There’s a much more recent example of the phenomenon, an American one. It involves two prominent North Carolina politicians: the late senator Jesse Helms and former congressman and governor Jim Martin.
During the mid- to late-1970s, both major political parties began rethinking their approach to tax policy. Ronald Reagan, who narrowly lost the GOP presidential nomination in 1976 but would triumph four years later, was among those who sharpened or revised their views on how best to reform the tax code to promote growth, opportunity and fairness. The movement drew its ideas not only from a group of congressional members and staffers led by U.S. Rep. Jack Kemp, a New York Republican, but also from various economists, analysts and journalists.
Their goals were ambitious. They believed that America’s “stagflation” — a painful combination of stagnant growth and high inflation — was partly caused by high marginal tax rates that punished savers, hampered investment and discouraged work effort. They sought a sweeping rewrite of the nation’s fiscal policies.
Kemp began working on the issue in early 1975. His small group comprised half a dozen Republican members of the House Ways and Means Committee, including Martin, and half a dozen senators, including Helms. In June 1975, Kemp filed his first sweeping tax-reform measure, the Jobs Creation Act. It reduced the double-taxation of dividends, capital gains and other returns on investment. Martin was among the initial co-sponsors in the House. Helms co-sponsored the Senate’s companion measure.
While these initial bills came out of the minority, many Democrats then running Congress were receptive to new approaches. After President Jimmy Carter took office in 1977, Democrats were fully in control of the nation’s capital — and thus ultimately responsible for the economy’s performance. They remembered that President John Kennedy had initiated tax-rate reductions during the early 1960s. Sen. Lloyd Bentsen of Texas, an acolyte of JFK, was among those who saw the episode as instructive. Other Democrats on Capitol Hill agreed.
Thus, the tax-reform movement of the day was both an emerging school of economic thought and an increasingly bipartisan political coalition. But it had no name. Here’s how it got one: Virginia Tech economist James Buchanan hosted a symposium on fiscal policy that included Herbert Stein, who had chaired the Council of Economic Advisers in the Nixon and Ford administrations. Stein told participants that he didn’t care for the new thinking on tax policy championed by the Kemp faction. He called them “supply-side fiscalists.”
The term was meant to be derisive, but it made sense. The dominant economic thinking of the day, Keynesianism, blamed irrational drops in “aggregate demand” for the onset and severity of recessions. To maintain steady consumption in normal times, Keynesians advocated steeply progressive tax rates to transfer income from the wealthy to middle-class and poor households, who would be more likely to spend rather than save it. To return the labor market to full employment, Keynesians proposed higher government spending or temporary tax cuts amid recessions to juice overall spending on investment and consumption. They also advocated an inflationary monetary policy to reduce real wages and thus induce businesses to hire more workers.
Kemp’s supporters eventually accepted the label “supply-side economics.” On fiscal policy, they favored reducing the anti-investment bias in the tax code as well as the “tax wedge” between a worker’s take-home pay and the total cost of employing the worker, including income and payroll taxes. On monetary policy, supply-siders followed the lead of Columbia University economist Robert Mundell in advocating a strict focus on maintaining price stability, rather than having the Federal Reserve attempt to manipulate the real economy. Low, predictable tax rates and low, predictable inflation would create a policy infrastructure within which workers, employers, investors and entrepreneurs could make decisions based on market signals. The result, supply-siders predicted, would be more labor and capital deployed more productively. Because take-home pay would rise, more people would enter the labor force. Because after-tax returns to investment would rise, capital would flow from tax shelters, real estate and overseas into new or expanding American businesses.
Debates about the efficacy of supply-side policies continue to this day. Notice almost no one advocates a return to marginal tax rates of the 1970s, which topped out at 70%. Few dispute that taxes should be indexed for inflation and structured to avoid chasing investment capital away. Supply-siders gave us innovative, influential ideas. But others gave them their name.
