The Case for Supply-Side Economics
By John Hendrickson
“If businessmen were
allowed a wish, I am sure it would be unanimously for lower taxes,”
stated General Douglas MacArthur, in his retirement serving as Chairman
of Sperry Rand Corporation.
In order to achieve economic growth, encourage entrepreneurship, and
promote business and job expansion, taxes need to be kept low for both
businesses and individuals. The nation is currently struggling to work
its way out of an economic recession, and although Gross Domestic
Product (GDP) has increased and the unemployment rate has decreased to
9.7 percent, job growth and business recovery is still shaky as the
marketplace faces great uncertainty in regard to public policy.
President Barack Obama, in attempting to fight the recession, has
followed the Keynesian philosophy of using the force of federal
government spending to push the economy out of recession. The flagship
program in the Administration’s effort to bring economic recovery was
the $787 billion stimulus bill. The Administration also engaged in
financial bailouts, a government takeover of the auto industry, and the
cash for clunkers program, among other policies to bring the nation out
of recession. President Obama and the Democrat Congress also pushed for
increased regulations and for an aggressive reform agenda focusing on
universal health care and radical environmental reform.
The President and Democrat leaders in Congress are now pushing for an
$85 billion “jobs bill” with temporary tax credits and incentives that
will not be effective. President Obama has also put forth a $3.8
trillion budget proposal. The national debt is $12 trillion, the federal
government ran a $1.4 trillion deficit in 2009 and is projected to run a
$1.6 trillion deficit for 2010, and it appears that deficits will
continue into the future if federal spending is not checked.
Kudlow recently wrote that “the so-called $85 billion jobs program is
not a jobs program at all.”
The solution to bring about economic recovery is not additional
Keynesian spending programs, but tax cuts that will stimulate the
private sector of the economy. As Economic historian Burt Folsom wrote:
If spending our way deeper into debt doesn’t work, what does? Answer:
Increase incentives to invest. For example, if we lower tax rates, we
tell investors they can keep more of what they earn. That gives them
incentives to expand, hire new workers, and try to create new products —
or better existing products — that consumers will want to buy…The U.S.
tried this strategy of across the board tax cuts in the 1920s and 1980s,
and those two decades were among the most prosperous decades in U.S.
The market and business confidence has reacted with uncertainly toward
the current Democrat policy agenda, and any tax increase — whether in
the form of the bank tax or allowing the Bush tax cuts to expire — would
be detrimental to any recovery.
“And taxing capital
is the worst idea of all. That’s why the capital-gains tax must not be
increased,” noted Kudlow.
Congress should consider reducing tax rates to encourage private-sector
growth and this includes cutting both the corporate and capital gains
tax. “If we would cut both rates (to 25 percent on corporate rates and 5
percent on the dividend tax) we would not only turn American
entrepreneurship loose — we would also slash the unemployment rate…,”
In addition “raising the top two income-tax brackets from 33 to 35
percent, and then from 35 to 40 percent, thereby penalizing those who
own about half of the small-business income, is a job destroyer,” argued
Paul (R-TX) wrote that “the economy is fragile because of the
overwhelming stranglehold of bureaucracy and taxation of Washington.”
In addition Rep. Paul argued that “any jobs Washington might create
through these endless spending programs are paid for through more
taxation and debt put on the productive sectors of the economy.”
The policy of cutting
taxes to stimulate the private sector of the economy was utilized by the
presidential administrations of Warren G. Harding, Calvin Coolidge, John
F. Kennedy, and Ronald Reagan during the 20th century. Andrew
Mellon, who served as Secretary of the Treasury during the 1920s, argued
that “the history of taxation shows that taxes which are inherently
excessive are not paid.”
Mellon also argued that higher tax rates do not necessarily mean more
revenue for the government, but rather appropriate tax cuts would bring
more revenue into federal coffers.
A policy program of across-the-board tax cuts, reducing spending and
regulation, and balancing the budget would result in not only an
economic recovery, but an incentive for the private sector to start
growing. Although this policy formula has proven to work, it is
uncertain lawmakers will move in this direction. As Rep. Paul noted:
Still, Washington is full of talk of more regulation, more taxation and
spending. The Senate is still struggling to pass a massive regulatory
increase on the financial sector, even as the stock market suffers more
shockwaves. Pay-as-you-go rules give the appearance of fiscal
responsibility, but in truth these rules are only used as a
justification to raise taxes.
consequences and policymakers need to consider the consequences that
their ideas may have on public policy. It is essential that lawmakers
return to constitutional limited-government solutions. “The Constitution
gives some excellent limitations that would get us back on the right
path if we would simply abide by them,” noted Rep. Paul.
serves as a blueprint for sound public policy. “The Framers of the
Constitution understood that only the ingenuity of the American people,
free from government interference, could get us through hard times, yet
Washington seems bent on prolonging the agony,” stated Rep. Paul.
John Hendrickson is a Research Analyst at Public Interest Institute.
The views expressed herein are those of the author and not necessarily
those of Public Interest Institute or Tax Education Foundation. They are
brought to you in the interest of a better-informed citizenry.
Douglas MacArthur, “The National Budget Now Governs the
Economy,” in A Soldier Speaks: Public Papers and Speeches of
General of the Army Douglas MacArthur, Vorin E. Whan (ed.),
Praeger Publishers, New York,
1965, p. 324.
Larry Kudlow, “The Washington, D.C., Disconnect,” National
Review Online, <http://www.nationalreview.com> February 12,
2010, (February 15, 2010).
Burt Folsom, “Will our nation come to its senses”?
BurtFolsom.com, February 11, 2010, <http://www.Burtfolsom.com>
(February 15, 2010).
Ron Paul, “More spending is always the answer,” Texas
Straight Talk: A weekly column, <http://www. House.gov/paul/index.shtml>
February 15, 2010, (February 15, 2010).
Andrew Mellon, Taxation: The People’s Business, The
MacMillan Company, New York, 1934, p. 13.