When did Republicans quit on supply side and go John Maynard Keynes on us? What can’t be said enough is that supply-side economics isn’t about fiddling with the tax rate to increase tax revenues by lowering taxes.
Rising tax revenues are the opposite of supply-side economics exactly because more wealth is handed to the federal government to centrally plan the allocation of. True supply-side economics is all about reducing the barriers to production. Get it?
While economists almost to a man and woman worship at the altar of consumption as the driver of economic growth, supply siders don’t even think about consumption. There’s no reason to. And that’s because consumption is an always and everywhere effect of production. In which case reduce the barriers to production, and consumption will soar in exactly equal amounts consequently. Say it repeatedly that consumption is an effect of economic growth, not the driver.
Which requires a pivot to the Republicans and the tax cuts they passed last year. As the Wall Street Journal recently reported, “Republicans have rebranded the ‘one big beautiful bill act’ as the ‘working families tax cut.’” The politics of the latter make little sense as will be argued soon enough, and they don’t because the economics make no sense. Tax cuts for “working families” quite simply have nothing to do with the increased production that we call economic growth.
That’s because tax cuts for “working families” are by their very description Keynesian tax cuts. They’re designed to “put money in people’s pockets” so that they spend it. Which is what working families will do. Since they’re not flush with cash, working families will spend their bigger paychecks, or as the Republicans are now saying, they’ll spend their tax refunds that Treasury projects will be $1,000 higher. But for one problem once again, there’s no growth in what has the GOP so giddy.
If “working family” tax cuts had anything to do with economic growth, then Republicans and Democrats would always agree on cutting taxes since both sides fancy their respective Party as demotic, or “of the people.” Get more money in people’s pockets either through rebates, direct tax cuts, or simple handouts. No one needs encouragement to consume!
Except that consumption is yet again an effect of economic growth. Supply siders know this. Which means true, supply-side tax cuts substantially reduce the tax burden on the very rich who, by virtue of being rich, have no need to spend the fruits of their tax cuts. Which is precisely the point. Rather than spend the extra money in their pockets, the seriously rich already in possession of all that they need (and much more) have no choice but to put their untaxed wealth to work. Think investment.
Remember this with supply-side economics and specifically removing the barriers to production top of mind. That’s what investment does. When producers and entrepreneurs are matched with precious capital, their productivity soars. Translated, real economic growth that isn’t driven by consumption, but by the investment that enables the very production surges without which there is no consumption.
Which is why even the politics of the Republicans’ tax cut rebrand makes no sense. As Republicans used to say with great gusto, the American people want economic growth. They were right, and that’s why their tax cut was and is wrong. There’s once again no growth to be found in tax cuts for “working families” as the term supply-side economics indicates.
Originally published on Real Clear Markets.
