Productive potential growth in an economy is a catalyst for growing living standards and prosperity. Productive potential refers to the potential output within an economy. The adoption of new production techniques increases the productive potential within an economy, as is the case with an increase in the availability of new resources and technology. However, neither of these can occur without cuts to corporate tax and lower rates for higher earners, rendering tax reductions the most important factor in inducing productive potential growth within an economy.
The introduction of new production techniques within a nation can lead to an increase in the productive potential of the said economy. This was the case in Japan during the 1960s, as the majority of Japanese corporations adopted lean production techniques in the production of cars. This involved greater collaboration amongst workers, leading to a multi-functional environment, as a posed to the specialisation and mass production techniques that dominated over preceding decades. As a result, Japanese factories were able to produce more cars with a greater variety of products on offer, due to the increased efficiencies that came with adopting new production techniques. The number of idle workers within factories as lean was adopted sharply decreased. A limitation to introducing new production techniques is the time that workers take to adapt to new production techniques, thereby decreasing the productive potential in the short term. With this said, the ability of firms to adopt new production techniques depends greatly on the amount of available capital to invest in developing and enhancing production methods, with tax cuts supplying businesses with these much-needed funds. Therefore, it is clear that adopting new production techniques leads to productive potential growth. However, tax reductions facilitate this, rendering the ability of firms to develop new production techniques dependent on cuts to corporate taxes and higher-income earners.
Moreover, an increase in the availability of resources and technology can lead to productive potential growth. CHina’s development over recent decades can be attributed to this, as the growing prevalence of machinery within factories and production spaces greatly increased productivity levels. This is due to the greater efficiency that comes with technology, as computers are far less error-prone compared to workers, resulting in fewer resources being wasted. In addition, China’s increase in the ability to extract natural resources has led to greater productive potential growth. One such example would be coal; as the largest coal producer in the world, China has enough energy to power factories and machinery. The increase in coal reserves has enabled China to expand the number of plants and factory facilities, as it has enough energy to keep them working, resulting in an increase in productive potential. With this said, the increased use of resources such as coal has a damaging effect on the environment, which could reduce productive potential in the long term due to the heightened possibility of natural disasters that could disrupt production. At the same time, the discoveries of new technologies and natural resources couldn’t have occurred without business investment which becomes more likely with tax cuts, due to the increase in capital that investors and firms alike can use to facilitate said discoveries. Therefore, it is evident that increased availability in resources and technology can produce productive potential growth, due to the higher productivity and efficiency that comes with technological advancements, and the growing ability of factory production that comes with the discovery of natural resources. With this said, these innovations and discoveries are dependent on tax reductions, due to the investment the latter provides, rendering an increase in the availability of resources and technology a result of supply-side tax cuts.
There is no doubt that tax reductions on both the corporate and individual sides, with the latter reductions, skewed towards higher earners, result in the growth of an economy’s productive potential. First of all, corporate tax reductions increase the amount of capital available for firms, leading to further investment in PP&E. Greater investment in factory facilities facilitates an increase in the productive potential of an economy, due to the more advanced technology and services on offer for workers. At the same time, corporations may decide to use their increased capital to invest in new workers. As there are more employees assigned to the production of a specific product, the result is typically a short production time, rendering an increase in the productive potential of said firm. Alongside an increase in employment, a firm may opt for increasing the salaries of existing employees. This comes naturally with corporate tax cuts, due to the increased demand for labour that follows, putting upward pressure on wages. Increased worker salaries boost consumption, producing further business activity and revenue. As a result, firms have even more capital to invest, thereby producing a positive feedback loop in which production and wages increase. Cuts in income-tax to wealthier individuals produces a similar effect to corporate tax reductions, as higher-income earners primarily invest most of their income. A common limitation raised when supply-side tax cuts enter the fray are when firms decide to use their increased capital on stock buybacks or dividends, as a posed to investment into the business. However, once dividend holders/stockholders are credited with funds, they tend to use their improved liquidity to invest in other assets, thereby boosting the productive potential of other firms or increasing economic growth elsewhere. Therefore, it is clear that tax reductions increase the productive potential of an economy. This is achieved through increased investment in company operations, resulting in more labour, factories and technologies – all of which boost productivity and thus productive potential.
Ultimately, an economy can increase its productive potential in three main ways – the adoption of new production techniques, an increased availability of new resources and technologies, and supply-side tax reductions. With this said, the latter has the greatest effect on an economy’s productive potential out of the aforementioned, as tax reduction enable and promote the use of new production techniques and the discovery of new resources/technologies, through the increased capital investment that accompanies tax cuts.