Is Cutting A Tax Rate Also A Good Macroeconomic Policy?

The strand of supply side thinking emerges in its advocacy of the large tax cuts. We saw in our analysis of the multiplier model how taxes could affect aggregate demand and output. Supply side economists believe that the role of taxes in affecting aggregate demand has been overemphasized.

They argue that government has too often used taxes to raise revenues or stimulate demand while ignoring the impacts of the rising tax burden on incentives. High taxes, in their view, lead to people to reduce their labor and capital supply. Indeed, some supply side economists particularly. Arthur Laffer, have suggested that high tax rates might actually lower tax revenues.

This Laffer curve proposition holds that high tax rates shrink the tax base because they reduce economic activity. Mainstream economists across the political spectrum, and even some supply side economists, have scoffed at the Laffer proposition that cutting tax rates today would increase tax revenues.

To fix what they view as a defective tax system, supply side economists propose a radical restructuring of tax system, through an approach sometimes called supply side tax cuts.