Supply Side Economics

Does this really work?

The purposeof Income Taxes

The Laffer Curve Illustrates the amount of revenue Government

collects is a function of tax rate

When tax rates are very high:

an tax rate => tax revenues

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 isDe-regulation?

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

LRAS1PriceLevel

RealGDP

AD1

SRAS1

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.

1978 Airline Deregulation Act

Phased out federal regulations of airline routes, fares, and entry

1980 Motor Carrier Act Eliminated federal restrictions on entry, routes, and fares in the trucking industry

1981 Economic Recovery Tax Act

Decreased marginal tax rates by 30 percent

1982 AT&T breakup AT&T monopoly on phone service ended via antitrust action

Supply-Side Policy Milestones

End

• For more information see the Supply Side reading on my website

1986 Tax Reform Act Eliminated most tax preferences for investment and saving, but sharply reduced marginal tax rates

1990 Social Security Act amendments implemented

Payroll tax increased to 7.65 percent

Supply-Side Policy Milestones

1990 Americans with Disabilities Act

Employers must provide more access for the disabled

1990 Immigration Act Increased immigration quotas, new preference for skilled workers

1990 Clean Air Act Toughened pollution standards 1991 Surface

Transportation Act Accelerated highway and rail

improvements 1993 Rebuild America

Program Increased infrastructure

investment

Supply-Side Policy Milestones

1993 Family Leave Act Employers required to offer unpaid leave

1994 NAFTA North American trade barriers lowered

1996-97

Minimum Wage Minimum wage jumps from $3.85 to $5.15 per hour

1997 Taxpayer Relief Act Capital gains tax reduced, tuition tax credits enacted

Supply-Side Policy Milestones