Siding With Supply

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The economic numbers that followed the Bush tax cuts of 2003 aren’t something that Democrat politicians are likely to talk much about prior to the November election. “The net worth of American households has increased by some $6 trillion since May 2003,” reports Stephen Moore in The Wall Street Journal. “Virtually all of the wealth losses from the end of the Clinton era have been recaptured. The median household has increased its wealth by almost $20,000 in real terms since the supply-side tax cuts took effect.”

The idea underlying supply-side economics is that high levels of taxation, litigation, and regulation weaken incentives to work, save, and invest, thereby holding back increases in productivity, economic expansion, job creation, and income growth. Conversely, according to this view, lower income taxes that increase after-tax wages will encourage more work; lower taxes on interest income will encourage more saving; and lower taxes on income from capital will stimulate more investment.

The result, in this supply-side analysis, is higher productivity by way of increased spending on better machinery and equipment, increased American competitiveness in the global economy, and more economic growth, which in turn keeps unemployment low and inflation in line. According to supply-sider Arthur Laffer, tax cuts need not produce lower revenues in the government’s coffers. In fact, arguing that higher taxes discourage economic activity, Laffer maintains that lower tax rates might well have the result of increasing government revenues and lowering the deficit.

That’s a supply-side economic theory in a nutshell, and it pretty much describes what has taken place over the past three years. The Department of Labor reports that labor productivity last year was up by a record-breaking 5%. “The 2005 gain was the highest single-year increase ever recorded,” Moore says. This is the highest increase since the government began measuring productivity in the 1950s. “Over the past four years, manufacturing productivity has increased by the largest amount ever in such a stretch of time.”

That means that the U.S. is more competitive in the world economy, an unmistakable plus in terms of American workers’ future job security and income growth. And the results are already showing up. Moore reports that “real compensation,” i.e., compensation adjusted for inflation, “is up 70/0 since 2001, with the biggest gain this year.”

On taxes, according to government numbers reported in Jul)!, “federal revenues have increased by more than $520 billion. That is the largest real increase in tax revenues over a two-year period in American history.” The largest jump in government revenues has come from increased tax payments on capital gains and dividends. Just as high taxes on cigarettes discourage smoking, high taxes on dividends and capital gains discouraged investment. The 2003 Bush tax cut reduced the dividend tax rate and the capital gains tax to 15%. And the change in government revenues, with lower tax rates? “The latest data from the Congressional Budget Office,” Moore says, “finds a 70% increase in capital gains receipts and a 31% hike in dividend payments since 2003.” Further, with profits up, federal tax receipts from corporate income taxes increased by 40% over the past three years.

None of the above is intended to suggest that everything’S rosy. The number of Americans living in poverty isn’t down. The number of people without health coverage is up. Wage increases for millions of workers haven’t kept pace with inflation. Adjusted for higher prices, the buying power of the minimum wage is lower than it was in the 1950s. And on international trade, flawed policies continue to place U.S. companies and workers on the downside of an uneven playing field.

The solution to these remaining problems, however, is not a rollback of the Bush tax cuts. Reductions in poverty and increases in workers’ income will most likely come from continued economic growth, from increased American innovation and investment, and from improved American competitiveness in the global economy.

The facts show that expansions in investment, innovation, productivity, economic growth, and overall income growth are directly correlated with low tax rates. The path to prosperity isn’t by way of boundless government. Simply stated, incentives matter. The Democrats, if they’re serious about making a dent in our remaining economic problems, will have to come up with something better than demonizing Wal-Mart and raising taxes.

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