Supply-side economics, embraced by U.S. president Ronald Reagan during the 1980’s in an attempt to boost the U.S. economy after the stagflation of the 1970’s, provided the theoretical underpinnings for the large number of tax cuts that, some experts argue, led to growth in the national economy.
During the 1970’s, inflation ran rampant, and as workers tried to earn enough to keep up with inflation, a large number of taxpayers were pushed into higher tax brackets. In turn, this decreased the amount of income people could spend and brought economic growth to a crawl. This negative state of financial affairs provided the opportunity for the emergence of supply-side economics, a controversial economic theory that holds that lowering the amount of tax that high-income people (who are more likely to be investors and entrepreneurs) are required to pay provides them with the incentive to produce more goods and services through investments, thus boosting the economy. In addition, because less of their earnings must go to taxes, people would feel encouraged to work more. Higher numbers of workers would enter the workforce and consequently increase the tax base. Proponents of supply-side economics argued that tax cuts would diminish tax-avoidance activity, and tax revenue would increase. Economist Arthur
Throughout the late 1970’s and early 1980’s, scholars, economists, and legislators argued back and forth over the idea of supply-side economics. Lowering tax rates and increasing revenues did not go together in traditional economic theories.
Controversy surrounding the effects of supply-side economics continues unabated, with critics arguing that lowering tax rates beyond a certain level will have destructive effects in the long run. Nevertheless, tax incentives for people to increase work and invest more deeply have affected U.S. financial history and remain an important economic legacy of the 1980’s.
Atkinson, Victor A. Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics Is the Answer. Lanham, Md.: Rowman & Littlefield, 2008. Bartlett, Bruce. Reaganomics: Supply-Side Economics in Action. New York: Arlington House, 1981. Canto, Victor A., Douglas H. Joines, and Arthur B. Laffer. Foundations of Supply-Side Economics. Burlington, Mass.: Academic Press, 1983.
Corporate income tax
Personal income tax
Federal monetary policy