Trump Puts Supply-Side Economics to Its Final Test

Corporate tax cuts were basically the last hope for supply-side economics. This economic doctrine, which became popular in the 1980s, holds that taxes distort the economy a great deal, and that cutting taxes therefore produces big gains in growth. Those gains are assumed to eventually result in higher wages for workers, leading some to derisively label the idea as trickle-down economics.

But since the turn of the century, a bevy of tax cuts don’t seem to have had the broad positive effects that supply-siders anticipated. A series of studies has generally concluded that the growth effects of President George W. Bush’s income tax cuts of 2001 and 2003 were small, and the dividend tax cut of 2003 had even less of an impact. That generally fits with economic theory, which holds that the lower the tax rate, the less of an effect cutting it will have — income and dividend taxes had already come down significantly decades earlier, so it makes sense that cutting them even further should have diminishing returns. In any case, earnings for the bulk of Americans stagnated in the 2000s, leaving many with the feeling that the supply-side credo had little to offer.