Supply Side Economics [4/7]

Supply Side Economics: Belief that as AS curve determine level of inflation, unemployment, & econ growth.  
To increase economy,  the AS curve will have to shift to the right which will have to benefit the economy first.

Supply Side Economics focus on marginal tax rate. 
 

Marginal Tax Rate: amount paid on last $ earned or on additional $ earned.

Lower taxes are incentives for businesses to invest in our economy. 
Lowered taxes are incentives to increase savings & therefore create lower interest rates which will increase business investment.

Supply Side Economists support policies thay promote GDP growth. They argue high marginal tax rate along with the current system of transfer payments.
Ex. Welfare provides disincentive to work, invest, innovate, & undertake entrepreneurial ventures.

Referred to Raeganomics
Lowered the marginal tax rate to get U.S. out of a recession. = deficit. 

Laffer Curve: trade off between tax rates & gov. revenue.
Used to support supply side argument.  
As tax rates increase from 0. Tax revenue increase 0 to some max level & then decline.

3 criticism:
1. Research suggests that impact of tax rates on incentives to work, invest, & to save are small.

2. Tax cut also increase demands which can fuel inflation & cause demand to exceed supply.

3. Where economy actually located on the curve is get to be determined.