Supply Side Economics
Does this really work?
What is the purpose
Of Income Taxes?
Supply-Side Economics
• Orthodox macro theory consists of demand-oriented
theories
– they failed to explain stagflation (late 1970s)
• Supply-side economists believe the problems were high
rates of taxation & heavy regulation:
– This had reduced the incentive to work, save and invest.
– What was needed was not a demand stimulus
– Incentives are needed to stimulate supply.
What is
De-regulation?
The Laffer Curve
Amount of revenue Government
collects is a function of tax rate.
When tax rates are very high:
an
tax rate => tax revenues
Supply-Side Policy
• Goal of a supply-side policy is to shift the aggregate
supply curve to the right
• The supply-side toolbox has several tools:
–
–
–
–
Tax cuts to stimulate work effort, saving, and investment
Deregulation to reduce production cost/stimulate investment.
Expenditures on education training/research expands capacity to produce
Immigration policies alter the size/skill of labor force
Graphing Supply Side Economics
Evaluating Supply-Side
Economics
• Among the criticisms of supply-side economics is that it is
unlikely a tax cut would substantially increase the supply of
labor.
• When households receive a higher after-tax wage, they might
have an incentive to work more, but they may also choose to
work less.
Supply-Side Policy Milestones
1978
1980
1981
1982
Airline Deregulation
Act
Phased out federal regulations
of airline routes, fares, and
entry
Motor Carrier Act
Eliminated federal restrictions
on entry, routes, and fares in
the trucking industry
Economic Recovery Decreased marginal tax rates
Tax Act
by 30 percent
AT&T breakup
AT&T monopoly on phone
service ended via antitrust
action
Supply-Side Policy Milestones
1986 Tax Reform Act
1990 Social Security Act
amendments
implemented
Eliminated most tax
preferences for investment
and saving, but sharply
reduced marginal tax rates
Payroll tax increased to 7.65
percent
Supply-Side Policy Milestones
1990 Americans with
Disabilities Act
1990 Immigration Act
Employers must provide more
access for the disabled
Increased immigration quotas,
new preference for skilled
workers
1990 Clean Air Act
Toughened pollution standards
1991 Surface
Accelerated highway and rail
Transportation Act
improvements
1993 Rebuild America
Increased infrastructure
Program
investment
Supply-Side Policy Milestones
1993 Family Leave Act
1994 NAFTA
1996- Minimum Wage
97
1997 Taxpayer Relief Act
Employers required to offer
unpaid leave
North American trade barriers
lowered
Minimum wage jumps from
$3.85 to $5.15 per hour
Capital gains tax reduced,
tuition tax credits enacted