Supply Side Economics
Changes inAS and not AD are the main active force in determining the level of inflation, unemployment rates, and economic growth.
- Supply side Economist: support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments such as: unemployment compensation or welfare programs provide disincentives to work, invest, innovate, and undertake entrepreneur ventures.
- Incentive to Save & Invest
- High marginal tax rates reduce the rewards for saving and investment.
- Consumption might increase but investments depend upon savings.
- Lower marginal tax rates encourage saving and investment.
Laffer Curve
- A theoretical relationship between tax rates and tax revenues.
- As tax rate increase from zero, tax revenue increase from zero to some maximum level and then decline.
- 3 Criticisms
- Evidences suggest that the impact of tax rates on incentives to work, save, and invest are small.
- Tax cuts also increase demand which can fuel inflation, and demand may exceed supply.
- Where the economy is actually located on the curve is difficult to determine.
Arthur B. Laffer is the father of supply Side economics and his ideas are contrast to Keynesian economic principles. The Laffer curve shows the relationship between tax revenue and tax rate and I like how you included the faults and criticisms of the curve.
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