Why We Need To Learn Supply-side Economics

Key points in this article:

  • Trump’s tax cut idea is based on supply-side economics
  • Countries that raised taxes and lowered public enthusiasm always decline
  • The Japanese people must stand on the supplying side to escape the poverty mindset

Last December in the U.S. President Trump signed a USD1.5 trillion tax cut bill.

It was former advisors of the Reagan administration who helped bring this about.

One of these was Dr. Arthur Laffer, the father of supply-side economics also known for the Laffer Curve (a theory of the correlation between taxation and government revenue). He currently serves as one of Trump’s economic advisors.

This article will look at Laffer’s ideas with concrete examples to better understand Trump’s tax cut bill.


Enthusiasm Economics

Supply-side economics is a stance that aims for economic growth through strengthening the supply side. In other words, economic growth is intimately related with people’s incentives. The Laffer Curve reveals that the greater the state taxes her people, the less incentive people have to work or spend money. This way the economy fails to grow and the tax revenue decreases.

Laffer claims that supply-side economics sparks enthusiasm in people.


Bad Example 1: Heavy Tax States Collapsed

Dr. Laffer advocates a flat-rate tax to increase incentives. In a lecture at an Australian think tank, the Institute of Public Affairs, he explained the “fall from grace” that high tax U.S. states faced:

“In the last 70 years in the United States, 11 states have introduced the income tax . . . I just did a comparison of the metrics [e.g. income, employment rate, GSP, etc.] in all of these 11 states in the 3 years prior to them introducing the income tax; and then I went to the latest 2 years and looked at their metrics right now . . . Each and every one of those states has declined as a share of the overall U.S. economy – bar none – in every single economic metric.”

“Michigan put in the income tax. At that time they were 5.2% of the U.S. economy. Today they are 2.7% of the U.S. economy. That is a collapse.”

“In 1965 New Jersey had neither an income tax nor a sales tax . . . It was one of the fastest growing states in the nation. People from everywhere were moving into New Jersey. The highest in-migration state, and they had a balanced budget.”

“6 years ago . . . they had the highest property taxes, the highest sales taxes, the highest income taxes. [It was] the slowest growing state in the nation. People were leaving like rats off a sinking ship, and they had a huge budget deficit.”

Did the high taxes then raise the provision of public services, such as schools and infrastructure maintenance? Laffer says, “It’s shocking: of the 11 states, 8 states declined in their provision of public services . . . 5 of the 8 states actually declined dramatically.

In other words, most of those states that raised or introduced taxes got poorer and had less shares in the economy.


Bad Example 2: Sweden’s Fall

Another example is the welfare state of Sweden.

In 2002, Sweden’s per capita burden of ‘income tax + social-security contributions’ was as high as 71%, needed in order to fund the welfare policy. The progressive income tax has a steep curve, so the more one earns the more taxes are paid.

Thus, there is little incentive to work longer, and many people decide to work less and spend time with family to avoid an even higher tax.

While the employment rate amongst women increased due to the public nursing services, people in private companies work less so they are suffering low labor productivity.

In Sweden, the sorts of things happening in some, U.S. states are happening in the whole country.


How to Raise Incentive and Production Rates

The above examples clearly show that high taxes mean a loss of enthusiasm for work, a drop in labor productivity, and ultimately, economic decline.

Laffer asserts that Trump’s tax cuts will raise production rates in the U.S.

“I believe that the President’s tax proposal plus what else he has also done will increase annual productivity growth by something like1 to 2 percentage points per year over the coming decade. This productivity growth will generate more tax revenues in addition to more jobs, output and employment. With productivity increases in the 1.7 to 2.7 percentage point range, 3% GDP growth over the coming decade should be a “slam dunk.” And with this type of GDP growth, tax revenues won’t be a problem.”

“Each and every one of us knows that if our incentives increase we’ll work harder, longer and smarter.”

(from a report by Laffer Associates 8 May 2017)

The U.S. plans to cut USD1.5 trillion in taxes in the coming decade. But this is not all.

Trump’s policy has a special spice that will make companies want to make capital investments. The policy allows the total cost of facility investment (such as factories) to count as part of the company’s expenses. It is immediately amortized over 5 years.

This means that any money used for facility investment remains untaxed. Usually depreciation only allows facility investment money to be appropriated over a long time period, so the remaining money is taxed. Trump’s system of immediate amortization makes it easier for companies to invest

It is a policy that raises investment incentive.

Much of the international media are slamming Trump for allegedly increasing the U.S. government deficit. That is, proposing a USD4.4 trillion budget regardless of a presumed drop in tax revenue due to tax cuts. The aforementioned data on 11 U.S. states and Sweden, however, clearly show that high tax policies discourage the people’s incentives.

Trump is trying to do the opposite.


Japan and the Poverty Mindset

Let us now look at a key country in Asia: Japan.

Japan’s high progressive tax rate is unequalled throughout the world. On top of this, they have the corporate tax, consumption tax, inheritance tax and gift tax.

These cumulative taxes are making the people lose incentive to work, and is consequently creating a declining society just like in those 11 U.S. states and Sweden.

“Countries can become possessed by the god of poverty”, said Master Ryuho Okawa, founder and CEO of Happy Science, in his book “Prosperity Thinking”. “Japan is now one of them. Japan is being possessed by the god of poverty”.

How can Japan move out of this poverty-stricken mindset? In the book, Master proposes how:


“The national leaders are trying to pull the whole country down, and Happy Science is shining the light upwards from below [in the civilian ranks]. But it’s very difficult to shine light from below. It takes time for them to start feeling the heat and to move out. Sometimes we’re helpless if the state leaders support the god of poverty.”

We can easily drive out the god of poverty as long as there are no poverty supporters. Japan has poverty supporters, so it’s very difficult to drive poverty out. The only way around it is to change the mindset of the people.

The key to this is supply-side economics: the idea of raising incentive and labor productivity. In other words, it is to live life on the ‘giving side’ to increase the total amount of happiness in the world.

The Japanese government is undertaking the so-called “worker’s reform” and encouraging people to work less. From a more prudent viewpoint, however, this means increasing the number of people who ‘take’ as opposed to people who ‘give’. This is the prime cause of the poverty mindset.

Humans by nature derive more happiness from ‘giving’ than from ‘taking’.

“By its very nature the soul is productive and creative,” said Master Okawa in his book “The Nine Dimensions”. Supply-side economics coincides perfectly with this natural state of the soul.

Countries must establish a tax system that does not hinder the creativity of her people. More precisely this means embracing Laffer’s idea of the flat tax rate.

Additionally, each and every person should learn that ‘giving’ creates more happiness than ‘taking’, which is the key to departing from the poverty mindset.
(Hanako Cho)

Why We Need To Learn Supply-side Economics
Copyright © IRH Press Co.Ltd. All Right Reserved.