Supply-Side Economics

Supply-side economics holds that lower tax rates and lighter regulation spur growth by giving businesses and workers stronger incentives to produce, invest, and hire. It became the guiding theory of the Reagan administration and has shaped Republican tax policy ever since.

Supply-side economics rose to prominence in the late 1970s as an answer to the stagflation that had baffled traditional Keynesian policy. Economists like Arthur Laffer and Robert Mundell argued that the high marginal tax rates of the postwar era were strangling productive activity. If rates were cut, taxpayers would have stronger reasons to work, save, and invest. The resulting growth would broaden the tax base, partially offsetting the revenue loss. The Laffer Curve, sketched famously on a napkin, illustrated the idea that at very high rates, cuts could actually increase revenue. President Reagan embraced the theory. The Economic Recovery Tax Act of 1981 cut the top marginal income tax rate from 70 percent to 50 percent, with further reductions in the Tax Reform Act of 1986 that brought the top rate to 28 percent. Supporters credit these cuts with sparking the long expansion of the 1980s and 1990s. Critics argue that deficits grew, inequality widened, and the promised revenue effects were overstated. The basic logic survives in modern conservative tax policy. The Tax Cuts and Jobs Act of 2017 cut corporate and individual rates on supply-side reasoning. Whether tax cuts pay for themselves remains contested. Whether they affect behavior is not in serious dispute.