# Proof that Supply Side Economics Works

Discussion in 'Economy' started by itfitzme, Mar 3, 2012.

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### itfitzmeVIP Member

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I've been looking for some sort of measure that would prove it. It took a while, but I finally found one. Once I found it, it became so obvious it was down right laughable. (If someone would check my math, I'd appreciate it. Sometimes, in the excitement, I can make an error.)

This is how economic proof work. We start with the hypothesis that supply side economics works. We define some sort of measure.

A measure that works is the correlation between the percentage change in the employment-civilian labor force ratio and the percentage change in the top marginal corporate tax rate.

The idea being that lowering the top marginal rate will cause employment to go up. So a negative percentage change in the top marginal rate would cause a positive percentage change in the employment-civilian labor force ratio.

So, if supply side economics works, then the two will be negatively correlated.

One simple way to see a correlation is a scatter plot. When there is a correlation, a scatter plot will show the data points all lined up.

Here is a scatter plot of the two with a one year lag time. This is the strongest correlation that can be obtained.

That straight line, sloping downward, proves that supply side economics works.

That R^2 number is a measure of how much of an effect it has. It says that 2% of the variability is caused by a change in the top marginal corporate tax rate.

The equation y=-.0215x-.0008 says that the (% change in the employment-CFL ratio) = -0.0215 * (% Chg Top Marginal Rate).

If we decrease the top marginal rate by 50%, then employment will go up by .0215 * 50 = 1.075%.

That's how that work. And it proves that supply side economics works. Of course, correlation doesn't prove causality. But the causality is obvious.

The current corporate top marginal rate is 35%. The current employment-CLF ratio is 90.3%.

We can get from the current 90.3% employment to 95% employment by lowering the corporate tax rate by 4.7/.02 = 235%. That will obviously work. It is so obvious when you think about it. There is no possible argument against it.

The current rate is 35%. So we can lower it to 35% - 235% = - 200%. All we have to do is raise income taxes. Then we can pay companies at a 200% rate on every dollar they make.

That is, after all, what we are saying. We shouldn't be punishing companies for making money by taxing them. We should be rewarding them.

All we need to do is give every company \$200 for ever \$1 in profit and they will be creating jobs and product like gangbusters. In fact, it makes absolute sense that we could completely eliminate unemployment entirely this way. We would kick Ireland's ass. Every company now manufacturing in China would be setting up shop in the U.S. within a couple of years.

So, eat that you socialist liberals.

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Last edited: Mar 3, 2012
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### Lumpy 1Diamond MemberSupporting Member

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I see that you've done a lot of work on this and you deserve a rep for it..

at least I hope so...

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### editecMr. Forgot-it-All

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Your model is confusing your contrived coincidental correlation for causation.

What's more your one year change in top marginal corporate rates is entirely specious data.

Try corrleating the change on top marginal corporate rates to employment rate over the last 40 years and see what you get.

You'll get no correlation at all.

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Last edited: Mar 3, 2012
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### itfitzmeVIP Member

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Really,editec?

Did you actually read it?

How many data points did you count on the graph? You didn't. If you did, you wouldn't made the statement. It is the obvious behavior that follows directly from your statement. I read your "40 years" and immediately started counting the dots. When I got to 20, starting from the bottom up, I doubled and concluded it was about 40 years worth.

Still, did you read everything?

It's amazing. Why do people bother talking at all? It's not really talking, it's just barking.

I had a dog. Every day, one of the neighborhood mothers would walk by our house, walking her child home from school. Our dog, Flap, would run to the window and bark at them. And by god, not once did they ever approach our house. What a smart dog.

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### DSGEVIP Member

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Hmm... See I get the feeling this is clearly a joke, but I guess I'll respond normally...

So first off, the specification hasn't been justified. For an OLS estimator to be unbiased, we need a very special assumption: the error term is uncorrelated with the regressors. So basically, if there's something which impacts the employment-population ratio which may be correlated with changes in the top marginal tax rate, then the model is misspecified and OLS doesn't work. So is there anything like that left out?

How about changes in all the other tax rates? Does supply side theory tell us that only changes in the top marginal tax rate affects economic activity? If other tax cuts affect employment (eg, payroll tax cuts), and they're correlated with the regressor (maybe because tax cuts are all given out at once rather than exogenously and individually), then they need to be included.

What about GDP growth? If top marginal rate cuts are given out when the economy is booming, since the deficit shrinks and the government wants to be reelected, or in slumps to "stimulate" the economy, then it's correlated and needs to be included.

Then you can check your specification by running a Ramsey RESET test or other diagnostic.

Also, where are the t statistics? Just from looking at the scatter plot it seems extremely likely that the coefficient isn't significantly different from zero.

And of course, as you're aware, we've gotta watch out for reverse causation. It could very well be a booming economy causing lower top marginal tax rates.

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Last edited: Mar 3, 2012
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### EdwardBaiamontePlatinum Member

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So is your conclusion that we should raise corporate taxes to raise employment?

Also, can you say if you are liberal or conservative and why?

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### sealyboboDiamond Member

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No. We get money out there in circulation by taxing corporations and using that money to fund infrastructure projects. That puts money in people's pocket and lowers unemployment which increases wages. Corporations are just sitting on their profits. Or giving it all to their top 1%'ers. The CEO's. Hense the recent growing gap between the rich and the poor??? And why WE aren't spending as much as we used to? But remember before WE were spending too much. Remember that angle? The GOP said we made too much, but now they complain that jobs are coming back at \$10 hr? What a joke, huh? Talk about flip flop on every issue when its conveinent!

What will get corporations to hire? Demand you say? I agree. So lets start talking about how to get more money in our pockets, not less. Republicans have argued for the CEO but againt the Union workers. Against the union auto workers, police, government employees, teachers and firefighters. They have asked all of them to take a pay cut. But given corporations tax breaks? What for? Give the tax breaks to the people and the corporations will hire more people to keep up with the demand that comes from the money we're spending.

What are you, a liberal or conservative?

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### sealyboboDiamond Member

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### DSGEVIP Member

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What's the matter? Can't assess an argument on its own merits? Need to know their politics so you can regurgitate one of your preprogrammed responses? I'm seriously starting to believe that you're a trolling robot.

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### techienyConservativeSupporting Member

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Your model is right on. We are in trouble as a world economy !

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