The effectiveness of supply-side tax cuts under alternative political models

Conclusion Unless a supply-side tax cut is accompanied by a genuine limit on government spending, there are two relative price effects that need to be taken into consideration. The case for a supply-side tax cut has been based on the relative price shift between consumption versus investment goods. However, investment incentives created by this change in relative prices may be completely stymied by the political response to an accompanying relative price shift between publicly and privately supplied goods. It is the conclusion of this paper that the latter relative price effect will be more important in a political process controlled by the median voter than in one controlled by special interests.Based on the conclusion, it is interesting to speculate that those who model government as responsive to the median voter, [e.g., Meltzer and Richard (1981)] will be less enthusiastic about supply-side tax cuts not accompanied by spending limits than those who model government as controlled by special interests [e.g., Niskanen (1971)]. Another, and possibly safer, conjecture is to reverse directions and conclude that enthusiastic supply-siders will be those who believe that government size is largely determined by the demands of special interests and as a consequence is excessive.