Download Economics 104B - Lecture Notes Part VI

Economics 104B - Lecture Notes - Professor Fazzari
Topic VIII: Economic Growth and Supply-Side Policy
(Final Version, April 15, 2013)
A. Short-Run and Long-Run Macroeconomics
1. Demand-side orientation of Keynesian macroeconomics

The Keynesian Cross model and much of the associated discussion of policy
emphasizes the demand side of macroeconomic theory: how changes in spending
drive economic fluctuations.

A key question whether demand is high enough to generate an equilibrium at full
employment and potential output.
2. If policy is effective at targeting potential output the real impact of demand
shocks is temporary

We have seen how various policy measures, monetary policy in particular, can get the
economy to Y*. Most economists believe that, in the long run, the economy will
reach Y*, or at least operate close to Y*.
o If this is the case, shocks to demand will ultimately have temporary effects on real
output and employment. A negative demand shock may push the economy below
potential output, but the economy will eventually regain the Y* path along which
the supply side determines macroeconomic performance.

There is wide agreement that through effective monetary policy, the economy will
always get to Y* in the long run.
o The way this happens was discussed in the previous section of these notes.
o The idea that monetary policy can get the economy to Y* is a critical part of the
“new consensus” macroeconomics analyzed earlier.

There is an alternative mechanism for an economy to reach Y* after a demand shock:
the adjustment of prices and wages.
o Basic idea: unemployment leads to falling wages, or at least a reduction in the
growth rate of wages. Lower wages cause firms to reduce prices. Lower prices
stimulate aggregate demand.
o This process continues until demand is high enough to generate output of Y* and
full employment. At this point, the downward pressure on wages ceases and the
economy follows the Y* path unless it is hit by other shocks. Again, the impact
of insufficient demand on the real economy is temporary.
o According to this view, Keynesian demand-side results are due to some kind of
nominal rigidity. For example, if wages respond slowly to unemployment the
“self correction” process described here operates slowly and insufficient demand
can prevent the economy from reaching Y* quickly.
o Whether this process works effectively in real-world economies is a matter of
some debate in macro theory. In particular, the idea that falling wages and prices
are important to restore the economy to full employment implies that deflation
should help economies recover from negative demand shocks. On the contrary,
historical evidence suggests that deflation has not been helpful, and central banks
around the world work hard to prevent deflation.
o For this reason, the mainstream view in macroeconomics seems to be that
monetary policy is the key mechanism that will push the economy back toward
Y* if demand is too low.
3. Key long-run issue: potential output when all resources fully utilized

If the economy operates close to Y* in the long run, then Y* is the key determinant of
long-run economic growth and rising living standards. Understanding Y* is also
critical to explaining different long-term economic performance across countries.

Y* is determined by the resources and technology available in the economy.
Economists think of these factors as the "supply side" as opposed to the expenditure
decision that determine AD on the "demand side" of the economy.

Many economist argue that long-run growth is the most important issue in macro.
According to the mainstream view, the ultimate determinant of long run growth is the
movement of Y*. The key, therefore, is to increase Y*. By doing this, long run
growth and improved living standards will be made possible.

For this reason, almost all economic theories of long-run growth focus exclusively on
supply-side factors.

This perspective affects policy recommendations. Supply-side economic policy is
based on the idea that the key to a strong economy is to enhance the supply of output,
that is, to increase potential output.
o From this perspective, insufficient aggregate demand is not the dominant
macroeconomic problem, at least over the long run. (remember, demand shocks
have temporary effects only according to this view.) The objective is to increase
resources and improve technology.
o Incentives are key to supply-side policy. Note that in our earlier discussion of
supply-side macroeconomics, incentives to produce play a key role in the
determination of Y*. Supply-side policy is based on improving the incentives to
work, save, invest, and develop new technology. The main policy to improve
incentives is to cut taxes.
B. Long-Run Growth of Output
1. The exceptional performance of capitalism in long historical perspective

Some economic historians have said that up until about 1750, there was absolutely no
improvement in living standards. Output grew, but only roughly in line with
population. Most people lived in poverty in ancient times, and most people continued
to live in poverty through the early 1700s. After the industrial revolution, however,
there were drastic improvements in living standards in developed countries.

In recent times there has been a general belief that each generation would have a
higher standard of living that of the previous generation.

Thus, people went for over thousands of years with little or no change in living
standards. Following the Industrial Revolution, it came to be expected that we would
have significant improvements in just a 20-30 year period.

One estimate is that since the early 1800s there has been a 20-30 times increase in
standard of living.

Economic history therefore largely confirms that capitalism has led to dramatic
improvements in living standards. There undoubtedly have been other negative
effects of capitalism, such as environmental degradation. It is also evident that not
everyone has benefitted equally from economic growth. Inequality across people and
across countries remains a significant economic issue. But the rise in aggregate
standards of living of the overall population of developed, capitalist societies in the
past two to three centuries has no parallel in human history.
2. Key role of productivity growth
a) Population growth and importance of per capita GDP

To measure living standards, we cannot just look at the growth in output. What is
important is the per capita output—that is, the output per person. If the economy just
grew in proportion to its increase in population, living standards would not rise.
Higher living standards require higher output per capita.

Labor Productivity = Output per Worker (or output per labor hour). Higher labor
productivity implies higher living standards
b) Effect of on long-run living standards of small changes in productivity growth
rates

The following table tells us by how much living standards would improve over 25
years if there was a 1, 2, or 3% annualized increase in labor productivity.
Annual Labor
Productivity
Growth
1%
2%
3%
Generation Improvement in
Living Standards
(25 years)
28%
64%
119%
Improvement in Living
Standards over a
Century
170%
624%
1822%
3. Sources of growth in labor productivity and per capita output
 What causes labor productivity to rise? There are two main sources: capital
accumulation (both physical and human) and technological improvement
a) Capital accumulation: physical and human

To increase labor productivity through human capital, we must improve the education
and skill of workers. Economic growth may have been so much better in developed
countries because of the education of the workers.

Physical capital investment gives workers better equipment and working conditions.
These investments should also raise the productivity of labor.
o Capital accumulation can raise productivity dramatically if it brings an underdeveloped country to modern standards. For example, mechanization can
greatly improve agricultural productivity in poor countries. Basic education
may dramatically expand the skills of workers.
o But in developed countries, it may not be possible to attain much further
benefit by just adding more of the same capital to production. Simply adding
more machines may not do much for labor productivity unless the new
machines can do things better than older ones.
o For those of you who have studied micro, this point is closely related to
concept of diminishing marginal productivity or just diminishing returns. If
we add more and more of the same resource, the increment to output gets
smaller and smaller. The current view in the economics profession is that we
can get more growth from increased availability of capital but not indefinitely
so.
b) Technical change

For the above reason, technological improvement is considered the most important
factor affecting labor productivity growth (and therefore Y*) in the long run. It is
more important to have technological improvements in the machines and technologies
that firms use, not just to have accumulation of the same types of machines.

Technological improvement was likely responsible for the productivity resurgence of
the past 15 years. New computer-based technologies and the internet have allowed
companies to do things in more efficient ways that raise the productivity of their
workers.
4. The productivity slowdown of the 1970s and recent optimistic news about U.S.
labor productivity

Improving labor productivity growth through better skills, education, or technology
can make a huge difference in living standards in the long run. Over the long run,
labor productivity growth will be the most important factor in determining living
standards.

Since World War 2, U.S. labor productivity has grown at rates bracketed by the
hypothetical examples in the table above. Recent data from the Bureau of Labor
Statistics show the following annualized growth rates of labor productivity:
Period
1947-1973
1973-1997
1997-2005
2005-2012
Annualized Labor Productivity
Growth Rate
2.8%
1.4%
3.1%
1.5%

Note that labor productivity grew very quickly in the decades after World War 2.
Growth rates near 3 percent for such a long time suggest large increases in living
standards from generation to generation. In the 1970s and 1980s, there was a
substantial decline in labor productivity growth. At the time, this was a cause for
concern. A growth rate of 1.4 percent per year will lead to higher standards of living,
but the increases will not be dramatic. Fortunately, productivity growth has
rebounded in the mod 1990s.

There is no consensus among economists about what brought productivity down in
the 1970s and 1980s and then back up in the 1990s. As the economy improved
following the stagflation of the mid 1970s and then the recession of 1981-82 rates of
capital accumulation remained low. But investment alone cannot be the only culprit.
Looking at technological advances, this period coincides with the PC revolution.
Some economists who study productivity changes argue that the importance of the
computer was not fully realized in the economy until the 1990s with networks and the
internet.
o This argument draws on previous experiences with major technological
innovations, such as the railroads and the automobile—their economic impact
was not fully realized when they were invented, it took years for their full
integration in the economy.

But labor productivity has again slowed down from right before the Great Recession
through the end of 2012. Has technological change slowed? Perhaps not, as we
continue to see advances in electronics, bio-technology, and energy production, just
to name a few key industries. But the relatively stagnant economy of recent years
likely did slow the dissemination of new technologies.
o Slow business investment during the recession and stagnant recovery was
likely caused by low capacity utilization, and some reduced access to credit
for business.
o With weak investment, businesses are not replacing capital as quickly and
therefore do not take advantage of newer technologies.

We cannot be sure that labor productivity growth will continue at high rates in the
future. Thus, we cannot be sure that standards of living will continue to rise quickly.
5. Critique: do demand-side factors have larger long-run effects than usually
assumed?

Supply-side explanations for growth currently dominate the economics profession.
One critique of this view is based on the weakness of the mechanism through which
the economy will return to its potential level of output (Y*).

The assumption that output returns to Y* in a reasonably short period of time is
supported to some extent by the evidence of the U.S. economy prior to 2000. In the
postwar period, recessions were shallow and short. The 1974-75 recession was deep,
but recovery was quick. Following the 1981-82 recession, it took four to five years
for a return to potential output. The same was true in the aftermath of the 1991-92
recession.

But the evidence following the 2001 recession has been less favorable. Theoretically,
by late 2004, we should have reached Y* after the weak period beginning with the
2001 recession. But U.S. economic performance was mediocre from 2002 to 2004
despite the most aggressive Keynesian monetary and fiscal stimulus since World War
2. This experience calls into question the effectiveness of the mechanisms for
restoring the economy to Y* over a relatively short period.

Concerns have become even greater in the aftermath of the Great Recession. Job
growth has been anemic since the recovery officially began in the summer of 2009.
At the current pace of job growth it could easily take a decade to get back to Y*.

A stunning example in recent history is the stagnation of the Japanese economy.
Japan is only now leaving behind years of experience with deflation. Its economy has
been rather stagnant for 15 years in spite of expansionary monetary policy.

The above examples present troubling evidence for the assumption that the economy
will return to potential output in a short amount of time.

If you compare the U.S., Japan, and Western Europe, it is the American consumer
that has stayed exceptionally strong for two decades now.

Supply-side explanations for economic growth are driven by the role of capital
accumulation and technological change. But firms will invest more when demand is
strong (as captured in higher sales) and firms will allocate more resources to R&D
when their sales and cash flow are high. These arguments suggest channels through
which demand-side effects may extend beyond the short run. If this is the case, the
forces that determine the growth of spending may be a more important long-term
economic factor than most modern growth theories recognize

An application of this idea is the end of the “consumer age” that arguably occurred
with the onset of the Great Recession. From the middle 1980s until the beginning of
the Great Recession, U.S. consumption grew quickly relative to income. This growth
contributed a lot to aggregate demand. During these two decades, U.S. macro
performance was pretty good. GDP growth was high relative to other developed
countries. Unemployment fell to the lowest levels since the 1960s. The recessions of
1990-91 and 2001 were fairly mild (although recoveries were sluggish). Strong
consumption growth could have been responsible for this relatively good performance
due to its contribution to aggregate demand. But if this story is correct, demand
effects seem to extend beyond the “short run,” about two decades, not just a year or
two.
a. In addition, the consumption boom was associated with rising household
debt, as we discussed earlier this semester. So, one could argue that
consumption-led growth for two decades “sowed the seeds of its own
destruction.” This “destruction” became the Great Recession.
b. That outcome has been a real problem for the U.S. (and global)
economies. But the unhappy ending to the “consumer age” does not
change the fact that strong U.S. consumption growth could have been an
important engine of economic growth in the U.S. for an extend period of
time.
c. The American consumer also was arguably an important engine of global
aggregate demand. The growing U.S. trade deficit represents an important
source of export growth for other countries.
d. In assessing the prospects for recovery from the Great Recession, this
discussion is potentially very important. If demand growth over longer
periods of time is not “automatically” consistent with the growth of Y*,
there is a potential for persistent stagnation, beyond the “short run.” The
specific concern is that without debt-fueled consumption growth that was
such an important source of aggregate demand before the Great Recession,
the U.S. economy will be sluggish. The relatively poor labor market
performance since the trough of the Great Recession in summer, 2009,
supports this rather pessimistic interpretation.
C. Policy and Potential Output
1. Government can stimulate potential output by improving incentives

Supply-side economic policy is based on the idea that the key to a strong economy is
to enhance the supply of output, that is, to increase potential output.

From this perspective, insufficient aggregate demand is not the key macroeconomic
problem. The objective is to increase resources and improve technology.

Incentives are key to supply-side policy. Note that in a previous lecture, incentives to
produce play a key role in the determination of Y*. Supply-side policy is based on
improving the incentives to work, save, invest, and develop new technology. The
main policy to improve incentives is to cut taxes.
2. Cut tax rates to improve incentives
a) Lower income taxes to stimulate labor supply

Supply side economics reasons that cutting the income tax rate will improve the
incentives for people to work. When taxes are lower and “take-home” pay is higher
more people will choose to work and also current workers will be willing to work
more hours.

With more people working, Y* will rise. Therefore, equilibrium output will be
higher, per-capita output will be higher, and material living standards will be higher.
(Remember, the GDP measure that corresponds to Y and Y* does not make a
deduction for the leisure foregone when people enter the labor force.)
b) Lower taxes on interest income to stimulate saving and release resources for
investment in new capital

As discussed earlier, the supply-side perspective argues that higher saving provides
more resources for investment. Thus, tax policy that raises the incentive to save will
increase investment, raise physical capital, and increase potential output.

Better saving incentives might also increase human capital accumulation. For
example, more students may get a college education if people save more for college
expenses.

Let’s look in a little more detail at how higher saving can stimulate investment.
o Consider the equation Y* = C + I + G + Ex – Im
o This equation looks like the AD equation emphasized by the Keynesian Cross
model. Following the supply-side perspective, however, the level of output is
not actual output (Y) but potential output (Y*). The supply-side perspective
assumes that there will be adequate demand to get the economy to potential
output. (How does demand get to Y*? If you don’t know, review the first
few topics in this section of the notes.)
o If we hold output constant at Y* and reduce C by raising saving, some of the
other components in the equation must rise to offset lower C.
o One important impact of lower C, according to the supply-side theory, is
higher I. Higher investment raises the capital stock and pushes Y* higher.
o According to this perspective, the objective of higher saving is re-allocate
some of Y* away from current consumption to investment

The contrast between Keynesian demand-side economic policy and supply-side
economic policy is most pronounced with respect to saving. It is important to
recognize that, unlike Keynesian-oriented tax cuts, supply-side tax cuts are not aimed
at increasing consumption. They focus on (1) improving incentives to work and (2)
increasing savings to provide funds for investment.

Is the supply-side assumption that output always gets to Y* reasonable? This is a
hard question, which is discussed in some detail above. A widely accepted
perspective is that effective monetary policy can get the economy close to Y*, at least
within a year or two. Thus, according to this prevalent modern view, we should rely
on monetary policy to take care of the demand side over a relatively short horizon.
Tax policy can then focus on providing strong incentives to produce, raising Y* in the
long run.
o But the Great Recession suggests qualifications to this view with output well
below potential more than 5 years after the beginning of the recession, even
though the Fed has pursued aggressive expansionary monetary policy.
c) Lower capital gains taxes to encourage investment

Tax policy can also directly target investment (rather indirectly targeting investment
by trying to raise saving).

We discussed the investment tax credit and more generous depreciation allowances
for business earlier as means to raise investment. We also discussed how some
people argue that lower capital gains taxes will increase investment. The basic logic
is that much of the benefit an entrepreneur will obtain from starting or expanding a
business is likely to be taxed at the capital gains rate. So, a lower capital gains tax
rate encourages business creation and expansion.
a. If an entrepreneur starts a business and then later sells it (or at least part of
it) to outsiders when it becomes successful, the financial gain she enjoys is
the rise in the value of an existing asset. Therefore, this gain is taxed at
the lower capital gains tax rate.

Higher investment has a demand-side effect, but because it leads to a higher capital
stock, higher investment also raises Y* through the supply side.

Note that demand-side and supply-side objectives are consistent with investment.
Higher investment is good from both perspectives. This result contrasts with
consumption and saving. High saving is good from the supply-side perspective, but
bad from the demand-side perspective (because higher saving implies lower
consumption).
3. Reduce regulatory burden

Regulation affects the way resources are used:
o Environmental regulation impacts the way an economy can use its natural
resources.
o Safety laws and other labor laws can affect the way the economy uses its
human capital.

More regulation will lead to reduced Y*. Remember that this is a positive statement;
it gives no indication of whether regulation is good or bad, but states just that
regulation will lower potential output. To evaluate whether a particular regulation is
good, one would need to compare the costs of the regulation in terms of lost output to
the benefits of a better environment or a safer workplace.

It is possible to make a supply-side argument that in the long run effective
environmental regulation may raise Y*. This approach considers how the sustainable
use of resources might lead to a more productive economy over the long run.
4. Assessing effectiveness of supply-side policies.
a) Review of 1980s policies

Reagan made it very clear in his 1980 campaign that his economic policy would
focus on the supply side. The Kemp-Roth bill passed during the first year of the
Reagan Administration dramatically lowered the tax rates.
o At the time, the highest marginal tax rate was 70%; the tax cut reduced
that percent initially to 50% and then down to 28% after the Tax Reform
Act of 1986. Remember it is the marginal tax rate that is important for
improving incentives. Your decision to work more (or less) will be based
on how much tax you pay on any additional earnings.

The tax cut bill was passed in 1981 and took effect in 1982. It was phased in over
three years. (Note that phasing in supply-side tax cuts can hurt incentives since
there will be greater incentives in the future; people may hold off additional work
until the tax cut is fully phased in).
b) Best evidence for supply-side view is the long expansion from 1983 to mid 1991.

1983, 1984, and 1985 had very high growth rates. Some people argue that it was
the supply-side tax cuts that got the U.S. economy back on track after the
disappointing 1970s.
c) But detailed look at this expansion indicates that it may have been led by
consumption and aggregate demand rather than aggregate supply.

While the expansion of the 1980s undoubtedly followed the Reagan tax cuts, the
expansion did not necessarily result from supply-side incentives. There are other
explanations for the expansion.

The tax cuts could have worked through the demand side. Remember that a tax
cut could be designed for supply-side or demand-side objectives, but there is no
way to assure that the taxpayers use the tax cut for the intended purpose. There is
nothing to say that workers will want to work, save, and invest more as a result of
a tax cut; rather, they may just increase consumption.

Evidence against the Supply-Side (or for the Demand Side):
o If a tax cut is working through the supply side, the saving rate should
increase.
o If a tax cut is working through the demand side, the saving rate should
stay constant or fall.
o Data: Personal Saving Rate = (saving) /(disposable income)
19781982
9.8%
19831987
8.3%
19881992
6.9%
o Therefore, the saving rate actually decreased after the tax cuts of the
Reagan ara. This would suggest a Keynesian. Or demand-side,
interpretation of the tax cuts and the middle 1980s recovery. (See the
discussion above of the “consumer age.” The middle 1980s was the
beginning of a long period of falling saving rates, rising consumption, and
rising household debt.)
o The graph above provides a longer term perspective on the change in the
saving rate. Notice that the saving rate began a sustained downward trend
roughly around the time of the Reagan tax cuts. It did not rise again until
consumer borrowing was sharply curtailed with the onset of the Great
Recession in 2008.

Investment did rise right after the first round of tax cuts went into effect.
However, this rise in investment can be explained in other ways. Increases in
investment are typical in the recovery phase of a cycle after a recession. The rise
in investment does not look unusual in the middle 1980s compared with similar
periods during which tax rates were higher.
o The graph above looks at investment (PNFI is “private nonresidential
fixed investment) as a share of GDP over a longer horizon. Investment
was a high share of GDP before the Reagan tax cuts. After a bounce-back
from the early 1980s recession, the investment share of output actually
declined rather substantially, not rising again until the Clinton years of the
1990s.

The labor supply did rise substantially during the period. However, this could be
due to demographics, as the Baby Boom generation was hitting the post-college
working age. Also, this was a continuing period of a higher proportion of women
entering the labor force. These factors could account for the increase in the labor
force more than the tax-cut incentives. However, some would argue that part of
the reason that women started entering the work force was in fact due to increased
incentives.

Overall, there is no strong evidence of specific supply-side growth in the
economy after the Reagan tax cuts. The economy did do fairly well, but the good
performance was consistent with a “consumption boom” initiated by the tax cuts.
If higher consumption led growth, this period looks more like a Keynesian,
demand-side boom, as predicted by higher consumption and a shift up of AD in
the Keynesian Cross model.
d) Partial reversal of tax cuts during the 1990s expansion

The Bush (senior) and Clinton administrations to some degree reversed some of
the tax cuts of the 1980’s. These tax increases were designed to decrease the
government deficit. (More on the effects of the deficit soon to come.)

Thus, the supply incentives would be reversed. If supply-side incentives were
really at work in the economy, then we would expect relatively weak economic
performance in the 1990s. Some supply-side economists made this prediction
when the tax rates were increases.
o The economy did enter a recession and period of slow growth in 1990.
This weakness, however, largely preceded the tax increases.

But after 1992, the economy performed remarkably well through most of 2000.
This evidence is largely inconsistent with the supply-side perspective on tax rates.
One might defend the supply-side interpretation by noting that in spite of the
Bush and Clinton tax increases, tax rates in the late 1990s were still much lower
than they were prior to the Reagan administration. But this is a rather weak
defense. One of the very best periods in all of U.S. economic history (the mid to
late 1990s) occurred after tax rates were increased.
5. Supply-side policies and the distribution of tax burdens across income classes
a) Criticism of tax cuts for the rich and “trickle down” economics

Whether designed to be supply-side or demand-side, across-the-board income tax
cuts will benefit the rich more than the poor. The poor just do not pay as much in
income taxes (and the really poor do not pay any income taxes). As discussed
earlier in the semester, income taxes are less than payroll taxes for a majority of
U.S. households. For this reason, supply-side income tax cuts are often criticized
as "unfair." This is an ongoing debate about tax cuts.

Some economists deal with the distribution issues of tax cuts using the concept of
“trickle down.” Tax cuts may directly benefit the rich more. However, the
incentive effects will increase potential output. By increasing Y*, more jobs will
be available at higher wages and there will be generally good macroeconomic
performance. Thus, tax cuts will either directly or indirectly benefit everyone. If
the benefits are small, however, one could call them a "trickle." The "trickle
down" term is used to suggest that the benefits for lower classes of tax cuts for the
are minimal.
b) Supply-side view that tax cuts for the wealthy have indirect benefits for others

It is also the case that entrepreneurs tend to be wealthy members of society, so it
also might be necessary to decrease their tax rates in order to increase incentives
for those individuals who may be most important in creating to economic growth.

The Reagan administration emphasized incentives to work, save, invest, and
develop new technology. They argued that the subsequent increase in Y* would
raise welfare of all citizens.
6. Recent perspectives on supply-side policy

It is not clear, however, that the “incentive effects” of tax cuts are all that large.
Recall that the evidence for supply-side effects of tax cuts over the past 20 years is
not that large. Even one of the most fervent tax cutting presidents of all time, George
W. Bush, referred sometimes to Keynesian consumption effects of tax cuts rather than
to supply-side incentives.

If the main objective of tax cuts on the economy is to stimulate consumption and AD,
it might be more effective to cut taxes more for middle and lower income groups that
will likely spend a higher proportion of their tax cuts. (This point was discussed in an
earlier section of the notes.)

Even before the economy turned sluggish, in the presidential campaign of 2000,
George W. Bush argued for a tax cut because he felt taxes imposed too much of a
burden on people. He emphasized that money should be given back to the taxpayers
because the government was running a surplus. Bush has rarely mentioned incentives
and does not emphasize the supply-side arguments.

This reflects a significant transition from the 1980s, when incentives were the reasons
for tax cuts. Now it is more of a moral / justice issue—according to Bush it is the
right thing to let people keep the money they earn. The logical implication of this
view is that tax cuts will go disproportionately to the wealthy because they pay a
disproportionate share of taxes.

Alternatively, one may take the view that it is appropriate for the government to
impose a much higher tax burden on the rich. The rich gain the most from the
economy, and thus one might argue that they should bear more of the tax burden
necessary to keep the society functioning well.
a. This perspective is consistent with President Obama’s (among many
others) argument that the Bush tax cuts should be allowed to expire for
couples earning more than $250,000 a year.
b. In fact, after compromises with the Republicans, the Bush tax cuts expired
for high-income earners in 2013, but the increases start for couples making
more than $400,00

Some people also believe that inequality in society is morally unfair. Furthermore,
inequality can cause significant social problems (increased crime, for example). If
this is the case, the government may be justified in redistributing income and wealth
to some extent. High taxes on the rich may finance social safety net programs for
lower classes.

Many conservatives argue that government is much too large. This critique has some
similarities with supply-side policy recommendations. The supply-side argument
emphasizes that government activities reduce the incentives to produce output by
imposing taxes and regulations. This view, however, can be interpreted as a positive
rather than a normative statement.

The normative conclusion of some conservatives that government is too large (its
benefits don't justify its costs) leads to questions of how to reduce the size of
government. Some people argue that government will never voluntarily shrink. But
if government's tax base is cut, the "beast" will be "starved" of revenue, and it will
have to shrink. This argument provides another justification for tax cuts.