Opinion: How Supply-side Economics Continues to Halt Legislative Progress
The only philosophy seemingly all U.S. presidents agree upon: creating more jobs. On March 31st, 2021, President Joe Biden unveiled his attempt at fulfilling this standard campaign promise through his proposed American Jobs Plan — an ambitious piece of legislation targeting transportation infrastructure, incentivizing renewable energy, and of course, creating jobs. However, the plan’s $2 trillion dollar price tag over the next decade was heavily scrutinized as imprudent spending, particularly by conservative and republican politicians.
Through my group’s research at the International Socioeconomics Laboratory on elected officials’ psychological viewpoints of the American Jobs Plan, one common denominator seemed to show up in disapproval of the plan; a distaste for the method of funding. The corporate tax hikes and capital gains taxes were viewed as economically debilitating; things that would destroy American businesses, forcing them to export labor overseas, and subsequently harm the American working class.
Such is a notion often parroted by supporters of supply-side economics (also commonly referred to reaganomics). Under this philosophy, tax cuts and financial benefits offered to capital owners and entrepreneurs results in stimulated economic growth due to an increase in disposable income, and worker wages will increase as a result.
A weak link of reasoning stands behind the notion that tax cuts targeted towards high-income earners is the most beneficial for increasing aggregate demand. This largely ignores the concept of differing marginal propensity to consume between different income brackets. Individuals in lower income brackets have higher marginal propensities to consume per extra dollar compared to higher income brackets. Thus, it is actually more logical to offer tax breaks to the lower and middle classes, rather than higher income earning individuals through a regressive system.
If we assume that federal spending must be offset with an increase in tax revenue, we cannot afford to lower taxes on the corporations and the wealthiest individuals in the country. Prior to the Trump Administrations' drastic Tax Cuts and Jobs Act which set a single corporate tax rate of 21%, American corporations already faced an effective tax rate that was average for industrialized nations, which negates the notion that tax cuts are necessary to increase our weak competitiveness among the industrialized world.
After taking this argument into account, we also need to consider the trade-off between higher tax rates, and a possible decrease in revenue due to a reduction in consumption + investment. However, the evidence suggests that we are not on the wrong side of the Laffer curve currently, and would benefit from corporate tax increases through increased tax revenue. According to the Congressional Research Service, past studies which had identified a revenue-maximizing corporate tax rate of 30% suffered from econometric flaws which lead to “biased and inconsistent results”.
The root issue, however, lies in an over-emphasis on the harmfulness of the federal deficit, present in the rhetoric of supporters of both demand-side and supply-side economics. Modern economic theories, particularly modern monetary theory, suggest that public debt may not always be a reason for concern. Empirically, public debt has little negative impact on GDP growth and even positive impacts at times due to the fiscal multiplier effect. Also, as taxes primarily serve the purpose of motivating individuals to use government-issued currency, taxation does not fund government spending directly but rather central banks issuing currency; as long as the government is the sole issuer of fiat currency, the government can never become insolvent. The sole financial constraint on currency printing then presents itself as inflation.
Furthermore, inflationary pressures have only sky-rocketed as a result of excessive spending in conditions where productive capacity is cut sharply or labor capacity is met, such as the notorious case of hyperinflation in Zimbabwe. Recovering from a disastrous economic recession, the U.S. economy is nowhere near full employment capacity or productive output. Simply put, under the current economic conditions, there is little justification to put off accretive fiscal policy such as infrastructure, or public works spending.
While it is arguable that both demand-side and supply-side economic philosophies are hindered by a fundamental misunderstanding of the role of taxes and public debt, there is one essential distinction. Demand-side economics is not hindered by the same flawed assumptions supply-side thinkers adopt in garnering government revenue to fund policy. In the midst of the worsening climate crisis, exacerbating income inequality, and deteriorating infrastructure, we must acknowledge that laissez-faire capitalism and market forces alone will fail miserably in ensuring the greatest welfare of the American population. Not everything that’s bipartisan is good, and not everything that’s good is bipartisan: if bipartisanship means agreeing to flawed supply-side economic policies, the usefulness of bipartisanship in American politics moving forward needs to be critically analyzed.