Supply-side Economics, the 2017 Tax Act, and Beyond

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Supply-side Economics, the 2017 Tax Act, and Beyond

September 17, 2021 BUSINESS & ECONOMICS 0

Several of the 2017 Tax Act’s architects were prominent supply-side proponents during the Reagan tax cuts of the 1980s. The economic case for lower supply-side tax rates was based on Robert Mundell’s policy mix paradigm, which he created in 1962. Within that paradigm, the easy fiscal/tight monetary policy option was designed for situations involving either reserve or exchange rate pressure (as during the Kennedy Administration) or substantial domestic inflation (as under the Carter and Reagan Administrations). Because there was no currency weakness or inflationary preconditions in the United States after the 1980s, tax cuts did not produce the desired stimulating effects. If such requirements are not met, tax rate cuts will result in either internal overheating or a shift of income to people in higher tax brackets. Mundell’s policy mix advocacy should not be relied upon in any argument in favour of the 2017 Tax Act. In cases where exchange rates are set, or if domestic monetary policy alternatives are otherwise limited or absent — such as in Eurozone periphery nations – the case for an easy fiscal/tight money strategy may have unexpected force. In contrast, the response to the Pandemic of 2020-2021 draws attention to what may become the policy mix macroeconomics’ constraints.

Author (S) Details

Dr. Clark Johnson
Trade Engine LLC, USA.

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