3 of 21

No

Write now Article Tools

Page 4 of 4

the boom years of the late 1990s. It looked like tax-cut advocates might finally have some ammunition to advance their cause, even though the economy during this period performed about on par with its performance in the years prior to President Bush's first tax cut.

Then in January, 2008, economic distress signals began to pop up everywhere. Christmas sales figures for large retail chains were down, almost unanimously, some by double-digits. Payroll jobs unexpectedly shrank by 17,000. A sub-prime mortgage crisis continued to ripple through the economy. Record foreclosures and bankruptcies followed. Large banks recorded mammoth losses as they wrote off debt. The giant mortgage company, Countrywide Financial Corp., required rescue from Bank of America. The U.S. dollar continued to weaken. Food prices shot up.

This rash of bad news evoked a panic response. On January 22, the Federal Reserve cut its rates on overnight loans to banks by .75%. On January 30, it lopped off another .5%. An emergency economic stimulus package was hurried through congress to put $150 billion of tax rebates into consumers' hands by May, adding $150 billion to the deficit which remained out of control. Interest on the public debt will put a chill on the economy's health for decades to come, just when baby boomers' retirements eat away at the surplus of social security receipts to expenditures.

Six years after Bush's tax cut no one was talking about the healthy economy. It was an economy on life support needing "stimulus", with financial institutions needing "rescue". Supply side tax policies were given ample opportunity to prove its merits, with a sympathetic president and congress pushing their cause. No one can argue that the result was a healthier economy.

The reason why tax cuts don't always lead to a healthier economy can be found in that icon of tax cut advocates: the Laffer curve. This curve is a simple chart that illustrates how tax cuts stimulate productivity and leads to greater tax revenues. Along one axis is "Government Revenues". Along the other axis is the tax rate percentage. Government Revenues are zero if the tax rate is 0%. Government Revenues are also zero if the tax rate is 100%, presumably because everyone starves to death with the government taking every last scrap of income. In between, the curve rises and then falls. The big unanswered question is: at what tax rate does the curve peak? The Kennedy tax cut may have been successful because the highest tax rate was 91%. Below the 50% level, when even the biggest earners get to keep most of what they earn, the stimulus effect is less and may lead to the government having to curtail necessary functions, many of which keep the economy healthy. Too many tax cut advocates ignore the part of the curve that shows a rise in revenues as tax rates rise. If the Laffer curve shows starving taxpayers at one extreme, the result at the other extreme is a starving government. Neither is good for the economy.

Learn more about this author, Charles Hughes.
Click here to send this author comments or questions.

• << previous page
• 1
• 2
• 3
• 4

Add your voice

Know something about Supply-side economics: Do lower taxes increase a country's economic health??
We want to hear your view. Write now!