This blog post originally appeared on RealMoney Silver on July 22 at 8:00 a.m. EDT.Herbert Stein, a former economic adviser to President Nixon, coined the term "supply-side economics" in 1976. (Later that year, this term was repeated by Jude Wanniski.) Its use incorporates the ideas of economists Arthur Laffer and Robert Mundell. (The Laffer curve posits that tax rates and tax revenue are distinct and that neither too-high nor too-low tax rates will maximize tax revenue.) Supply-side economics, which is viewed by its critics as a form of "trickle- down economics," is a school of economic thought that argues that economic growth can be most effectively created by lowering barriers for people and corporations to produce (supply) goods and services, such as reducing income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. And they point to the tax cuts of the Kennedy administration and the high rates of the Hoover and Nixon administrations in justifying that view. Many of today's supply-siders today have policy recommendations regarding the lowering of corporate tax rates at their core. Yesterday and this morning, two of the largest companies, Microsoft ( MSFT - Get Report) and General Electric ( GE - Get Report), reported quarterly profits that exceeded expectations -- both enjoyed the benefit of lower (and low) effective tax rates. Microsoft had an effective tax rate of only 7%, down from 25% a year ago, while General Electric paid an effective tax rate of 19%. And cash payments are even lower than the aforementioned effective tax rates. Indeed, General Electric pays zero in cash taxes. I am not sure about all of you, but those tax rates are substantially below what I pay to the U.S. government in taxes. My questions (at the risk of encouraging class and political warfare) for supply-siders are as follows:
- Microsoft and General Electric paid an effective tax rate of 7% and 19%, respectively, in the latest quarter. How much lower can (or should) the tax rates of Microsoft and General Electric go?
- Will an even lower tax rate give these two companies some incentive to add jobs and expand their capital expenditures?