unit 5 Supply-side economics

Supplyside Economics

• change in AS, not in AD, which determines the level of inflation, unemployment rate and economic growth
• supplyside economists support policies that promote GDP growth by arguing that higher 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 entrepreneurial ventures
• lower marginal tax rates induce more work and AS increases; they also make leisure more expensive and work more attractive

Incentives to Save & Invest

1. High marginal tax rates reduce rewards for savings and investment
2. Consumption might increase, but investments depend on savings
3. Lower marginal tax rates encourage saving and investment

Laffer Curve

• Depicts the relationship between tax rates and government revenues
• As tax rates increase from 0, government revenue increases from 0 to some max level, and then decline
• 3 Criticisms of Laffer Curve

1. Research suggests that the impact of tax rates on incentives to work, save, and to invest are small.
2. Tax cuts increase demand which can fuel inflation and demand may exceed supply.
3. Where the economy is actually located on the curve is difficult to determine.