A frequently asked question is if tax cuts are so economically positive, why did the economy collapse following the Bush tax cuts? Here's my view of the proper supply-side answer:
1) The 2001 Bush tax cuts were largely consumption-oriented rebates and credits that did little to incentivize new economic production.
2) The 2003 tax cuts were on the supply side, meaning oriented towards lowering the penalty on additional work and investment, and they did improve the economy. Growth accelerated from 2003-2007, unemployment fell rapidly, and despite high federal spending the budget deficit shrank as a percentage of GDP.
3) Unfortunately, at the same time US monetary authorities were pursuing a weak dollar policy which encouraged investors to shunt capital into hedges like gold, oil and real estate. The effect was: A) reduced investment in the productive economy; and B) soaring prices in commodities and real estate, the latter of which became a bubble that burst in summer 2007.
4) As supply-side eminence grise Robert Mundell has explained repeatedly, almost a year after the apex of the mortgage crisis, Ben Bernanke's Federal Reserve compounded the damage by suddenly tightening* money, causing the dollar to soar 30% in three months, the largest such appreciation in such a short time in peacetime history. Tight money sent the over-leveraged economy into a liquidity crunch, crashed the financial system, and broke the economy's back.
5) Since then, the dollar has see-sawed back and forth by wide margins, creating elements of both deflation (tight credit, low interest rates, generally moderate CPI) and inflation (high commodity prices), ensuring continued economic malaise. Combined with pending tax increases and additional costs associated with Obamacare and added regulation, it is an inhospitable climate in which to take economic risks. Investors and entrepreneurs are sidelined.
6) The bottom line is: supply-side tax rate cuts work, but not in a vaccum. The supply-side policy mix requires tax cuts and a stable dollar. The last decade proved Art Laffer's maxim that in terms of economic impact, if regulation is a one, tax cuts are a 10, and monetary policy is a 100. Get money wrong and you're sunk, no matter how good your fiscal policy.
*Note: tightening in this case refers to ceasing to loosen at the expected pace. From May to September 2008 the Fed paused its fast rate cuts at 2%, catching markets by surprise and leading to a mad scramble for cash. The dollar soared and gold plummeted. Bernanke may have paused due to CPI rising to 5.5% and oil hitting $140/barrel.