by Robert Griffith

Created on: October 12, 2008

Supply-side economics currently has two popular definitions. A Yes or No answer depends on the particular definition the reader embraces. The great schism in modern supply-side economic theory occurs at the fault line of how taxes in particular affect production and consumption, and who should be taxed less in order to support economic growth. On one side are those who say corporations should be taxed less in order to produce supply, resulting in a "trickle down" effect. On the other are those who say consumers should be taxed less in order to create more demand, resulting in an upward cash flow from consumer to producer.

I borrow money. I buy materials and pay you wages to make a widget. You use that money to buy a widget from me. That's the production-consumption cycle in a nutshell.

Nearly every economist, regardless of the school of thought they embrace, acknowledges that the supply side of economic supply and demand theory - production - is basic to a healthy, growing economy. Increased supply through production causes higher income and a better standard of living because goods and services, in order to be created and/or made available, require an initial capital investment in the materials and labor required for their creation. This initial investment is reclaimed when the wages paid and profits earned on the production side of the cycle supplies a large number of people with earned money, allowing those people to become consumers and buy the products made.

Strictly speaking, when supply-side economic theory looks at the influence of taxes on production, it wants to establish a marginal tax rate, that is, the point when a tax rate begins to interfere with production and consumption of produced goods and services. Higher tax rates pull money from the production-consumption cycle, leaving less money to circlate in the cycle. So everyone is interested in where and from whom tax money should come from, how much is enough, and at what point does it become too much and so detrimental to the economic cycle.

What has happened to the straightforward, simple recognition of the vital nature of a healthy production-consumption cycle is what usually happens with human nature: two separate, complex schools of thought about taxation emerged, based primarily on self interest. Production and consumption, rather than being regarded as equally important components of the cycle, were assigned a value of priority which dictated a greater or lesser tax burden for one side or the

• 1
• 2
• Next Page >>