The Institute of Economic Studies (IEE) and the Juan de Mariana Institute maintain that supply-side economics remains fully relevant in the face of the economic challenges of the 21st century and provides an appropriate framework to enhance growth, investment, and the generation of opportunities in an increasingly demanding global context.
Both institutions presented this Wednesday the book "The Laffer Curve and Supply-Side Economics. Tax Cuts for Growth," a work that reviews one of the most influential schools of economic thought in recent decades and claims the current utility of its ideas to address some of the major economic challenges of the 21st century.
The work includes contributions from Arthur B. Laffer, Brian Domitrovic, Diego Sánchez de la Cruz, Gregorio Izquierdo, Fernando Pinto, and Manuel Llamas, who analyze from various angles the principles, historical evolution, and current importance of so-called supply-side economics.
The text argues that sustained economic growth largely depends on the ability of countries to produce, invest, and innovate. Therefore, it suggests that public policies should promote a favorable climate for business activity, capital accumulation, technological advancement, and job creation.
Among its central theses, the authors emphasize that companies, employees, entrepreneurs, and investors react to the incentives derived from the institutional, regulatory, and tax framework. In this sense, they argue that measures that reward effort, investment, and innovation drive economic expansion, while those that increase the costs of producing and investing can hinder growth.
The book dedicates a prominent chapter to the legacy of Arthur B. Laffer, author of the preface, whose Laffer Curve illustrates how fiscal policy conditions the behavior of individuals and companies. As explained in the publication, revenue is not determined solely by tax rates but also by its impact on investment, employment, productivity, and economic activity as a whole.
In a press conference, the general director of the IEE, Gregorio Izquierdo, pointed out that the Laffer Curve "is misinterpreted." "The Laffer Curve is nothing more than a metaphor for behavior," he stated.
Izquierdo has specified that it does not constitute an automatic rule according to which any tax cut is self-financed by the increase in activity it generates. "It will occur in certain contexts and circumstances with certain tax figures depending on the prior level that the tax has," he explained.
The work lists as principles associated with this school a competitive taxation that incentivizes work, savings, investment, and entrepreneurship; efficient and sustainable public spending; price stability; a proportionate regulation that facilitates business development; and an open economy integrated into international trade.
In its conclusions, it is stated that lasting prosperity requires prior wealth creation and economic growth. According to the authors, this growth derives from investment, employment, savings, and entrepreneurship decisions, strongly influenced by the institutional environment and the existing incentives.
The challenge of the public pension system
The director of the Juan de Mariana Institute, Manuel Llamas, has focused on the future of public pensions. In his opinion, if this issue is not addressed, contributory benefits in Spain "run the real risk of, in the face of a debt crisis or economic crisis, suffering a drastic cut like the one Greece suffered during the euro debt crisis just 15 years ago."
Starting from the fact that the average inflation of the last year exceeds 3% and taking as a hypothesis a revaluation of 3.5% for the next fiscal year, Llamas has estimated that it would be necessary to allocate nearly 8 billion euros additional.
"There is panic among politicians to address this problem, which is the most serious problem from a budgetary point of view that Spain has and that no party is willing to tackle with necessary reforms, because time is running out to be able to implement gradual reforms," he has warned.