When I spend the day with my 4yo grandson, I rely upon the wisdom described in two books. One is called Raising an Emotionally Intelligent Child by John Gottman. Studies show that children whose parents practice "emotion coaching" are more physically healthy and emotionally resilient, less affected by stress, perform better academically, have better relationships, and are less likely to develop behavior problems.
The other book is How to Talk So Kids Will Listen, and Listen So Kids Will Talk. You can read part of this really practical guide to communicating with your kids here: http://www.amazon.com/How-Talk-Kids-Will-Listen/dp/038081....
These excellent resources have practical tips and examples of how to be a more empathetic parent. It's not the same thing as being permissive, either, since it actually helps you draw clear limits for your child in a way that children can better accept. We have found that when we let my grandson know that we hear his need or desire empathetically, he's amazingly capable of working through and choosing a more appropriate reaction, even when we can't let him do what he wants.
Timeouts, threats, deprivations and other punishments never really yielded such positive results, and I notice that on those rare occasions when I "feel" like coming down on him harder, its because I've skipped the important step of being empathetic because I feel too rushed (or lazy).
One other contemplation on time-outs (which work for some kids but not for others): This approach is most effective when used as a chance for a child to reset out-of-control emotions. It should be a "safe" time, preferably still in connection with a parent (who might be sitting nearby sorting the laundry). If it is used as punshment, with rigid rules about minutes per year and the shame of isolation, the whole process can seriously backfire with a righteously angry and spirited child. Then the timeout loses its original purpose (a chance for the child to calm down) and becomes about winning and losing. This is too much for some children, and the results can be really sad – the breakdown of a loving, cooperative and supportive environment in which a child feels trust.
I always shudder when I hear a well-intentioned mom describe a two-hour "time out" in which she thinks she has to repeatedly drag a reactive child back to the naughty spot. I had a mom like that, and a sister who was broken, for life, by that kind of interaction.