Supply-Side and Tax Cuts

The battle lines have been drawn. On one side we have the Republicans and their House version of the largest tax cut since Reagan, discos, and platform shoes. And in the other corner, weighing in with the populist pitch of greater entitlements for all (paid for by those who work) are the Democrats, led by President Clinton.

At stake for both parties is the huge swing vote of the new millennium political picture . . . the great investor class made up of the 100 million who vote with their portfolios in mind.

Our referee for this main event is none other than Federal Reserve Chairman Alan Greenspan who has his own opinions about how Congress should spend your money.

The Republicans have been busy making a case for supply side economics, the trickle down theory of incentive driven economic growth, and (bet you don't remember this one) the Laffer Curve.

Say what? That's right, the Laffer Curve, built in part on the economic theory of French economist Jean-Baptiste Say, is back. Say's Law of Markets states that lower tax rates on production will lead to more output, more jobs and more incomes to be used for consumption. An economy in a low tax environment will produce more so we can consume more.

Art Laffer, one of President Reagan's economic advisors, found that rising tax rates create a disincentive to work. As taxation increases beyond a certain level, government revenues actually start to decrease, since people start disengaging from the workplace. On the other hand, as taxes fall, people feel more incentive to work, growing the tax base and protecting against an erosion of government revenues.

Republicans have backed up their position that tax cuts will encourage non-inflationary growth with models like the one created by former Reagan economists Gary and Aldona Robbins of the Institute for Policy Innovation. Their supply-side model shows that the Archer tax plan from the House will, on the average, increase economic growth by nearly one-half of one percent per year between 2000 and 2009, leading to 1.5 million new jobs and $1.5 trillion in expanded capital formation.

And, across the ring, seeing the glass half empty, are the Democratic foes of supply-side economics. They argue that the economy does not need further stimulus. They see a tax cut as running counter to traditional (re: Keynesian) economic thinking. They do not believe that with the economy running full steam producers can deliver sufficient new supply to meet the increased consumption, leading to inflation and higher interest rates.

Our referee, Federal Reserve Chairman Greenspan, made his position clear when he expressed to Congress his opinions that any budget surplus should be used first to pay down debt and then addressed with a tax cut. His position, put in laymen's terms, is simply "pay down the house mortgage first, and then begin saving in your 401(k).

As for me, I'm on the supply side. History of the past 18 years has clearly shown what a major tax cut can do for our economy. Reaganomics works. Incentives work. Our economic system is the most productive, efficient economy in the world. We have proven that tax cuts are powerful incentives for us to work harder and for our businesses to invest more.

The reasons we have a budget surplus to argue about is that we Americans worked hard for it. Now it's only right that we should get some of it back!

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