Supply-side economics is an economic theory that postulates tax cuts for the wealthy result in increased savings and investment capacity for them that trickle down to the overall economy. President Ronald Regan was a staunch believer in supply-side economics, resulting in the name "Reaganomics
Reaganomics
Reaganomics refers to the economic policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics or voodoo economics by political opponents, and free-market economi…
What is the difference between trickle down theory and supply-side theory?
In recent history, the term has been used by critics of supply-side economic policies, such as "Reaganomics.". Whereas general supply-side theory favors lowering taxes overall, trickle-down theory more specifically targets taxes on the upper end of the economic spectrum.
Is ‘supply-side economics’ a trickle-down idea?
David Stockman, who as Ronald Reagan's budget director championed Reagan's tax cuts at first, later became critical of them and told journalist William Greider that "supply-side economics" is the trickle-down idea:
What are the two forms of trickle down economics?
Trickle-down economics is displayed in two forms: supply-side and demand-side. In the former, the theory states that tax cuts for wealthy individuals and corporations would lead to more jobs and a better standard of living as these entities hold the resources required for an increase in economic growth.
What is the opposite of supply side economics?
Supply-side economics advocates tax cuts and deregulation to drive economic growth. The Laffer Curve is the visual representation of supply-side economics. The opposite of supply-side is demand-driven Keynesian theory. President Reagan used supply-side economics to combat stagflation.
What is the basic belief of supply-side economics?
Supply-side economics believes that producers and their willingness to create goods and services set the pace of economic growth while demand-side economics believes that consumers and their demand for goods and services are the key economic drivers.
Why do people believe in trickle-down economics?
The idea behind trickle-down economics is simple: cut taxes for the richest and the benefits will trickle down. These policies should enable wealthy owners to create more jobs for middle and lower class citizens, meaning the benefits are felt by everyone.
Who believes in trickle-down economics?
Major examples of Republicans supporting what critics call "trickle-down economics" include the Reagan tax cuts, the Bush tax cuts and the Tax Cuts and Jobs Act of 2017.
What is the example of trickle-down effect?
The trickle-down theory is the theory that benefits given to people at the top of a system will eventually be passed on to people lower down the system. For example, if the rich receive tax cuts, they will pass these benefits on to the poor by creating jobs.
What is the trickle down theory?
Key Takeaways. The trickle-down theory states that tax breaks and benefits for corporations and the wealthy will trickle down to everyone else. Trickle-down economics involves less regulation and tax cuts for those in high-income tax brackets as well as corporations. Critics argue that the added benefits the wealthy receive adds to ...
How much did the federal government increase in taxes between 1981 and 1989?
Between 1981 and 1989, total federal receipts increased from $599 billion to $991 billion. 1 The results empirically supported one of the assumptions of the Laffer Curve. However, it neither shows nor proves a correlation between a reduction in top tax rates and economic benefits to low- and medium-income earners.
How much is the tax cut for corporations?
Corporations, on the other hand, got a permanent tax cut to 21%. 4 The bill also doubled the exemption for the estate tax, meaning the tax didn't kick in until over $11.18 million for the tax year 2018; the first year following the Act's approval. The amount has increased every year since then and for 2020 and 2021 the amounts are $11.58 million and $11.7 million, respectively. 5
What does 0% mean in tax?
At 0%, no tax can be collected; at 100%, there is no incentive to generate income. This should mean that specific cuts in tax rates would boost total receipts by encouraging more taxable income . Laffer’s idea that tax cuts could boost growth and tax revenue was quickly labeled “trickle-down.”.
Why does the government take in more tax revenue?
As a result of the widespread economic growth, the government takes in more tax revenue—so much so, that the added revenue is enough to pay for the original tax cuts for the wealthy and corporations.
Why do people spend more money?
Wealthy individuals spend more due to the extra money, which creates demand for goods in the economy and ultimately spurs economic growth and more jobs. The workers also spend and invest more, creating growth in industries such as housing, automobiles, consumer goods, and retail. Workers ultimately benefit from trickle-down economics as their standard of living increases. And since people keep more of their money (with lower tax rates), they're incentivized to work and invest.
What are the factors that drive the economy?
Many factors drive growth, including the Federal Reserve Bank's monetary policy, such as lowering interest rates making loans cheaper. Also, trade and exports, which are sales from U.S. companies to foreign companies, as well as foreign direct investment from corporations and investors overseas, contribute to the economy as well.
Does It Work?
Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact.
How does a tax cut affect the economy?
Every dollar cut in taxes reduces government spending, and its stimulative effect, by exactly one dollar. According to Laffer, that same tax cut has a multiplier effect on economic growth. Every dollar in tax cuts translates into increased demand. It stimulates business growth, which results in additional hiring. 11 .
What are the benefits of trickle down economics?
Advocates of trickle-down economics promise that businesses will use the extra cash from tax cuts to expand. Investors will use their tax-cut windfall to buy more companies or stocks. Owners will invest in their operations and hire workers. 4
What is the Laffer curve?
The Laffer Curve is the theoretical underpinning of supply-side economics. Economist Arthur Laffer developed it in 1974. 10 He argued that the effect of tax cuts on the federal budget are immediate. They are also on a 1-for-1 basis.
Why is corporate tax cut important?
A corporate tax cut gives businesses more money to hire workers, invest in capital equipment, and produce more goods and services. An income tax cut increases the dollars per hour worked. It boosts workers' incentive to remain employed and creates more labor.
Why is supply side important?
It boosts workers' incentive to remain employed and creates more labor. That is one of the four factors of production that drive supply. Adding to supply will allow the economy to grow. 3 . Supply-side is similar to trickle-down economics but there are a few key differences.
What are the factors of production?
The factors of production are capital, labor, entrepreneurship, and land. 1. Supply-side fiscal policy focuses on creating a better climate for businesses. Its tools are tax cuts and deregulation. According to the theory, companies that benefit from these policies are able to hire more workers.
What would happen if the extra dollar ended up going to less productive businesses?
If the extra dollar ended up going to less productive businesses, we might see a temporary uptick in employment and intermediate goods sales that then melted away when the business was out-competed. If home buyers got the money instead, it might mainly fuel increased house prices.
How would a rich person lend money to a bank?
A rich person might instead lend the bank that extra dollar by depositing it into a bank account. If the bank then promptly loaned that money out to domestic borrowers, then we might see a positive economic effect, if the main borrowers who benefit from this looser cash were businesses that went on to use the money for a productive purpose.
What is trickle down economics?
The broad idea of trickle-down economics is that giving economic help to companies or people at the top of society should, through one of various possible mechanisms, generate benefits for those in layers further down. Let’s look at the various mechanisms through which this is theorised to work.
Why would taxes be raised?
More taxes could also be raised if the employees of that company, as it expanded, shared in its increased productivity in terms of their taxable take-home pay. An increase in government tax revenue could then in theory be allocated to welfare, infrastructure, and other progressive budget line items, benefiting more people indirectly.
What is each decision taken by?
Each is taken by some individual person in a particular department with particular, constrained, information and decision-making authority. It’s not guaranteed that each such decision maker in a company will know about a bit of extra cash due to a tax break and be spurred because of it to take a particular decision in their realm that dovetails with decisions taken by other company workers.
Why would companies expand in Australia?
In theory, some companies might be drawn to expand operations in Australia because of lower company tax rates. If those expansions created jobs for previously unemployed people, or equal or better jobs for Australian workers compared to what those workers previously could get, then the benefits would be spread to workers.
Why do rich people invest in Australian stocks?
In fact, since rich people have a lower marginal propensity to consume than poorer people, they’re more likely to spend an extra dollar on investment than on stuff.
What was the object of government in 1921?
The philosophy that had prevailed in Washington since 1921, that the object of government was to provide prosperity for those who lived and worked at the top of the economic pyramid , in the belief that prosperity would trickle down to the bottom of the heap and benefit all.
What is trickle down economics?
Trickle-down economics, also known as trickle-down theory or the horse and sparrow theory, is the economic proposition that taxes on businesses and the wealthy in society should be reduced as a means to stimulate business investment in the short term and benefit society at large in the long term. In recent history, the term has been used by critics ...
What was Ronald Reagan's economic policy?
Ronald Reagan 's economic policies, dubbed " Reaganomics ", included large tax cuts and were characterized as trickle-down economics. In this picture, he is outlining his plan for the Economic Recovery Tax Act of 1981 from the Oval Office in a televised address, July 1981. Trickle-down economics, also known as trickle-down theory or ...
What did Hillary Clinton call Trump's tax plan?
In a 2016 presidential candidates debate, Hillary Clinton accused Donald Trump of supporting the "most extreme" version of trickle-down economics with his tax plan, calling it "trumped-up trickle-down" as a pun on his name.
What is the most enduring zombie idea?
In a study of "zombie ideas", political scientists Brainard Guy Peters and Maximilian Lennart Nagel describe trickle-down economics as the most enduring "zombie idea" in American politics. By zombie idea, they refer to ideas which have been unsuccessful at achieving intended goals, yet still survived in public policy discourse.
Why is the national debt not the only cause of declining economic conditions in America?
It is because America has not invested in its people. It is because we have not grown. It is because we've had 12 years of trickle-down economics.
When was the term "trickle down" first used?
The Merriam-Webster Dictionary notes that the first known use of "trickle-down" as an adjective meaning "relating to or working on the principle of trickle-down theory" was in 1944 while the first known use of "trickle-down theory" was in 1954.
What is the trickle down view?
Trickle down is the view that if growth takes place automatically the poor will get benefits of growth, let alone the rising inequalities.
What are supply siders?
Supply siders like to reduce regulations and taxes on businesses. Most of them like to reduce taxes in general, but to the extent we need taxes, prefer demand side taxes like sales and value-added taxes. Pro growth people care less about the total amount collected in taxes than the marginal rates—since it is marginal rates that change incentives. Demand siders like to reduce taxes too, but in ways that encourage spending—like cutting taxes on poor people, or sales taxes. Redistributionists like to increase taxes so there is more to distribute.
What is supply side economics?
Supply side economics is about producing a larger SUPPLY of consumer goods. Its in the name of the idea. Its about SUPPLY.
What is the thing about economics?
The thing about economics, is that most US citizens have practically no comprehension of it. We tend to think of economics in the same terms that some of us think of religion. To most Americans, what we are told by the “media” about economics doesn’t make sense. But because some important people like presidents and senators, make these claims, and because some crackpot like Ayn Rand wrote books based on the nonsense, and because people who claim to be “economists”
Is a pro growth supply or demand sider?
Logically, you could be a pro growth supply sider or a redistributionist supply sider, but you rarely see that. People who emphasize the supply side are nearly always pro growth people. People who emphasize the demand side can be either pro growth or redistributionist.
Is there such a thing as trickle down economics?
There is no such thing as trickle-down economics.
Is the economy a supply or demand?
All economists agree the economy has both a supply side and a demand side . The majority of economists from the 1930s to the 1970s thought that the demand side was far more important. If there was enough demand, businesses would form and expand to supply the demand; and that process would generate enough wages to support demand growth and prosperity. Bad times resulted when demand fell.
What is the Laffer curve?
During the Ronald Reagan administration, advisor Arthur Laffer proposed a bell-curve style pattern analysis for drafting the relationship between the alterations in the government tax rate and the nominal tax receipts. This analysis was rather termed the Laffer Curve. The shape of the curve proposes that there is a chance that taxes might not produce maximum revenue or receipts to the government. An example would be a light tax of 0% and a heavy tax of 100%. Both of them wont benefit the economy, because at 0%, taxes will not be incurred in the nation, and at 100% businesses wont operate because there is no chance of making a profit (which is the sole aim of business establishments). Thus, this model suggests that tax cuts would help increase receipts since it encourages more taxable income. This idea from Arthur Laffer was termed trickle-down as it suggested that tax cuts will boost economic growth and returns from tax. The US marginal tax rate fell from 70 to 20 between 1980 to 1988, and total receipts moved up to $991 billion from $599 billion between 1981 to 1989 when this theory was applied. This strengthened the Laffer Curve as expected, although the theory doesnt prove any relationship between tax cuts and its benefit to average and low-income employees.
What is the trickle down theory?
The trickle-down theory (otherwise known as trickle-down economics) postulates that applying special tax cuts to the rich and wealthy as well as bigger corporations with benefit the society, by later affecting everyone else. This model states that the application of income and capital tax cuts or the addition of other financial benefits to big corporations and large investors will alter the economic growth of a nation positively. It focuses on the belief that economic growth is most likely propelled by entities with the biggest resources and skills, and in a case where this growth this achieved, the community benefits at large.
Is trickle down theory a political theory?
The trickle-down theory is not really an economic assumption but a political concept. While most persons will confuse it with supply-side economics, there is really no concept there that fits economic values. An example of the trickle-down theory is the US bank bailouts in 2008, as well as the European Unions Common Agricultural Policy (CAP). For a policy to be termed trickle-down, it must satisfy the following:
Supply-Side vs. Demand-Side Economics
Supply-side and demand-side economics are often quite contentious and divisive topics in the modern world. Supply-side economics is the theory that economic growth is best achieved through policies that encourage increased output or supply.
What Is Supply-Side Economics?
Supply-side economics is associated with the ideals characterized by Classical and Neo-Classical economic theory, such as limited government reach, regulation, and policies that promote business and investment.
What Is Demand-Side Economics?
Demand-side economics is closely associated with the economic theories espoused by members of the Keynesian school of thought, named after Maynard Keynes. The idea is that demand will create supply.
Understanding Supply-Side Economics
- Like most economic theories, supply-side economics tries to explain both macroeconomic phenomenaand—based on these explanations—offer policy prescriptions for stable economic growth. In general, the supply-side theoryhas three pillars: tax policy, regulatory policy, and mone…
The Argument That Supply Creates Its Own Demand
- In economics, we review the supply and demand curves. The chart below illustrates a simplified macroeconomic equilibrium: aggregate demand and aggregate supply intersect to determine overall output and price levels. (In this example, the output may be the gross domestic product, and the price level may be the Consumer Price Index.) The below chart illustrates the supply-sid…
Three Pillars
- The three supply-side pillars follow from this premise. On the question of tax policy, supply-siders argue for lower marginal tax rates. In regard to a lower marginal income tax, supply-siders believe that lower rates will induce workers to prefer work over leisure (at the margin). In regard to lower capital-gainstax rates, they believe that lower rates induce investors to deploy capital productive…
What's Gold Got to Do with It?
- Since supply-siders view monetary policy, not as a tool that can create economic value, but rather a variable to be controlled, they advocate a stable monetary policy or a policy of gentle inflation tied to economic growth—for example, 3% to 4% growth in the money supply per year. This principle is the key to understanding why supply-siders often advocate a return to the gold stand…
Supply-Side Economics FAQs
- Why Is It Called Supply-Side Economics?
It is called supply-side economics because the theory believes that production (the "supply" of goods and services) is the most important macroeconomic component in achieving economic growth. - What Is the Opposite of Supply-Side Economics?
The opposite of supply-side economics is Keynesian economics, which believes that the demand for goods (spending) is the key driver for economic growth.
The Bottom Line
- Supply-side economics has a colorful history. Some economists view the supply-side as a useful theory. Other economists so utterly disagree with the theory that they dismiss it as offering nothing particularly new or controversial as an updated view of classical economics. Based on the three pillars discussed above, you can see how the supply side cannot be separated from the po…
What Is Trickle-Down Theory?
Understanding Trickle-Down Theory
- Trickle-down economics is political, not scientific. Although it is commonly associated with supply-side economics, there is no single comprehensive economic policy identified as trickle-down economics. Any policy can be considered “trickle-down” if the following are true: First, a principal mechanism of the policy disproportionately benefits wealthy businesses and individual…
Steps to Trickle Down Theory
- The trickle-down theory starts with a corporate income tax reduction as well as looser regulation. Also, wealthy taxpayers may get a tax cut, meaning the top income brackets get lowered. As a result, more money remains in the private sector leading to business investment, such as buying new factories, upgrading technology, and equipment, as well as hiring more workers. The new te…
Trickle-Down and The Laffer Curve
- American economist Arthur Laffer, an advisor to the Reagan administration, developed a bell-curve style analysis that plotted the relationship between changes in the official government tax rate and actual tax receipts. This became known as the Laffer Curve. The nonlinear shape of the Laffer Curve suggested taxes could be too light or too onerous to produce maximum revenue; i…
Criticisms of Trickle Down Theory
- Trickle-down policies typically increase wealth and advantages for the already-wealthy few. Although trickle-down theorists argue that putting more money in the hands of the wealthy and corporations promotes spending and free-market capitalism, ironically, it does so with government intervention. Questions arise such as, which industries receive subsidies and which …
Real-World Example
- Many Republicans use the trickle-down theory to guide their policies. But it is still very heavily debated even today. President Donald Trump signed into law the Tax Cuts and Jobs Act on Dec. 22., 2017. The law cut personal tax rates slightly but also personal exemptions. The personal tax cuts expire, however, in 2025 and revert to the old, higher rates.3 Corporations, on the other ha…
How It Works
Supply Side Versus Demand Side Economics
- Supply-side is the opposite of Keynesian theory. It states that demand is the primary driving force of economic growth. Supporters use fiscal policy to better the lives of consumers regardless of whether they work or not.6 A study by Moody's and Economy.com found that every dollar spent on unemployment benefits stimulates $1.73 in economic demand.7 For example, the Obama benefi…
Theory Behind Supply-Side Economics
- The Laffer Curve is the theoretical underpinning of supply-side economics. Economist Arthur Laffer developed it in 1974.10He argued that the effect of tax cuts on the federal budget are immediate. They are also on a 1-for-1 basis. Every dollar cut in taxes reduces government spending, and its stimulative effect, by exactly one dollar. According to ...
How Well It Worked
- President Ronald Reagan put supply-side economics into practice in the 1980s. He used it to combat stagflation. That's a rare combination of stagnant economic growth and high inflation. For this reason, supply-side economics is also called "Reaganomics."4 He believed that the free market and capitalism would solve the nation's woes. His policies matched the "greed is good" …
Studies That Support Supply-Side Economics
- The U.S. Department of the Treasury developed a model showing that the Bush tax cuts increased annual gross domestic product by 0.7%.16But the model assumes that the revenues lost by the cuts were offset by reduced fiscal spending and keeping the budget balanced. If instead, tax cuts were offset by future tax increases, the impact would be negative. The future tax increases woul…
Studies That Don't Support Supply-Side Economics
- A study by the National Bureau of Economic Research found precise figures on how much revenue will be recouped by tax cuts. Corporate tax cuts do a little better. Each dollar cut returns 50 cents to revenue. This shows that, over the long-term, the revenue lost by tax cuts will be only partially regained. Without a decrease in spending, tax cuts lead to an increase in the budget def…
The Bottom Line
- Economists still debate whether tax cuts lead to increased economic growth over the long term. The Treasury Department study did mention that, in the short-term and in an economy that is already weak, tax cuts will provide an immediate boost. The NBER study found that tax cuts will create larger budget deficits unless spending is also cut. Over the long term, and in a healthy ec…