Here's how Wikipedia defines supply side (or trickle down) economics:
"Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. Supply-side economics is often conflated with trickle-down economics, now a term given to right-leaning economists' views. The term supply-side economics was coined by journalist Jude Wanniski in 1975, and popularized the ideas of economists Robert Mundell and Arthur Laffer."
This is what George H. W. Bush called "voodoo economics" when he was running against Ronald Reagan in the Republican primaries leading up to the 1980 presidential election and it explains George W. Bush's tax cuts and John McCain's pledge to make those cuts permanent.
I'm not certain that it has been formalized but the other side of that theory would be demand side economics and this makes a little more sense to me. I just don't buy into the theory that a company, on the strength of a lower tax rate, would hire additional employees and increase production hoping that consumers would, in turn, start purchasing the newly produced items. What I do believe is that putting more cash in the hands of the consumer would, in all liklihood, result in increased demand which would lead to greater levels of production which would lead to increased employment which leads to even more purchasing, etc., etc.
What I don't necessarily agree with is the one-shot stimulus checks that were sent out this past spring and which are, again, being contemplated by congress. No business owner worth his (or her) salt will have any part of hiring more workers and increasing production simply to meet a short-term spike in demand that is created by such a stimulus. However, a stimulus that includes tax cuts for individual tax payers makes a lot of sense to me. If my wife and I had an extra $50 or $100 each month we'd be more likely to go out for lunch or buy more dance stuff for my fourteen-year-old.
Should the same breaks in tax rates be extended to businesses as well? A few weeks ago there was a "point of view" article in the Raleigh News & Observer that put forward the theory that higher tax rates on businesses would compel businesses to add payroll since additional payroll dollars were incrementally cheaper with a higher rate than with a lower rate. This article was resoundingly booed by letter writers and I can see why. It could happen in theory (I made it work messing with examples in Excel but my "company" had to pile on expenses that would not have been necessary) but no in practice. I suppose corporations should be given the same tax breaks but you've got to remember that corporations can take deductions that are not available to individuals and corporations are going to try to maximize sales and profits regardless of the tax rate.
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I believe in the supply-side economic theory, but I agree adjusting corporate tax rates at this time is not the best answer. On that I think we agree. I have gone back and forth on that, but I have finally decided what my opinion is (for today anyway LOL).
If the government wants to encourage job creation, it has to make it less expensive and a better investment for the corporations. Adjusting the corporate income tax rates will not do that because the company may use the savings for other expenses or give raises to owners or executives (non-growth activities).
Making it less expensive for companies to hire workers means fixing the payroll tax system, the employer-provided pension and health care system, and numerous other regulatory systems related to employees. If we lower corprate taxes, it reduces the tax savings achieved by investing in jobs while the cost of adding jobs remains high - so we are back at square one.
I agree that a stimulus needs to include individual tax cuts that are longer lasting than a one-time check rebate. But they also need to improve the job-creation environment for corporations. My wife is a realtor, but we could never hire an employee because of the extra expenses associated with it (insurance, payroll taxes, unemployment taxes, compliance costs, etc).
The tax laws already favor corporations in this country. In an environment of declining demand, any further tax breaks for them will simply be pocketed by the companies and the individual taxpayers will not receive any marginal benefit.
I guess really I am saying that we need a good balance of both demand- and supply-side economics for the system to prosper. When this relationship is imbalnaced, one side suffers. It could be argued that Clinton was a demand-side president who cancelled out some of the Reagan trickle-down effect, and that balance was once achieved. But the Shrub swung the balance back to the corporations, and now the demand side is suffering.
Okay - my brain is hurting again. Great food for thought bluedog!
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