Reaganomics
Supply Side Economics and Laffer Curve
Supply Side Economics:
- Changes in AS and not AD are the main active force in determining the level of inflation, unemployment rates, and economic growth.
- Supply side economists support policies that promote GDP growth by ongoing that high marginal tax rates along with current system of transfer payments such as unemployment of compensation or welfare programs provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.
Incentives to Save and Invest:
- High marginal tax rates reduce the rewards for savings and investment
- Consumption might increase but investments depend upon savings
- Lower marginal tax rates encourage saving and investment
Laffer Curve:
- Theoretical relationship between tax rates and government revenues
- As tax rates increase from 0, tax revenues increase from 0 to same maximum level and then decline
3 criticisms of Laffer curve:
1. Evidence suggests that the impact of tax rates an incentive to work, save and invest are small
2.Tax cuts can also increase demand which can fuel inflation and demand exceed supply
3. Where the economy is actually located on the curve is difficult to determine
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