Supply-side economics: Do lower taxes increase a country's economic health?

Governments have tried to boost their countries' economies by lowering taxes. Tax represents a drain on the resources available for investment and entrepreneurship. Lower tax means more money in people's pockets. More money to circulate. More money available for goods and services. More money available for investment. The incentives to make money are also higher - you get to keep most of what you make! Lower business taxes in particular mean more money to invest in business.

The other side of the coin is that lower taxes mean less revenue for the government. Of course, government spending can also be used to boost economic activity, but the general consensus is that free enterprise is the healthier route. Government is a major spender. If there is insufficient money to fund government expenditure, then the government has two choices. It must cut spending or allow for a greater budget deficit.

Cutting government spending is generally considered to be the healthier route. Government spending is notoriously wasteful. Inflated departments that are not productive contribute little to the economy. While it is true that a government can spend its way out of recession, money in the private sector is much more likely to be used in a more productive capacity.

Government departments are there to maintain government services - services such as education, defence, justice and police. The departments create procedures that become a burden to the actual service providers, but create many government jobs. Spending cuts should be applied to these departments to achieve a less wasteful environment. Economies and efficiencies can be achieved by cutting back on administrative waste. For education, leave the funds for the schools, but cut departmental excesses. Reduce the administration effort required.

Funding tax cuts by increasing the budget deficit presents a number of problems. It means that government is spending money that it does not have. It also means that the country itself will be in debt. It is similar to a household. A certain level of debt is not a problem, especially where that debt is being used to finance capital assets. However, funding consumption with debt is destructive. Most government spending is consumption based.

The next part of the equation relates to how the lower taxes are distributed. If the majority of the tax cuts are for the benefit of the rich and the super rich, the benefit to the economy is likely to be moderate. Much of the tax relief will simply be added to accumulated wealth rather than put into productive use.

Extra money in the hands of the middle and working class is more likely to be put back into the economy. Growth is largely funded by spending.

Of course tax cuts in the hands of business can produce good results. Business could use the additional capital to fund additional investment, research and development and in reducing debt. However, some companies would simply use the additional funds increase the distribution of profits. Perhaps the cuts should be passed on to business as investment incentives.

So tax cuts can be healthy for economic activity.

In conclusion there are three parts to this equation. The amount of money being put back into the economy; funding of these cuts - spending cuts or deficit; finally the distribution of the funds - to assist the wealthy to accumulate more or to be placed into hands that will spend them.