Supply-side economics

Supply-side economics is a macroeconomic theory arguing that economic growth can be most effectively created by lowering taxes and decreasing regulation,[1][2] by which it is directly opposed to demand-side economics. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices and employment will increase.[3]

The Laffer curve is one of the main theoretical constructs of supply-side economics, the idea that lower tax rates when tax level is too high will actually boost government revenue because of higher economic growth.[4]

The term "supply-side economics" was thought for some time to have been coined by journalist Jude Wanniski in 1975, but according to Robert D. Atkinson the term "supply side" was first used in 1976 by Herbert Stein (a former economic adviser to President Richard Nixon) and only later that year was this term repeated by Jude Wanniski.[5] Its use connotes the ideas of economists Robert Mundell and Arthur Laffer.

Unemployment to wages
Unemployment compared to wage growth in the USA between 1945 and 2018.

Historical origins

Supply-side economics developed in response to the stagflation of the 1970s.[6] It drew on a range of non-Keynesian economic thought, including the Chicago School and New Classical School.[7][8] Bruce Bartlett, an advocate of supply-side economics, traced the school of thought's intellectual descent from the philosophers Ibn Khaldun and David Hume, satirist Jonathan Swift, political economist Adam Smith and United States Secretary of the Treasury Alexander Hamilton.[9]

However, what most separates supply-side economics as a modern phenomenon is its argument in favor of low tax rates primarily for collective and notably working-class reasons, rather than traditional ideological ones. Classical liberals opposed taxes because they opposed government, taxation being the latter's most obvious form. Their claim was that each man had a right to himself and his property and therefore taxation was immoral and of questionable legal grounding.[10] On the other hand, supply-side economists argued that the alleged collective benefit (i.e. increased economic output and efficiency) provided the main impetus for tax cuts.

As in classical economics, supply-side economics proposed that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. Early on, this idea had been summarized in Say's Law of economics, which states: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value".

John Maynard Keynes, the founder of Keynesianism, summarized Say's law as "supply creates its own demand". He turned Say's law on its head in the 1930s by declaring that demand creates its own supply.[11]

In 1978, Jude Wanniski published The Way the World Works in which he laid out the central thesis of supply-side economics and detailed the failure of high tax rate progressive income tax systems and United States monetary policy under Richard Nixon and Jimmy Carter in the 1970s. Wanniski advocated lower tax rates and a return to some kind of gold standard, similar to the 1944–1971 Bretton Woods System that Nixon abandoned.

Laffer curve

Three different Laffer curves: t* represents the rate of taxation at which maximal revenue is generated and the curve need not be single-peaked nor symmetrical

The Laffer curve embodies a postulate of supply-side economics: that tax rates and tax revenues are distinct, with government tax revenues the same at a 100% tax rate as they are at a 0% tax rate and maximum revenue somewhere in between these two values. Supply-siders argued that in a high tax rate environment lowering tax rates would result in either increased revenues or smaller revenue losses than one would expect relying on only static estimates of the previous tax base.[12][13]

This led supply-siders to advocate large reductions in marginal income and capital gains tax rates to encourage greater investment, which would produce more supply. Jude Wanniski and many others advocate a zero capital gains rate.[14][15] The increased aggregate supply should result in increased aggregate demand, hence the term "supply-side economics".

Fiscal policy theory

US GDP Growth vs Personal Income Tax Rate
Historical data from 1930 to 2015 shows a slight positive correlation between higher top marginal tax rates and GDP growth rate (red line)[16]

Supply-side economics holds that increased taxation steadily reduces economic activity within a nation and discourages investment. Taxes act as a type of trade barrier or tariff that causes economic participants to revert to less efficient means of satisfying their needs. As such, higher taxation leads to lower levels of specialization and lower economic efficiency. The idea is said to be illustrated by the Laffer curve.[17]

Supply-side economists have less to say on the effects of deficits and sometimes cite Robert Barro’s work that states that rational economic actors will buy bonds in sufficient quantities to reduce long-term interest rates.[18]

Effect on tax revenues

Many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster-growing economy would be sufficient to compensate completely for the short-term costs of a tax cut and that tax cuts could in fact cause overall revenue to increase.[13] Some hold this was borne out during the 1980s when advocates of supply-side economics claim tax cuts ultimately led to an overall increase in government revenue due to stronger economic growth. However, some economists dispute this assertion pointing to the fact that revenue as a percentage of GDP declined during Reagan's term in office.[19] The fact that tax receipts as a percentage of GDP fell following the Economic Recovery Tax Act of 1981 shows a decrease in tax burden as share of GDP and a corresponding increase in the deficit because spending did not fall relative to GDP. Total tax revenue from income tax receipts increased during Reagan's two terms, with the exception of 1982–1983.[20] The Treasury Department also studied the Reagan tax cuts and concluded they significantly reduced tax revenues relative to a baseline without them.[21]

Some contemporary economists do not consider supply-side economics a tenable economic theory, with Alan Blinder calling it an "ill-fated" and perhaps "silly" school on the pages of a 2006 textbook.[22] Greg Mankiw, former chairman of President President George W. Bush's Council of Economic Advisers, offered similarly sharp criticism of the school in the early editions of his introductory economics textbook.[23] Mankiw wrote in June 2017:

Tax cuts rarely pay for themselves. My reading of the academic literature leads me to believe that about one-third of the cost of a typical tax cut is recouped with faster economic growth.[24]

In a 1992 article for the Harvard International Review, James Tobin wrote:

[The] idea that tax cuts would actually increase revenues turned out to deserve the ridicule [...][25]

The extreme promises of supply-side economics did not materialize. President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This was not the case. Government revenues fell sharply from levels that would have been realized without the tax cuts.
—Karl Case and Ray Fair, Principles of Economics (2007), p. 695[26]

Supply side proponents Trabandt and Uhlig argue that "static scoring overestimates the revenue loss for labor and capital tax cuts" and that "dynamic scoring" is a better predictor for the effects of tax cuts.[27] To address these criticisms, in 2003 the Congressional Budget Office conducted a dynamic scoring analysis of tax cuts advocated by supply advocates. Two of the nine models used in the study predicted a large improvement in the deficit over the next ten years resulting from tax cuts and the other seven models did not.[28]

Effect on income inequality

Income inequality can be measured both pre- and after-tax. There is no consensus on the effects of income tax cuts on pre-tax income inequality, although one 2013 study indicated a strong correlation between how much top marginal tax rates were cut and greater pre-tax inequality across many countries.[29] However, an important side effect of income tax cuts in the U.S. is an increase in after-tax income inequality (other things equal), meaning the top earners receive a greater share of the after-tax income.[30] This is due to several tax policy factors:

  • Federal income taxes are progressive, meaning that higher income tax rates are levied on higher levels of income. For example, married couples filing jointly in 2017 pay a 25% tax rate on their income between $75,900 and $153,100, but 39.6% for income above $470,700.[31] This progressive policy meant the top 1% of income earners paid roughly 45% of the income taxes despite earning 17% of the pre-tax income in 2014.[32] So cutting income tax rates means relatively less is paid by higher-income households, leaving them with a greater share of the after-tax income.[30]
  • Approximately 40-50% of American households do not pay federal income taxes, either because they do not earn sufficient income to pay federal income taxes or qualify for exclusions (e.g. many elderly households do not pay income taxes on their Social Security benefits). The percent of households paying income taxes by age tends to rise into the prime working years (peaking at about 80% around age 50) and falls upon retirement.[33]
  • Income taxes are distinct from payroll taxes, which all workers pay. In other words, a paycheck will have withdrawal amounts for payroll taxes (e.g. Social Security and Medicare) along with withdrawals for federal income taxes; some of the latter may be refunded when the annual tax return is filed. Payroll taxes are flat taxes (the same rate is levied) for salary and wage income up to a specific threshold ($127,400 in 2017).[34]

For example, the Tax Policy Center evaluated a detailed supply-side tax cut proposal from presidential candidate Jeb Bush in 2015. Their conclusion was that the proposal would both increase deficits dramatically and worsen after-tax income inequality.[35]

The combination of market forces driving pre-tax inequality combined with a reduction in marginal tax rates after 1979 resulted in the share of after-tax income received by the top 1% increasing from 7.4% to a peak of 16.7% in 2007 before falling to 12.4% in 2013. The tax increases effective in 2013 due to the expiration of the Bush tax cuts for income over $400,000 ($450,000 for couples filing jointly) along with other tax increases on high incomes related to the Patient Protection and Affordable Care Act (Obamacare) contributed to the decline in after-tax inequality, although they were not sufficient to offset the rise in inequality since 1979.[30]

United States monetary and fiscal experience

Supply-side economists seek a cause and effect relationship between lowering marginal tax rates and economic expansion. The supply-side history of economics since the early 1900s hinges on the following key turning points:

The 1920s

After World War I, the highest tax bracket, which was for those earning over $100,000 a year (worth at least $1 million a year now), was over 70 percent.[36] The revenue acts of 1921, 1924 and 1926 reduced this tax rate to less than 25 percent, yet tax revenues actually went up significantly.[37]

Gene Smiley at the Foundation for Economic Education explains: "The share of income taxes paid by the higher net income tax classes fell as tax rates were raised. With the reduction in rates in the twenties, higher-income taxpayers reduced their sheltering of income and the number of returns and share of income taxes paid by higher-income taxpayers rose".[38]

The 1960s

Democratic President John F. Kennedy advocated a drastic tax-rate cut in 1963 when the top income tax rate was 91%, arguing that "[t]ax rates are too high today and tax revenues too low, and the soundest way to raise revenues in the long run is to cut rates now".[39] The Revenue Act of 1964 emerged from Congress and was signed by Kennedy's successor Lyndon Johnson on February 26, 1964. The stated goals of the tax cuts were to raise personal incomes, increase consumption and increase capital investment.


Ronald Reagan televised address from the Oval Office, outlining plan for Tax Reduction Legislation July 1981
Ronald Reagan gives a televised address from the Oval Office, outlining his plan for tax reductions in July 1981

In the United States, commentators frequently equate supply-side economics with Reaganomics. The fiscal policies of Republican Ronald Reagan were largely based on supply-side economics.

Reagan made supply-side economics a household phrase and promised an across-the-board reduction in income tax rates and an even larger reduction in capital gains tax rates.[40]

During Reagan's 1980 presidential campaign, the key economic concern was double digit inflation, which Reagan described as "[t]oo many dollars chasing too few goods", but rather than the usual dose of tight money, recession and layoffs, with their consequent loss of production and wealth, he promised a gradual and painless way to fight inflation by "producing our way out of it".[41]

Switching from an earlier monetarist policy, Federal Reserve chair Paul Volcker began a policy of tighter monetary policies such as lower money supply growth to break the inflationary psychology and squeeze inflationary expectations out of the economic system.[42] Therefore, supply-side supporters argue that Reaganomics was only partially based on supply-side economics.

However, the Congress under Reagan passed a plan that would slash taxes by $749 billion over five years. Critics claim that the tax cuts increased budget deficits while Reagan supporters credit them with helping the 1980s economic expansion that eventually lowered the deficits and argued that the budget deficit would have decreased if not for massive increases in military spending.[43] As a result, Jason Hymowitz cited Reagan—along with Jack Kemp—as a great advocate for supply-side economics in politics and repeatedly praised his leadership.[44]

Critics of Reaganomics claim it failed to produce much of the exaggerated gains some supply-siders had promised. Paul Krugman later summarized the situation:

When Ronald Reagan was elected, the supply-siders got a chance to try out their ideas. Unfortunately, they failed.

Although he credited supply-side economics for being more successful than monetarism which he claimed "left the economy in ruins", he stated that supply-side economics produced results which fell "so far short of what it promised", describing the supply-side theory as "free lunches".[45]

Income tax revenues in constant dollars decreased by $2.77 billion in that year. FICA tax revenue increased because in 1983 FICA tax rates were increased from 6.7% to 7% and the ceiling was raised by $2,100. For the self-employed, the FICA tax rate went from 9.35% to 14%.[46] The FICA tax rate increased throughout Reagan's term and rose to 7.51% in 1988 and the ceiling was raised by 61% through Reagan's two terms. Those tax hikes on wage earners, along with inflation, were the source of revenue gains in the early 1980s.[47]

It has been contended by some supply-side critics that the argument to lower taxes to increase revenues was a smokescreen for "starving" the government of revenues in the hope that the tax cuts would lead to a corresponding drop in government spending, but this did not turn out to be the case. Paul Samuelson called this notion "the tape worm theory—the idea that the way to get rid of a tape worm is [to] stab your patient in the stomach".[48]

There is frequent confusion on the meaning of the term "supply-side economics" between the related ideas of the existence of the Laffer Curve and the belief that decreasing tax rates can increase tax revenues. Many supply-side economists doubt the latter claim while still supporting the general policy of tax cuts. Economist Gregory Mankiw used the term "fad economics" to describe the notion of tax rate cuts increasing revenue in the third edition of his Principles of Macroeconomics textbook in a section entitled "Charlatans and Cranks":

An example of fad economics occurred in 1980, when a small group of economists advised Presidential candidate, Ronald Reagan, that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claimed, that tax revenues would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as far too optimistic. Lower tax rates might encourage people to work harder and this extra effort would offset the direct effects of lower tax rates to some extent, but there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates. [...] People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenues to rise.[49][50]

Clinton years

Cause of change from deficit in 1994 to surplus in 2001
Waterfall chart shows cause of change from deficit in 1994 to surplus in 2001, measured as a % GDP. Income tax revenues rose as a % GDP following higher taxes for high income earners, while defense spending and interest fell relative to GDP

The Bill Clinton years represent a counter-example to supply side economics as tax increases coincided with record job creation. President Clinton presided over the budgets for fiscal years 1994–2001. From 1998 to 2001, the budget was in a surplus for the first time since 1969.

Clinton signed the Omnibus Budget Reconciliation Act of 1993 into law, which raised income taxes rates on incomes above $115,000, created additional higher tax brackets for corporate income over $335,000, removed the cap on Medicare taxes, raised fuel taxes and increased the portion of Social Security income subject to tax, among other tax increases. The bill was strongly opposed by Republicans, vigorously attacked by John Kasich and Minority Whip Newt Gingrich as destined to cause job losses and lower revenue.[51] Nonetheless, income tax revenues nearly doubled in dollar terms, from $510B in 1993 (7.5% GDP) to $994B in 2001 (9.4% GDP).[52] Income tax rates were still at historically low marginal rates however.

More jobs were created during the Clinton era than the Reagan era in both relative and absolute terms and the rate of GDP growth was higher.[53][54] Defense spending was held roughly flat in dollar terms at $282B in 1994 (3.9% GDP) and ending at $306B in 2001 (2.9% GDP). Likewise, non-defense discretionary spending fell from 3.6% of GDP in 1994 to 3.2% of GDP in 2001. The combination of increasing tax revenues and falling spending relative to GDP moved the budget from a 2.8% GDP deficit in 1994 to a 1.2% GDP surplus in 2001.[52]

Research since 2000

State Employment growth and Tax Changes for the Top 10%
Supply-side economics proposes that lower taxes lead to employment growth, but historical state data from the United States shows a heterogeneous result

In 2003, Alan Murray, who at the time was Washington bureau chief for CNBC and a co-host of the television program Capital Report, declared the debate over supply-side economics to have ended "with a whimper" after extensive modeling performed by the Congressional Budget Office (CBO) predicted that the revenue generating effects of the specific tax cuts examined would be, in his words, "relatively small".[28] Murray also suggested that Dan Crippen may have lost his chance at reappointment as head of the CBO over the dynamic scoring issue.

State Employment growth and Tax Changes for the Bottom 90% v2
Tax decreases on high income earners (top 10%) are not correlated with employment growth, but tax decreases on lower income earners (bottom 90%) are correlated with employment growth[55]

Before President George W. Bush signed the 2003 tax cuts, the Economic Policy Institute (EPI) released a statement signed by ten Nobel prize laureates entitled "Economists' statement opposing the Bush tax cuts", which states:

Passing these tax cuts will worsen the long-term budget outlook, adding to the nation’s projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.[56]

Nobel laureate economist Milton Friedman agreed the tax cuts would reduce tax revenues and result in intolerable deficits, though he supported them as a means to restrain federal spending.[57] Friedman characterized the reduced government tax revenue as "cutting their allowance".

A 2008 working paper sponsored by the International Monetary Fund showed "that the Laffer curve can arise even with very small changes in labor supply effects", but that "labor supply changes do not cause the Laffer effect".[58] This is contrary to the supply-side explanation of the Laffer curve, in which the increases in tax revenue are held to be the result of an increase in labor supply.[59] Instead their proposed mechanism for the Laffer effect was that "tax rate cuts can increase revenues by improving tax compliance". The study examined in particular the case of Russia which has comparatively high rates of tax evasion. In that case, their tax compliance model did yield significant revenue increases:

To illustrate the potential effects of tax rate cuts on tax revenues consider the example of Russia. Russia introduced a flat 13 percent personal income tax rate, replacing the three tiered, 12, 20 and 30 percent previous rates (as detailed in Ivanova, Keen and Klemm, 2005). The tax exempt income was also increased, further decreasing the tax burden. Considering social tax reforms enacted at the same time, tax rates were cut substantially for most taxpayers. However, personal income tax (PIT) revenues have increased significantly: 46 percent in nominal and 26 percent real terms during the next year. Even more interesting PIT revenues have increased from 2.4 percent to 2.9 percent of GDP—a more than 20 percent increase relative to GDP. PIT revenues continued to increase to 3.3 percent during the next year, representing a further 14 percent gain relative to GDP.[58]

Bush tax cuts

During his presidency, President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003.

In 2007, the Bush administration pointed to the long period of sustained growth, both in GDP and in overall job numbers as well as increases in personal income and decreases in the government deficit.[60]

An analysis of the Bush tax cuts by the Economic Policy Institute claims that the Bush tax cuts have failed to promote growth since all macroeconomic growth indicators were well below average for the 2001–2005 business cycle. These critics argue the Bush tax cuts have done little more than deprive the government of revenue necessary keep a balanced budget.[61]

In 2006, the CBO released a study titled "A Dynamic Analysis of Permanent Extension of the President's Tax Relief".[62] This study found that under the best possible scenario making tax cuts permanent would increase the economy "over the long run" by 0.7%. Since the "long run" is not defined, some commentators[63] have suggested that 20 years should be used, making the annual best case GDP growth equal to 0.04%. When compared with the cost of the tax cuts, the best case growth scenario is still not sufficient to pay for the tax cuts. Previous official CBO estimates had identified the tax cuts as costing an amount equal to 1.4% of GDP. According to the study, if the best case growth scenario is applied, the tax cuts would still cost an amount equal to 1.27% of GDP.[63]

This study was criticized by many economists, including Harvard Economics Professor Greg Mankiw, who pointed out that the CBO used a very low value for the earnings-weighted compensated labor supply elasticity of 0.14.[64] In a paper published in the Journal of Public Economics, Mankiw and Matthew Weinzierl noted that the current economics research would place an appropriate value for labor supply elasticity at around 0.5.[65]

In 2003, a Congressional Budget Office study was conducted to forecast whether currently proposed tax cuts would increase revenues. The study used dynamic scoring models as supply side advocates had wanted and was conducted by a supply side advocate. The majority of the models applied predicted that the proposed tax cuts would not increase revenues.[28]

Kansas experiment

In May 2012, Sam Brownback, Governor of the state of Kansas, signed into law the "Kansas Senate Bill Substitute HB 2117",[66][67] which cut state income taxes deeply and was intended to generate rapid economic growth. The tax cuts have been called the "Kansas experiment",[68] and described as "one of the cleanest experiments for how tax cuts effect economic growth in the U.S."[69] The law cut taxes by US$231 million in its first year, and cuts were projected to total US$934 million after six years.[70] They eliminated taxes on "pass-through" income (used by sole proprietorships, partnerships, limited liability companies, subchapter S corporations,[68][67] for the owners of almost 200,000 businesses, and cut individual income tax rates as well.[70]

The original bill proposed by Brownback offset the losses expected to result from the cuts with increases in the state sales tax, as well as the elimination of numerous tax credits and deductions, but by the time the bill came to the governor to be signed these had been removed.[71] Brownback then argued that the cuts would pay for themselves by increasing revenue by boosting the state's economic growth.[72] Supporters pointed to projections from the conservative Kansas Policy Institute predicting that the bill would lead to a $323 million increase in tax revenue.[73]

Brownback forecast his cuts would create an additional 23,000 jobs in Kansas by 2020.[67] On the other hand, the Kansas Legislature’s research staff warned of the possibility of a deficit of nearly US$2.5 billion by July 2018.[70] Brownback compared his tax cut policies with those of Ronald Reagan, but also described them as "a real live experiment ... We'll see how it works."[74] The cuts were based on model legislation published by the conservative American Legislative Exchange Council (ALEC),[75][76] and were supported by The Wall Street Journal,[77][78] supply-side economist Arthur Laffer,[79] and anti-tax leader Grover Norquist.[80]

By 2017, state revenues had fallen by hundreds of millions of dollars[81] causing spending on roads, bridges, and education to be slashed,[82][83] but instead of boosting economic growth, growth in Kansas remained consistently below average.[84] A working paper by two economists at Oklahoma State University (Dan Rickman and Hongbo Wang) using historical data from several other states with economies structured similarly to Kansas found that the Kansas economy grew about 7.8% less and employment about 2.6% less than it would have had Brownback not cut taxes.[85][86] In 2017, the Republican Legislature of Kansas voted to roll back the cuts, and after Brownback vetoed the repeal, overrode his veto.[87]

According to Max Ehrenfreund and economists he consulted, an explanation for the reduction instead of increase in economic growth from the tax cuts is that "any" benefits from tax cuts come over the long, not short run, but what does come in the short run is a major decline in demand for goods and services. In the Kansas economy cuts in state government expenditures cut incomes of state government "employees, suppliers and contractors" who spent much or most of their incomes locally.[85] In addition, concern over the state's large budget deficits "might have deterred businesses from making major new investments".[85]

Gov. Brownback himself strongly rejected criticism of his cuts or any need to adjust the law,[88] declaring the cuts a success, blaming perceptions to the contrary on a “rural recession,” and on “the left media" which "lies about the tax cuts all the time”.[83]

Trump tax cuts

President Trump implemented individual and corporate income tax cuts which took effect in 2018. Rutgers economics professor Farrokh Langdana claimed that the Trump tax cuts were an example of supply-side tax policy, citing a letter from economists long-associated with the supply-side theory describing them as such.[89]

The New York Times claimed in November 2018 that the Trump tax overhaul "has fattened the paychecks of most American workers, padded the profits of large corporations and sped economic growth." Cautioning that "its still early but ten months after the law took effect, the promised 'supply side' bump is harder to find than the sugar-high stimulus." The writers explained that "It's highly unusual for grow this much during periods of prosperity" and that "the fiscal health of the U.S. is deteriorating fast, as revenues have declined sharply" (nearly $200 billion or about 6%) relative to the CBO forecast prior to the tax cuts. Results included:

  • Contrary to claims the tax cuts would pay for themselves, the budget deficit rose to $779 billion in fiscal year 2018, up 17% versus the prior year.
  • Corporate tax revenues were down by one-third in fiscal year 2018.
  • Stock buyback activity increased significantly.
  • GDP growth, business investment and corporate profits increased.
  • A typical worker in a large company got a $225 raise or one-time bonus, due to the law.
  • Real wage growth (adjusted for inflation) was slightly slower in 2018 than 2017.[90]


Changes Top 1% Share and Top Marginal Tax Rate v2
Supply side economics has been criticised for benefiting high income earners, as graph shows the change in top 1% income share against the change in top income tax rate from 1975–1979 to 2004–2008 for 18 OECD countries: the correlation between increasing income inequality and decreasing top tax rates is very strong[91]

Critics of supply-side policies emphasize the growing federal deficits, increased income inequality and lack of growth.[92] They argue that the Laffer curve only measures the rate of taxation, not tax incidence, which may be a stronger predictor of whether a tax code change is stimulative or dampening.[93] In addition, some studies have shown that in the past several decades, tax cuts in the U.S. seldom recoup revenue losses and have minimal impact on GDP growth.[94][95][96][97] David Harper claims that some economists dismiss the theory as offering "nothing particularly new or controversial as an updated view of classical economics".[98]

In a 2012 survey, when asked whether a "cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut", none of the economists surveyed by the University of Chicago agreed. 35% agreed with the statement "a cut in federal income tax rates in the US right now would lead to higher GDP within five years than without the tax cut".[99]

The Congressional Budget Office (CBO) has estimated that extending the Bush tax cuts beyond their 2010 expiration would increase the deficit by $1.8 trillion over 10 years.[100] The CBO also completed a study in 2005 analyzing a hypothetical 10% income tax cut and concluded that under various scenarios there would be minimal offsets to the loss of revenue. In other words, deficits would increase by nearly the same amount as the tax cut in the first five years with limited feedback revenue thereafter.[101]

Cutting marginal tax rates can also be perceived as primarily beneficial to the wealthy, which some see as politically rather than economically motivated:[102]

The specific set of foolish ideas that has laid claim to the name "supply side economics" is a crank doctrine that would have had little influence if it did not appeal to the prejudices of editors and wealthy men.
Paul Krugman[103]

Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows.
John Kenneth Galbraith[104]

See also

Notes and references

  1. ^ Neva Goodwin; Jonathan M. Harris; Julie A. Nelson; Brian Roach; Mariano Torras (4 March 2015). Principles of Economics in Context. Routledge. p. 286. ISBN 978-1-317-46217-0. supply-side-economics: the macroeconomic theory [...]
  2. ^ Dwivedi (2010). Macroeconomics, 3E. Tata McGraw-Hill Education. p. 372. ISBN 978-0-07-009145-0. The supply-side economics is the most recent macroeconomic thought.
  3. ^ Wanniski, Jude (1978). The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books. ISBN 0-465-09095-8.
  4. ^ Laffer Curve
  5. ^ Robert D. Atkinson (29 October 2007). Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics Is the Answer. Rowman & Littlefield. p. 50. ISBN 978-0-7425-5107-7.
  6. ^ Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.), p. 780. Prentice-Hall. ISBN 0-13-961905-4.
  7. ^ Schmidt, I.; Rittaler, J. B. (28 February 1989). "A Critical Evaluation of the Chicago School of Antitrust Analysis". Springer Science & Business Media – via Google Books.
  8. ^ Gandhi, Mr Ved P.; Ebrill, Mr Liam P.; Shome, Mr Parthasrathi; Anton, Mr Luis A. Manas; Modi, Jitendra R.; Sanchez-Ugarte, Mr Fernando J.; Mackenzie, Mr G. A. (15 June 1987). "Supply-Side Tax Policy: Its Relevance to Developing Countries". International Monetary Fund – via Google Books.
  9. ^ Bartlett, Bruce. "Supply-Side Economics: "Voodoo Economics" or Lasting Contribution?" (PDF). Laffer Associates: Supply-Side Investment Research (November 11, 2003). Retrieved 2008-11-17.
  10. ^ Gray, pp. 26–7 Liberalism. Minneapolis: University of Minnesota Press, 1995. ISBN 0-8166-2801-7
  11. ^ Malabre, Jr., Alfred L. (1994). Lost Prophets: An Insider's History of the Modern Economists, p. 182. Harvard Business School Press. ISBN 0-87584-441-3.
  12. ^ Laffer, Arthur (2004-06-01). "The Laffer Curve, Past, Present and Future". The Heritage Foundation. Retrieved 2007-12-11.
  13. ^ a b Bartlett, Bruce (2007-04-06). "How Supply-Side Economics Trickled Down". New York Times.
  14. ^ Wanniski, Jude "Taxing Capital Gains" Archived 2014-05-02 at the Wayback Machine
  15. ^ Alan Reynolds (July 1999). "Capital gains tax: Analysis of reform options for Australia" (PDF). Hudson Institute. Archived from the original (PDF) on 2005-07-18.
  16. ^ "Tax Rates During the Best Years for Economic Growth". The politics that work.
  17. ^ (Karl Case and Ray Fair, 1999: pp. 780–1).
  18. ^ Reynolds, Alan. "The "Conventional" Hypothesis: Deficit Estimates, Savings Rates, Twin Deficits and Yield Curves" (PDF). Cato Institute. Archived from the original (PDF) on August 6, 2009. Retrieved 2010-10-19.
  19. ^ Chait, J. (2007). The Big Con: How Washington Got Hoodwinked and Hijacked by Crackpot Economics. Boston: Houghton Mifflin. ISBN 0-618-68540-5.
  20. ^ CBO Historical Tables – Retrieved May 8, 2015
  21. ^ Treasury Department (September 2006) [2003]. "Revenue Effects of Major Tax Bills" (PDF). United States Department of the Treasury. Working Paper 81, Table 2. Retrieved 2007-11-28.
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External links

Aggregate supply

In economics, Aggregate Supply (AS) or Domestic Final Supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing and able to sell at a given price level in an economy.

Bruce Bartlett

Bruce Reeves Bartlett (born October 11, 1951) is an American historian and author. He served as a domestic policy adviser to Ronald Reagan and as a Treasury official under George H. W. Bush.

Bartlett has written several books and magazine articles critical of the George W. Bush administration and believes that its economic policies significantly departed from traditional conservative principles.

Demand-side economics

Demand-side economics is a macroeconomic theory which argues that economic growth is most effectively created by high demand for products and services. According to demand-side economics, output is determined by effective demand. High consumer spending leads to business expansion, resulting in greater employment opportunities. Higher levels of employment create a multiplier effect that further stimulates aggregate demand, leading to greater economic growth.Demand-side economists argue tax breaks for the wealthy produce little, if any, economic benefit because most of the additional money is not spent on goods or services. Instead, they argue increased governmental spending will help to grow the economy by spurring additional employment opportunities. They cite the lessons of the Great Depression of the 1930s as evidence that increased governmental spending spurs growth.British economist John Maynard Keynes is the most celebrated of demand-side economic theorists. He was able to show there is no automatic stabilizing mechanism built into an economy and because of that, economic intervention is necessary. Keynes saw his theories successfully demonstrated in the 1930s when they helped to end the Great Depression and into the 1950s and 60s when capitalism experienced its Golden Age. Additional proponents of demand-side economics include Leon Keyserling, John Kenneth Galbraith, Hyman Minsky, Joseph Stiglitz, James K. Galbraith, Steve Keen and Nouriel Roubini.

Demand-side economics is held in opposition to supply-side economics which argues that economic growth can be most effectively created by stimulating business through lowering tax rates on business and decreasing regulation of corporate and financial activities.

Democracy (journal)

Democracy is a quarterly journal of progressive and liberal politics, as well as culture, founded by Kenneth Baer and Andrei Cherny in 2006. Democracy is intended to be the progressive/liberal answer to such prominent and influential conservative journals as The Public Interest, Policy Review, Commentary, and The National Interest. Baer and Cherny state in a message to readers in the first issue that they intend to "regenerate the strength of the progressive movement" with "big ideas." Contrasting themselves with National Review's William F. Buckley, Baer and Cherny proclaim their journal will "stand athwart history and yell, Forward!" The editors put forward Democracy as "a place where ideas can be developed and important debates can be spurred" at a "time when American politics has grown profoundly unserious."Baer told The Hill “We think that the party is rich in tactics and poor in ideas. What we really need for long-term success is deep, serious thinking about how we’re going to apply long-held progressive values to new challenges.”Cherny added “I had started thinking about where all of the conservative ideas, for better or worse, had come from. Every big idea — Social Security privatization, supply-side economics, preemption, faith-based initiatives — had come out of one of their journals in their intellectual infrastructure.”In an editorial for the Los Angeles Times on July 10, 2006, Baer and Cherny laid out a case for making a break with what they characterized as the "ad hoc approach to politics" they claim the current Democratic Party is engaged in.On March 3, 2009 Michael Tomasky replaced Kenneth Baer as editor when Baer left to become associate director of the White House Office of Management and Budget.

George Gilder

George Franklin Gilder (; born November 29, 1939) is an American investor, writer, economist, techno-utopian advocate, and co-founder of the Discovery Institute. His 1981 international bestseller Wealth and Poverty advanced a practical and moral case for supply-side economics and capitalism during the early months of the Reagan administration. He is married to Nini Gilder, and has four children.

In the 1970s, Gilder established himself as a critic of feminism and government welfare policies, arguing that they eroded the "sexual constitution" that civilized and socialized men in the roles of fathers and providers. In the 1990s, he became an enthusiastic evangelist of technology and the Internet by several books and his newsletter, the Gilder Technology Report. He is also known as the chairman of George Gilder Fund Management, LLC.

Herbert Giersch

Herbert Giersch (11 May 1921 – 22 July 2010) was a German economist. He was one of the initial members of the German Council of Economic Experts in 1964, serving on the council until 1970, and also was president of the Kiel Institute for the World Economy 1969–1989. Giersch was considered the most influential German economist during the chancellorships of Willy Brandt, Helmut Schmidt, and Helmut Kohl.Born in Reichenbach, Silesia, Giersch attended the University of Breslau and the University of Kiel between 1939 and 1942, until he was drafted to serve in World War II. Returning from war captivity, he earned his Ph.D. in economics from the University of Münster in 1948. Giersch received a full professorship at the Saarland University in 1955. In 1969, he succeeded Erich Schneider at the University of Kiel, and held that chair until 1989.

Originally adherent to Keynesian economics in the 1950s and 1960s, he gradually became an advocate of supply-side economics in his later years.

Laffer curve

In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of government revenue. It illustrates the concept of taxable income elasticity—i.e., taxable income changes in response to changes in the rate of taxation. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and that there is a rate between 0% and 100% that maximizes government taxation revenue. The Laffer curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. However, the shape of the curve is uncertain and disputed among economists. Under some assumptions, such as revenue being a continuous function of the rate of taxation, the maximum illustrated by the Laffer curve is a result of Rolle's theorem, which is a standard result in calculus.One implication of the Laffer curve is that reducing or increasing tax rates beyond a certain point is counter-productive for raising further tax revenue. A hypothetical Laffer curve for any given economy can only be estimated and such estimates are controversial. The New Palgrave Dictionary of Economics reports that estimates of revenue-maximizing tax rates have varied widely, with a mid-range of around 70%. There is a consensus among leading economists that a reduction in the US federal income tax rate would not raise annual total tax revenue.The Laffer curve was popularized in the United States with policymakers following an afternoon meeting with Ford Administration officials Dick Cheney and Donald Rumsfeld in 1974, in which Arthur Laffer reportedly sketched the curve on a napkin to illustrate his argument. The term "Laffer curve" was coined by Jude Wanniski, who was also present at the meeting. The basic concept was not new; Laffer himself notes antecedents in the writings of the 14th-century social philosopher Ibn Khaldun and others.

Liberal Libertarian Party

The Liberal Libertarian Party (Spanish: Partido Liberal Libertario) was a political party from Argentina founded in 2009. It defines itself both as a classical liberal and libertarian party. Its political platform advocates limited government, free markets and individual liberties including freedom of religion, freedom of speech, freedom of the press, right to privacy and strong civil liberties. It advocates the values of the 1853 Constitution.Its goals are to limit the government intrusion on individual liberty, reduce government spending, lower taxes on everybody, balance the budget, reduce regulations and promote free trade. Their slogan is "Individual rights, free market and non-aggression"The party emphasizes the role of free markets and individual achievement as the primary factors behind economic prosperity. To this end, they favor laissez-faire economics, fiscal conservatism, and the promotion of personal responsibility over welfare programs. A leading economic theory advocated is supply-side economics. The party has been morally opposed to increasing the public debt and raising taxes, and proposed to reduce government spending as an alternative.

Liêm Hoang-Ngoc

Liêm Hoang-Ngoc (French pronunciation: ​[ljɛm ɔɑ̃n.ɡɔk]; born 11 December 1964 in Saigon, South Vietnam) is a Vietnamese-born French economist and Member of the European Parliament elected in the 2009 European election for the East France constituency as a member of the French Socialist Party. During his time as a Socialist, he was known to sympathize with the left of the party, and was close to Henri Emmanuelli. He is also a member of the alter-globalization collective Attac.

On 16 June 2015, he left the Socialist Party to found a new movement, the "New Socialist Left", calling for unity within the broad left of the left of the Socialist Party, the Green Party, and the Left Front to counter what he sees as the supply-side economics of the current Socialist government.

Hoang-Ngoc is an associate professor at the University of Paris 1 Pantheon-Sorbonne.

In the 2009 European elections, he was placed second on the Socialist list for the East region. He is currently a candidate in the French legislative election, 2017, running in the 4th district of Haute-Garrone as a member of La France Insoumise.

Liêm Hoang Ngoc who joined the political movement La France Insoumise suspended early July 2018 his relationship with this group for which he co-authored the economical programme.

Paul Craig Roberts

Paul Craig Roberts (born April 3, 1939) is an American economist and author. He formerly held a sub-cabinet office in the United States federal government as well as teaching positions at several U.S. universities. He is a promoter of supply-side economics and an opponent of current U.S. foreign policy.

Roberts received a doctorate from the University of Virginia where he studied under G. Warren Nutter. He subsequently taught at Stanford University and the University of New Mexico before going to work as an analyst and adviser at the United States Congress where he was credited as the primary author of the original draft of the Economic Recovery Tax Act of 1981. He was the United States Assistant Secretary of the Treasury for Economic Policy under President Ronald Reagan and – after leaving government – held the William E. Simon chair in economics at the Center for Strategic and International Studies for ten years and served on several corporate boards. A former associate editor at The Wall Street Journal, his articles have also appeared in The New York Times and Harper's, and he is the author of more than a dozen books and a number of peer-reviewed papers.

In 1987 Roberts was invested into the Legion of Honour at the rank of chevalier (knight) by President of France François Mitterrand. He is also recipient of the United States' Treasury Meritorious Service Award and the International Journalism Award for Political Analysis from the Mexican Press Club.

Perspectives on capitalism by school of thought

Throughout modern history, a variety of perspectives on capitalism have evolved based on different schools of thought.

Reagan Era

The Reagan Era or Age of Reagan is a periodization of recent American history used by historians and political observers to emphasize that the conservative "Reagan Revolution" led by President Ronald Reagan in domestic and foreign policy had a lasting impact. It overlaps with what political scientists call the Sixth Party System. Definitions of the Reagan Era universally include the 1980s, while more extensive definitions may also include the late 1970s, the 1990s, the 2000s (decade), and even the 2010s. In his 2008 book, The Age of Reagan: A History, 1974–2008, historian and journalist Sean Wilentz argues that Reagan dominated this stretch of American history in the same way that Franklin D. Roosevelt and his New Deal legacy dominated the four decades that followed it.

The Reagan Era included ideas and personalities beyond Reagan himself; he is usually characterized as the leader of a broadly based conservative movement whose ideas dominated national policy making in areas such as taxes, welfare, defense, the federal judiciary, and the Cold War. Other major conservative figures and organizations of the Reagan era include Jerry Falwell, Phyllis Schlafly, Newt Gingrich, and The Heritage Foundation. The Rehnquist Court, which was inaugurated during Reagan's presidency, handed down several conservative decisions. The Reagan era coincides with the presidency of Reagan, and, in more extensive definitions, the presidencies of Gerald Ford, Jimmy Carter, George H. W. Bush, Bill Clinton, George W. Bush, and Barack Obama. Liberals generally lament the Reagan Era, while conservatives generally praise it and call for its continuation in the 21st century.

Upon taking office, the Reagan administration implemented an economic policy based on the theory of supply-side economics. Taxes were reduced through the passage of the Economic Recovery Tax Act of 1981, while the administration also cut domestic spending and increased military spending. Increasing deficits motivated the passage of tax increases during the George H. W. Bush and Clinton administrations, but taxes were cut again with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001. During Clinton's presidency, Republicans won passage of the Personal Responsibility and Work Opportunity Act, a bill which placed several new limits on those receiving federal assistance.

Campaigning for the Democratic nomination in 2008, Barack Obama interpreted how Reagan changed the nation's trajectory:

I think Ronald Reagan changed the trajectory of America in a way that Richard Nixon did not and in a way that Bill Clinton did not. He put us on a fundamentally different path because the country was ready for it. I think they felt like with all the excesses of the 1960s and 1970s and government had grown and grown but there wasn't much sense of accountability in terms of how it was operating. I think that people... he just tapped into what people were already feeling, which was we want clarity, we want optimism, we want a return to that sense of dynamism and entrepreneurship that had been missing.


Reaganomics (; a portmanteau of [Ronald] Reagan and economics attributed to Paul Harvey) refers to the economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics or voodoo economics by political opponents, and free-market economics by political advocates.

The four pillars of Reagan's economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation.The results of Reaganomics are still debated. Supporters point to the end of stagflation, stronger GDP growth, and an entrepreneur revolution in the decades that followed. Critics point to the widening income gap, what they described as an atmosphere of greed, and the national debt tripling in eight years which ultimately reversed the post-World War II trend of a shrinking national debt as percentage of GDP.

Richard W. Rahn

Richard W. Rahn (born January 9, 1942 in Rochester, New York) is an American economist, syndicated columnist, and entrepreneur. Currently, he is Chairman of Improbable Success Productions and the Institute for Global Economic Growth. He also writes a syndicated weekly economic column which is published in The Washington Times, Real Clear Markets and many other places. He was the Vice President and Chief Economist of the United States Chamber of Commerce during the Reagan Administration and remains a staunch advocate of supply-side economics, small government, and classical liberalism.

Robert Mundell

Robert Alexander Mundell, CC (born October 24, 1932) is a Canadian economist. Currently, he is a professor of economics at Columbia University and the Chinese University of Hong Kong.

He received the Nobel Memorial Prize in Economic Sciences in 1999 for his pioneering work in monetary dynamics and optimum currency areas. Mundell is known as the "father" of the euro, as he laid the groundwork for its introduction through this work and helped to start the movement known as supply-side economics. Mundell is also known for the Mundell–Fleming model and Mundell–Tobin effect.

Supply creates its own demand

"Supply creates its own demand" is the formulation of Say's law. The rejection of this doctrine is a central component of The General Theory of Employment, Interest and Money (1936) and a central tenet of Keynesian economics.

Keynes's rejection of Say's law has on the whole been accepted within mainstream economics since the 1940s and 1950s in the neoclassical synthesis, but debate continues between Keynesian economists and neoclassical economists (see saltwater and freshwater economics).

Keynes's interpretation is rejected by many economists as a misinterpretation or caricature of Say's law — see Say's law: Keynes vs. Say — and the advocacy of the phrase "supply creates its own demand" is today most associated with supply-side economics, which retorts that "Keynes turned Say on his head and instead stated that 'demand creates its own supply'".

The exact phrase "supply creates its own demand" does not appear to be found in the writings of classical economists; similar sentiments, though different wordings, appear in the work of John Stuart Mill (1848), whom Keynes credits and quotes, and his father, James Mill (1808), whom Keynes does not.

Supply shock

A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general. This sudden change affects the equilibrium price of the good or service or the economy's general price level.

In the short run, an economy-wide negative supply shock will shift the aggregate supply curve leftward, decreasing the output and increasing the price level. For example, the imposition of an embargo on trade in oil would cause an adverse supply shock, since oil is a key factor of production for a wide variety of goods. A supply shock can cause stagflation due to a combination of rising prices and falling output.

In the short run, an economy-wide positive supply shock will shift the aggregate supply curve rightward, increasing output and decreasing the price level. A positive supply shock could be an advance in technology (a technology shock) which makes production more efficient, thus increasing output.

Trickle-down economics

Trickle-down economics, also called trickle-down theory, refers to the economic proposition that taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term. In recent history, the term has been used by critics of supply-side economic policies, such as "Reaganomics." Whereas general supply-side theory favors lowering taxes overall, trickle-down theory more specifically targets taxes on the upper end of the economic spectrum.

The term "trickle-down" originated as a joke by humorist Will Rogers and today is often used to criticize economic policies which favor the wealthy or privileged while being framed as good for the average citizen. David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea: It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory.

Political opponents of the Reagan administration soon seized on this language in an effort to brand the administration as caring only about the wealthy. Some studies suggest a link between trickle-down economics and reduced growth. Trickle-down economics has been widely criticized particularly by left-wing (socialist and social liberal) and moderate politicians and economists, but also some right-wing (conservative) politicians.

A 2019 study in the Journal of Political Economy found, contrary to trickle-down theory, that "the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10 percent on employment growth is small."

Wolfgang Wiegard

Wolfgang Wiegard (born February 17, 1946) is a German economist and member of the German Council of Economic Experts. He served as chairman of the council from April 2002 to March 2005.Born in Berlin, Wiegard studied at the University of Heidelberg, receiving his doctoral degree in economics in 1981. Since 1999 Wiegard holds a tenured professorship in economics at the University of Regensburg.Wiegard is considered a strong proponent of neoclassical supply-side economics. He is also a member of the Social Democratic Party of Germany.

Macroeconomic schools of thought
Early modern
20th- and 21st-century

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