Supply-side economics Summary

  • Last updated on November 10, 2022

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 Laffer, ArthurLaffer, who developed “the Laffer curve,” is credited with illustrating how decreases in tax rates result in increases in tax revenues.Economics;supply-sideSupply-side economics

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. Keynesian economic theoryEconomics;KeynesianKeynesian theory holds that consumers and their demand for goods and services drives the economy, but supply-side economics holds that producers and their willingness to create goods and services drives economic growth.

President Ronald Reagan, RonaldReagan made supply-side economic theory the framework for his economic policies, and between 1981 and 1986, the federal income tax rate was reduced from 70 percent to approximately 33 percent. The U.S. economy experienced great increases, with the gross national product rising at a far faster pace than during the 1970’s. Indeed, economic growth in the United States exceeded that of all industrial nations except Japan. Although critics pointed out that only the rich got richer, the total tax revenue collected from the wealthy also increased by 32 percent during the 1980’s and seemed to support the arguments of supply-side economists. As a result, during the late 1980’s, supply-side economic incentives gained prominence in the United States and throughout the world, with many countries similarly reducing their tax rates.

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.

Further Reading
  • 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

Taxation

Trickle-down theory

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