What is the 'Supply-Side Theory'

The supply-side theory is an economic theory holding that bolstering an economy's ability to supply more goods is the most effective way to stimulate economic growth.  At a fiscal level, supply-side theory focuses on taxes and deregulation, and at an economic level, human capital and entrepreneurship are the drivers. 

BREAKING DOWN 'Supply-Side Theory'

Supply-side theorists argue that corporate income tax reduction and loser regulation is the driving force of an economy. By freeing up more money at a corporate level, companies will invest in research, capital and human resources, which in turn should produce a greater number of goods and services. Supply-side economics is often referred to as trickle-down economics, where what is good for the corporate world will trickle down through the economy benefiting all. 

The theory behind supply-side economics derived from the Laffer Curve. The curve, designed by economist Arthur Laffer, argues that there is a direct relationship between tax receipts and federal spending, meaning they substitute on a 1-to-1 basis. The theory is prominent in conservative right-wing policy that argues the loss in tax revenue is made up by the increase in growth so, therefore, the argue tax cuts are a better form of economic growth and federal spending. 

History of Supply-Side Economics

In the 1980s, President Ronald Reagan used this theory to combat pricing issues that followed the recession in the early part of the decade. Reagan cut the top tax rate and the corporate tax rate. While the economy was dragged out of recession, national debt under Reagan surged. 

In 2017, President Donald Trump introduced a tax bill that, in principle, is based on supply-side economics. The bill plans to cut taxes, both income and corporate in the hope to stimulate growth. Proponents said the trickle-down would assist everyday Americans, despite evidence pointing that the majority of the tax relief will be seen by the upper class. 

 

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