Supply-side economics and the Laffer Curve
Advocated by neoliberal economists like Arthur Laffer and
embraced by President Reagan, ‘supply-side economics’ is based
upon the assumption that long-term economic growth depends
on ‘freeing up’ the amount of capital available for private
investment. A crucial theoretical component of supply-side
economics, the ‘Laffer Curve’ is a graphical illustration of the
thesis that increases in taxation rates will not always lead to an
increase in taxation revenue. As tax rates approach 100%, the
curve suggests, revenue will drop as citizens will have no
incentive to work harder. Supply-siders show a single-minded
commitment to reducing taxes on private income. Relying on the
Laffer Curve, they argue that new economic growth produced by
added investment will automatically generate sufficiently large
tax revenue surpluses. These, in turn, could be used by
governments to pay down their debts and ultimately balance
their budgets. Also known as ‘trickle-down economics’, supplyside
economics appealed to Reagan and Republican Party
legislators in the US Congress who, eager to cut taxes, were
nonetheless careful to preserve politically popular social
programmes like Social Security and Medicare