It is a losing proposition. Stewart Mandell is a third-year Law student at the University. -THE L.AFFGR WHEEL II12 2E COC le -; THS LAFFEM'LIGH.T 5LB 0 I Ll TH4E L&FFEQ CAM'/ t u5o+.s Tnn f I4 6 claim that this tax cut increased t aedtu Miigan t j Edited and managed by students at The University of Michigan Feiffer Vol. XCI, No. 157 420 Maynard St. Ann Arbor, MI 48109 Ir ceiEATeT AiTC V4t1 cS Editorials represent a majority opinion of the Daily's Editorial Board cornk)(2 TW-G, COTYI EGoVP MaYr wwv- s I acv o Thurmond rides again 11 4 THE CONSERVATIVE wave in Washington is having its effects in more areas than the federal budget. Sen. Strom Thurmond (R-S.C.), backed by the Reagan administration and Assistant Attorney General Lowell Jensen, has proposed legislation per- mitting the death penalty for some federal crimes, including espionage and the killing of a president. "There are too many bleeding hearts who seem to forget the victims who have been robbed, killed, or raped," Thurmond said. Thurmond's comment leads one to wonder whether he supports capital punishment as a means of crime deterrance oramerelyas a way of get- ting even with criminals. If he only wants revenge, then punishment is the best way to get it short of torture. But, if he actually advocates killing criminals as a deferrence to potential assassins, he should rethink his argument. John Hinckley, in his infamous let- ters to actress Jodie Foster, acknowledged that he might well die in his attempt to kill Reagan - yet this did not deter him in the slightest from trying. Most persons who are willing to assassinate a president are willing to die trying, and are not likely to recon- sider because of the threat of a death penalty. The taking of human life, whether it is the action of the state through the death penalty or the action of -an in- dividual criminal, is inherently wrong and cannot be tolerated. No individual or group of individuals should be per- mitted to terminate another person's life. Thurmond, who now holds a power- ful seat as Senate Judiciary Commit- tee chairman, has chosen a peak time to introduce his offensive legislation. The nation is still stunned over the at- tempted assassination of President Reagan. Although the attempted assassination is, of course, deplorable, we must not succumb to some primal blood lust for revenge. This desire for revenge may be, in the end, just as debased as the very crimes that would be punished by the death penalty. The death penalty cannot be tolerated in a modern society. Thur- mond and the Reagan administration should not be allowed to ride on the tails of this national tragedy, and enact such injudicious legislation. 'I- - c ~ r ' 3-°sW RP ft-i OFE " cz. OFF 1Wx XR"AT '~ LETTERS TO THE DAILY: New grade standards needed To the Daily: Your recent article on "The ABC's of the GPA", brought to mind a problem faced by many students - the unequal distribution of grades in certain classes. While the majority of professors have succumbed to "gradeflation", a minority hangs on to the old system. It is not that either system is better, the problem is receiving grades from two different systems. An example of this was last semester's Economics 406, in which the gradepoint average was 1.8. While some classes are relatively smarter than others, such a wide variation, especially considering the level of the cour- se, is more than random. There is a point where a professor should take some responsibility for what his students learn. I asked the T.A. after having seen the grade distribution, 3 A's and 11 B'srout of 43 students, and- he said under any other professor one's grade would be at least a full grade higher. When explaining someone's record, there is no way to include the mean for the class, it is assumed that all means are relatively the same, at least within schools or departments We need uniform grading stan- dards, at least within departmen- ts. Students should not have to suffer from such bureaucratic semantics as "gradeflation". -Jan Hansen April 8 Correction Due to a typographical error on yesterday's Opinion Page, the guest editorial, "A magic show of Reagan economics," incorrectly reported two statistics. The ar- ticle erroneously reported that "The Economic Report of the President calculated the tax cut's cumulative effect will be to increase aggregate supply 20 percent to 60 percent of GNP." The statistics should have read .2, percent to .6 percent of the GNP. a.' Editorial policies 1- // WNlrE 1HOMIE FEEDLOT SQIVIE ,00 I'y _ _. - r .. _ . / i ;r % / ii/ j r ' !i , N E : }, . 1 yl ... , ; i; k, Letters to the Daily should be. Leaflet figure wrong typed, triple-spaced, with inch margins. All submissions must be signed by the individual author(s). 4 To the Daily: Yesterday a leaflet put out by the "Responsible Alternative" political party came to my atten- tion. (I was tidying up the floor of a chemistry lecture hall following a mass distribution.) The only number cited in the entire discussion of budget is so spectacularly in error that I feel obligated to correct it. The total LSA general fund budget for travel, including faculty travel, administrative travel, and ap- plicant travel and moving is ap- proximately $153,000 not 1.5 million alleged in the leaflet. -Paul G. Rasmussen Associate Dean, Research and facilities, LSA. April 8 Names will be withheld only i unusual circumstances. Letters may be edited for clarity, length; grammar, and spelling. i 4 Weasel by Robert Lence! -frorr oil i ~;,_ I C/oS 7KHFI4AT A MK Xo ASK H~ROUT1I WAIRT WEAESEL ! Dptgi- 1usr ANt aR ZMEnm Rof THE ME" GENERATI ON. OWA, F5- r~~d I~'V ) % -, I[ '