By: Greg
In this blog post, I want to look at what is and isn’t “supply-side
economics,” also known as “trickle down economics.”
The fundamental idea behind supply-side economics is that
investment spurs growth. What do I mean by investment?
Investment means spending money now to generate more production in the future –
in other words, we choose to consume less today so we can consume more tomorrow.
A few examples of investments include: factories, cement trucks, education and
training programs, roads, etc. I would suggest that few people buy a factory
just because they like factories. They buy them so they can make more stuff.
The factory is an investment – it involves spending money today in order to get
more in the future. All of these investments increase output per person. If we
have more stuff but the same amount of people, then we are all richer.
Read that last sentence a few times until it sinks in.
A common fallacy is to think “Well, all that extra stuff we’re
making will just sit on the shelf because people can’t afford it!” But
remember, if there is more stuff and the same number of people who want it, the
stuff gets cheaper and we buy more. If this doesn’t make sense please comment
and I will explain further.
So what government policies would
encourage increased investment in the economy? Most economists (http://www.npr.org/blogs/money/2012/07/19/157047211/six-policies-economists-love-and-politicians-hate proposal three) agree that one of the best
ways to promote investment and hence growth is to cut or remove corporate
taxes. Businesses are the world’s investors, so if you like to promote growth,
tax them less. Many people think we should tax corporation because they are led
by greedy, overpaid executives and we don’t like that. But, if you think
someone is overpaid, tax them, not the company they run.
Another policy would be to
decrease the capital gains tax rate (a special, lower, tax paid on earnings
from stocks). The impacts of this policy are harder to see, but when we buy
stocks we are investing in a business which allows them to invest that money as
they choose. Advocates of supply side economics are highly against capital
gains taxes.
Notice that we didn’t mention
giving heavy income tax breaks to the super rich. This practice is not true
supply side economics! Though it can be argued that they are the most likely
people to invest the money which would in turn grow the economy, this is a more
indirect and sloppy approach. Though there are other reasons why we wouldn’t
want to tax the heck out of the rich, they don’t relate to supply side
economics.
100% pure, unadulterated supply
side economics would go so far as to advocate getting rid of the income tax for
all income levels. Why? Any form of income taxation discourages work. (You
might wonder how the government would be funded under this practice – tax
revenue would come from increased consumption taxes like sales taxes).
As a review, supply side economics holds that economic
growth first requires investment. Investment is choosing to consume less today
so we can consume more tomorrow. Good investments increase output per person
which makes us all richer because there is more stuff for less money. Supply
siders believe that we can promote investment by reducing corporate and capital
gains tax rates.
That’s it! Let me know if you any questions and I would be
happy to explain anything that doesn’t make sense.
