As these quotations from Krugman and Romer illustrate, many of todays proponents of Keynesian policy do not simply disagree with their critics, but go further by leading the general public to believe that only the Keynesians have scientific research on their side. This is simply not the case, as I now demonstrate.
Research Showing the Important Effects of Taxes on the Economy
The theoretical case for “supply-side economics” is straightforward: People respond to incentives. By allowing entrepreneurs, investors, and workers to keep a smaller fraction of their last dollar earned, hikes in marginal tax rates discourage business start-ups and investment and reduce labor supply. This is the logic behind conservative and libertarian warnings about proposals to address the long-run U.S. fiscal imbalance through large tax-rate increases on high-income people.
Although the basic theory is unassailable, it remains to test the practical significance of such supply-side effects. Fortunately, scores of peer-reviewed studies do just that. Far from the impression that Christina Romer gives, many economists find that taxes do matter.