A prevailing monetarist theory driving neo-conservative economic thinking is that low tax rates, in combination with deregulated economies, result in optimal economic performance. By contrast, it should be noted that the longest period of sustained economic growth in the United States, and to a similar extent here at home, arose during the Truman and Eisenhower presidencies. It was sustained until the Kennedy democrats brought in a tax cut, a fiscal policy feature that later became a fixture of G.O.P. economic theory. As the neo-conservative doctrine on this matter became prevalent, North American markets were increasingly subjected to the boom-bust economies preceding the Great Depression.
The tax and fiscal structure of the Truman – Eisenhower period have been researched to determine why the fiscal and monetary policy of that period resulted in such large and sustained growth in the U.S. economies. The study shows that those policies were not just geared towards more equitable sharing of the tax burdens and the distribution of wealth generated by our economies. The fiscal measures in place made sure that there was a sustained improvement in infrastructure works, and provided a bottom to economic downturns sustained as part of the normal function of the business cycle.
Further evidence to support Truman-Eisenhower style fiscal and monetary practices may be found during the long sustained growth period of the Clinton administration which mirrored closely those of the 1940s and 1950s U.S. administration. In policy options for U.S. and Canadian economic management, furthering the tax cuts and other fiscal policy approaches of the Bush administration would seem, in light of this evidence, to lock-in further periods of boom-bust cycles risking Depression scale downturns in economic activity as we have seen recently.
Another aspect of the failure of low-tax rate policies is that business growth and development relies heavily on infrastructure works, worker health and well-being, and economic sustenance to those workers who lose employment during downturns arising from the business cycle. The result is that governments are not able to reduce spending in line with equivalent tax reductions, and could not do so without impacting the health of the private sector. That means that when politicians argue for a lower tax rate to corporation and their citizen without a feasible means to cut spending, then higher government deficits result which must then be financed by increasing money supply, which in combination with the stimulus from tax decreases, puts upward inflationary pressures on the economy. In order to respond to the inflationary effects, central bankers must increase interest rates and tighten money supply. The end result is that, in exchange for tax breaks, higher interest charges result and become an effective “monetary tax” on all sectors of the economy. This effect would be delayed in an economic downturn as governments try to stoke economic growth, but as economies recover, low tax rates become a significant hindrance to economic growth.