March 2010

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.[1] 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.

Economist Larry Kudlow recently wrote that “the so-called $85 billion jobs program is not a jobs program at all.”[2] 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. history.[3]

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.[4]  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…,” noted Folsom.[5] 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 Kudlow.[6]

Representative Ron Paul (R-TX) wrote that “the economy is fragile because of the overwhelming stranglehold of bureaucracy and taxation of Washington.”[7] 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.”[8]

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.”[9] 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.[10]

Ideas have 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.[11]

The Constitution 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.[12]

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.

[1] 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.), Frederick A. Praeger Publishers, New York, 1965, p. 324.

[2] Larry Kudlow, “The Washington, D.C., Disconnect,” National Review Online, <http://www.nationalreview.com> February 12, 2010, (February 15, 2010).

[3] Burt Folsom, “Will our nation come to its senses”? BurtFolsom.com, February 11, 2010, <http://www.Burtfolsom.com> (February 15, 2010).

[4] Kudlow.

[5] Folsom.

[6] Kudlow.

[7] 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).

[8] Ibid.

[9] Andrew Mellon, Taxation: The People’s Business, The MacMillan Company, New York, 1934, p. 13.

[10] Paul.

[11] Ibid.

[12] Ibid.