Supply side economics or Regonomics
- makes changes in AS but bot AD and this determines the level of inflation, unemployment rate and economic growth.
• lower marginal tax rate induced more work, thus AS increases.
• Also makes leisure more expensive and work more attractive.
• Supply side economist: supports policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transferred payment, such as unemployment compensation and welfare programs provide decentitive to work, invest, innovate and undertake entrepreneurial ventures.
Incentive to save and invest
1. High marginal tax rates can reduce the reward for savings and investment.
2. Compensation might increase, but investment depends upon savings.
3. Lower marginal tax rates encourage saving and investment.
Laffer Curve
+ it depicts a theoretical relationship between tax rates and government revenue. Tax rates increase from 0, government revenues increase from 0 a to some maximum level and then it declines.
Criticisms of Laffer Curve
1. Research suggest that the impact of tax rates on incentives to work, save, and invest are always small.
2. Tax cuts also increase demand, which can fuel inflation, which causes demand to exceed supply.
3. Where the economy is actually located on the curve is difficult to determine.
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