Supply-side economics is an economic theory based on the idea that “supply” (goods and services) drives economic growth. According to this theory, putting more money into the hands of business people, investors and individuals – accomplished by cutting tax rates – creates incentives to save, invest, work and produce, thereby creating a stronger economy and a larger tax base (the total wealth subject to taxation). Ronald Reagan was a supply-sider, and the theory became known as “Reaganomics” or “trickle-down economics.”
The concept is illustrated by the Laffer curve, named for economist Arthur B. Laffer. The Laffer curve shows the relationship between the tax rate and tax revenue. The government receives no revenue at both ends of the curve, when tax rates are at 0 percent (no taxes are collected) and 100 percent (there’s no incentive to work if all money goes to pay taxes). The curve demonstrates the theory that a high tax rate on a small base and a lower tax rate on a large base can produce the same amount of revenue. Supply-siders, therefore, believe that lower government revenues due to lower tax rates could be at least partly offset – opinions differ as to how much – by a higher tax base made possible by higher incomes and lower unemployment. In the ’70s, supply-side economics was a counter to Keynesian economics, a “demand-side” school of thought.