The CBO came out with a new Report on the effects of Tax Cuts on Labor Supply, and Greg Mankiw disagrees with the conclusion that the shift in Labor offsets about 4% of the tax revenue loss. I disagree with the Report as well, but not as Greg does with the weighted Labor elasticity of 0.14. Well, actually I do, but I would go in the opposite direction from Greg; thinking the weighted elasticity of Labor should be 0.06. Labor elasticity stands almost frozen, held small because of cultural standards with relative rigid reaction to Overtime beyond 48 hours per Week average as the Norm, except in the Construction industry (60 hours per Week Overtime Norm). Tax Cuts do relatively little to expand Current Employment numbers. Increased Marketing and Sales efforts do not express Business desires to expand beyond these cultural Norms; such Business content to minimize utilization of Overtime production.
The Tax Cuts, therefore, must generate new Employment. This element relies to a far greater extent on expandable markets, than the Current Employment matrix; the existence of Current Employment consistently saturating the normal spectrum of Marketing Sales. There must be a market expansion of Product and Service Demand in order for New Employment to be sustainable. The rise in Temporary Employment has come about to service Spikes in Consumer Demand, but even here, Temporary Employment can only attain levels consistent with Market saturation. All this garbage means that Tax Cuts will not seriously impact Employment in the Short-run beyond some expansion in Overtime within normal ranges, affect Temporary Employment only in the Intermediate term, and only reflect natural economic growth in the long-term.
The CBO report was not as critical of Supply-side economics as it actually should express. Tax Cuts only basically impact the salvation of Business Profits, not real expansion of labor. Only when those Profits are reinvested in hard Business capitalization will there be an offset in tax revenue generation, and then only to the degree there exists a sustainable market Demand for more Product and Services. I must be honest to the point of stipulating I did not read the CBO Report, only Greg’s Post; still, Supply-side economics will, in themselves, not produce tax revenue offsets to Tax Cuts. lgl