To paraphrase John Kennedy, “Ich bin ein Keynesian.”

Jude Wanniski coined the term “Supply Side Economics” in 1976 as a reaction to  Keynesian and monetarist thought. In his book, The Way The World Works, Wanniski argues against taxes. “Working together three men can build three houses in three months. Working separately, they can build three houses in six months…. If the tax rate on home building is 49% they will work together … if the tax goes to 51% they will suffer a net loss because of their teamwork and so will work separately in the barter economy and pay no taxes. … the government loses all the revenue and the economy loses the production…”

Here are Wanniski’s assumptions:

1. Working alone three men can build a total of six houses in one year. Working together they can build 12 houses in the same year.
2. A 4% change in the tax rate, from 49% to 51%, is significant enough to cause someone to “drop out.”
3. The government taxes people when they work together but not when they work separately.

These assumptions are flawed. Continue reading →