Editing Supply-side economics (section)

== Definition and principles ==
James D. Gwartney and Richard L. Stroup provide a definition of supply-side economics as the belief that adjustments in marginal tax rates have significant effects on the total supply.<ref name=":1">{{Cite book|last1=Gwartney|first1=James D.|title=Macroeconomics, 4th ed.|last2=Stroup|first2=Richard L.|publisher=Harcourt Brace Jovanovich|year=1987|pages=253}}</ref> Gwartney and Stroup said "that the supply-side argument provided the foundation for the Reagan tax policy, which led to significant reductions in marginal tax rates in the United States during the 1980s".<ref name=":1" />

Barry P. Bosworth's book, Tax incentives and economic growth, published in 1984, provided another definition by presenting supply-side economics from two perspectives:

# "A broad interest in the determinants of aggregate supply – the volume and quality of the capital and labor inputs and the efficiency with which they are used"<ref name=":3">{{Cite book|last=Bosworth |first=Barry P. |url=http://worldcat.org/oclc/797160531|title=Tax incentives and economic growth|date=1984|publisher=Brookings Institution|isbn=0-8157-1035-6|oclc=797160531}}</ref>
# "A narrower focus on tax reductions as a means of increasing the supply of savings, investment, and labor."<ref name=":3" />

=== Supply-side vs. previous approaches to economic policy ===
Supply-side economics has originated as an alternative to Keynesian economics, which focused macroeconomic policy on management of final demand.<ref name="feldstein"/> Demand-side economics relies on a fixed-price view of the economy, where the demand plays a key role in defining the future supply growth, which also allows for incentive implications of investment.<ref name=":3" />

The Keynesian policy approaches focus on demand management as a major instrument to affect aggregate production and GNP, while [[Monetarism]] focuses on management of monetary aggregates and credit. Unlike supply-side economics, demand-side economics is based on the assumption that increases in GNP result from increased spending.<ref name=":4">Son, Hyung Chan (1990). [http://hdl.handle.net/10945/34831 "Supply-side economics in the Republic of Korea"]. Monterey, California: Naval Postgraduate School.</ref>

Traditional policy approaches were challenged by the theory of supply-side economics in the Reagan Administration of the 1980s. It claims that fiscal policy may lead to changes in supply as well as in demand.<ref>Fink, Richeard H., ''Supply-Side Economics'', University Publications of America, 1982.</ref> So, when marginal tax rates are high, consumers pursue additional leisure and current consumption instead of pursuing current income and extra income in the future. Therefore, there is a decline in work effort and investment, which in turn causes a decrease of production and GNP, regardless of the total demand levels.

On these assumptions, supply side economists formulate the idea that a cut in marginal tax rates has a positive effect on economic growth.

=== Role of the marginal tax rates ===
The main focus of supply-side economics is promotion of economic growth. In this regard, some studies have suggested to consider two relative prices.{{Which?|date=April 2025}}

The first one influences decisions of individuals on the distribution of their income between consumption and savings.<ref name=":5">Roberts, Paul C., ''The Supply-Side Revolution'', Harvard University, 1984.</ref>{{rp|36}} The cost of individual's decision to assign a unit of income to either consumption or savings is a future value of the unit, which has been given up by choosing either to consume or to save. The unit of income value is defined by the marginal tax rates. Therefore, higher tax rates would decrease the cost of consumption, which would cause a fall in investment and savings. At the same time, lower tax rates would cause the investment and savings levels to rise, while the consumption levels would fall.<ref name=":4" />

The second price influences decisions of individuals on the distribution of their time between work and leisure.<ref name=":5" /> The cost of individual's decision to allocate a unit of time either to work or leisure stands for current income, which was given up by choosing either work or leisure. The cost also includes the future income, which was given up for leisure instead of enhancing the professional skills. The value of lost income is defined by the tax rate assigned to the additional income. Therefore, the increase in marginal tax rates leads to a decrease in the price of leisure. However, if the marginal tax rate decline, the cost of leisure increases.<ref name=":4" />

Both the amount of retained and taxed income is determined by the marginal tax rate.<ref name=":4" /> That is why, from a supply-side economist's standpoint, marginal tax rates play a significant role in determining the development of the economy. Due to crucial role in determining how much time workers will spend on work and leisure or how much income will be spent on consumption and for savings, supply-side economists insist on decreasing tax rates as they believe it could improve the growth rates of the economy.

=== Laffer curve ===
Laffer curve illustrates a mathematical relationship between tax revenues and tax rates, which was popularized by economist Arthur B. Laffer in 1974.<ref name=":4" /> The Laffer Curve posits the existence of a maximum point when tax revenue is maximized at a specific (unknown) tax rate. Many interpret the Laffer Curve as higher tax rates can sometimes decrease the tax base, which will lead to the decrease in tax revenues even if the tax rates are high.<ref name=":1" /> Due to the effect exerted by taxes on the taxed income, the adjustment of tax rates may not lead to proportional changes in tax revenues. That is why, some supply-side economists insist decreasing high tax rates can result in an increase of tax revenues.

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.<ref name="Laffer, A.">{{cite web|last=Laffer|first=Arthur|date=June 1, 2004|title=The Laffer Curve, Past, Present and Future|url=http://www.heritage.org/Research/Taxes/bg1765.cfm|access-date=December 11, 2007|publisher=The Heritage Foundation|archive-date=December 1, 2007|archive-url=https://web.archive.org/web/20071201225944/http://www.heritage.org/Research/Taxes/bg1765.cfm|url-status=unfit}}</ref>

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. Supply-sider Jude Wanniski and many others{{Who?|date=April 2025}} advocate a zero capital gains rate.<ref>Wanniski, Jude [http://www.polyconomics.com/index.php?option=com_content&view=article&id=1806:taxing-capital-gains&catid=52:2003&Itemid=31 "Taxing Capital Gains"]. {{webarchive|url=https://web.archive.org/web/20140502013505/http://www.polyconomics.com/index.php?option=com_content&view=article&id=1806%3Ataxing-capital-gains&catid=52%3A2003&Itemid=31|date=May 2, 2014}}</ref><ref>{{Cite web|first=Alan |last=Reynolds|date=July 1999|title=Capital gains tax: Analysis of reform options for Australia|url=http://www.asx.com.au/about/pdf/cgt.pdf|url-status=dead|archive-url=https://web.archive.org/web/20050718013109/http://www.asx.com.au/about/pdf/cgt.pdf|archive-date=July 18, 2005|publisher=[[Hudson Institute]]}}</ref>