Republicans, Democrats, liberals, conservatives, pragmatists, ideologs, Presbyterians, or whatever, can never seem to agree on economic theories or tax policies. And if Republicans plan on winning this November they should make sure their economic theories might work. But supply-side economics, the Holy Grail of conservative politics, has never worked and apparently has little future.
Supply-side theorists claim that if generous tax cuts are given to the wealthiest individuals they will invest the extra money and stimulate the nation’s overall economic growth. Supply-siders further believe that this added growth will boost taxable incomes enough to make up for the revenue lost through tax reductions. In other words, the tax cuts will (supposedly) pay for themselves, a classic win-win situation. But let’s look at how supply-side policies actually work.
The wealthy elite of this nation didn’t get to be rich by making dumb decisions. Conservative by nature and rarely inhibited by a lack of money, they will invest only when there is a likelihood of increased stock dividends and capital gains. They will rarely invest when they simply have extra money available through tax reductions. In the real world, economic growth seems to be stimulated more by increased consumer demand than by corporate investment alone. In an otherwise normal situation, the wealthy will simply add the tax savings to their already bulging savings accounts. This, of course, creates even greater wealth disparity.
So where should the tax cuts go for the best results for everyone?
Conventional wisdom has long held that tax cuts for high-income groups lead to higher economic growth than cuts for working class folks. But attested by recent economic analyses, for the best overall results the largest tax cuts should go to middle and lower-income wage earners. These folks will almost immediately begin spending the extra money on real estate, automobiles, furniture, appliances and other consumer goods. This stimulated demand will invite more investment in production capacity and private-sector job creation — classic free-market economics at its best.
Recent history offers little evidence that supply-side economics ever works. In 2001 President George W. Bush cut the top rates on capital gains and dividend income down to 15 percent; and that was after it had already been severely cut by Bill Clinton four years earlier. But the following decade witnessed the worst economic performance since the Great Depression. By contrast, even though the top income tax rate was over 90 percent during the early Eisenhower years, the U.S. economy grew at an incredible pace back then. And this was in an era of high taxation, stringent regulation and tough labor unions. Annual GDP growth averaged more than 4 percent in those years. New job creation, a puny 0.8 percent during George W.’s two terms, had been 15.6 percent at one time under Bill Clinton and 7.1 percent under Eisenhower.
While supply-side fans crow about robust growth under Reagan after his 1981 tax cuts, growth was higher under Clinton even after his 1993 tax increase on top incomes. Ironically, median household income grew faster after Clinton’s 1993 tax increases than after Reagan’s 1981 cuts.
There are obviously many factors affecting U.S. economic performance including wars, world energy prices and the business cycle. But history shows there is little positive correlation between reduced taxes for the wealthy and overall economic growth.