NCPA - National Center for Policy Analysis

Roberts Opinion: Supply-Side Tax Cuts Improve Economy

June 2, 1997

In the 1970s supply-side economists were ridiculed for blaming inflation and a stagnant economy on easy money and recommending larger after-tax rewards for workers, savers, investors and risk-takers. But their advice became national economic policy starting with the Reagan administration and we are now reaping the benefits of a booming economy and low inflation rates.

  • Although President Clinton actually raised taxes and the economy would no doubt have done even better without the hikes, the revolution in communications and information technology and two important tax cuts independent of Clinton policies have offset the drag of his tax increases, economists point out.
  • Fortunately, the new economy was not regulated out of existence or delayed by industrial policy advocates.
  • Lower inflation produced, in effect, a tax cut for capital investment, and since depreciation allowances are not indexed the real value of the allowances are enhanced.
  • Privatizations of state-held industries around the world have greatly enhanced the value of assets and created business opportunities that have globalized the economy.

Today, even labor markets are global -- making it impossible for wage growth to outpace productivity growth.

Prior to the supply-side revolution, economists taught that increased demand raised output, but that sooner or later costs and inflation would rise as the economy reached full capacity and employment. But supply-siders disagreed, contending that tax reductions that raise the returns to labor and capital increase aggregate supply. Today's experience -- of high employment coupled with negligible inflation -- has, at last, vindicated them.

Source: Paul Craig Roberts, "What's So Mysterious About the Rip-Roaring Economy?" Business Week, June 2, 1997.

 

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