John McCain on taxes and Social Security

Greg Mankiw takes John McCain to task on basic economics:

Senator McCain tells the National Review:

"Tax cuts, starting with Kennedy, as we all know, increase revenues."

The interviewer, however, did not ask the natural follow-up questions:

1. If you think the 2001 and 2003 tax cuts increased revenue, why did you vote against them?

2. If you think tax cuts increase revenue, why advocate spending restraint? Can't we pay for new spending programs with more tax cuts?

I doubt that, in fact, Senator McCain believes we are on the wrong side of the Laffer curve. But unfortunately, fealty to the most extreme supply-side views is de rigeur in some segments of the Republican party.

It's no surprise that the National Review interviewer didn't follow through with the obvious questions, since he doubtless accepted the premise uncritically. No surprise either that the reviewer didn't catch on to the inconsistency between McCain's positions on tax cuts and Social Security. In the same interview, he says

Sen. McCain: I favor strongly retirement savings accounts, personal savings accounts, whatever you want to call them... But if I had to look back, and hindsight is always perfect, I might emphasize more the criticality of the system itself and add the requirement to have personal savings accounts. Do you see what I mean?

Ponnuru: Get it to balance first?

Sen. McCain: Yeah, I’d start at the chart: “You’ve got this much money coming in, you’ve got this much money going out, here’s where there’s more money coming in and here’s where there’s no money left. Now, where do you want to fix it?”... All of the media coverage seemed to center around retirement savings accounts, which again, I’m unalterably in favor of, totally in favor of, but somehow the media [made it]: “Bush hypes retirement saving accounts.” I would’ve liked to have seen the headline: “Bush: System is going to go bankrupt. Present-day workers will not receive the same benefits as present-day retirees.”

Well, if you believe tax cuts increase revenues, then there's an obvious solution here: cut Social Security taxes. Reduce the marginal Social Security tax rate from 12.5% to say 5%. That increases the supply of labor, which increases the Social Security tax base, which raises revenues, making the system solvent. Problem solved.

If you don't believe that story, then you must believe that there's a point at which tax cuts reduce revenues rather than increase them. Where is the empirical evidence that that magic rate is below the 39% top marginal rate on regular income but above the 12.5% marginal rate on Social Security? How do we know that the first Reagan tax cuts, which reduced the top rate from 75% to 50%, didn't move us to the normal (upward-sloping) portion of the Laffer curve? How do we know that we didn't get to the normal range of the Laffer Curve when Johnson (was it him?) reduced the top rate from 90% to 75%? How do we know we were ever on the downward-sloping portion of the Laffer curve?