Discussion of the Evans Paper

Aggregate supply is an old idea. Although discussed by Keynes and the early Keynsians, most recent econometric models can justly be criticized for not adequately developing the supply side. It is therefore exciting to review a supply-side model created by one of the most prominent model-builders. The Evans model was commissioned by the Senate Finance Committee as an attempt to incorporate supply-side effects which were not in existing econometric models. My remarks are based on a version of the model furnished to me courtesy of Dr. Evans (Evans, 1980). Theory suggests a number of channels through which, in the long run, a reduction in various tax rates might substantially increase aggregate supply. This would make possible a higher level of real output without inflationary consequences. Four of these channels have been built into the Evans model. They are: I. Because workers bargain for after-tax wages, a reduction in personal tax rates decreases wage demands; 2. Because income taxes reduce the incentive to work, a reduction in the personal tax rate increases both the participation rate and hours worked; 3. Because business taxes reduce the incentives to invest, reductions in these taxes will increase the stock of business capital; and 4. Because interest rewards savings behavior, a rise in the aftertax rate of interest will increase savings. Although theory suggests the possible existence of these channels, it has little to say about their strength. Earlier model builders have found substantial empirical support only for the third channel— business taxes. Evidence for the others have been mixed at best and most other models do not contain them.