change in AS, not in AD, which determines the level of inflation, unemployment rate and economic growth
supplyside economists support policies that promote GDP growth by arguing that higher marginal tax rates along with the current system of transfer payments such as unemployment compensation or welfare programs, provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures
lower marginal tax rates induce more work and AS increases; they also make leisure more expensive and work more attractive
Incentives to Save & Invest
High marginal tax rates reduce rewards for savings and investment
Consumption might increase, but investments depend on savings
Lower marginal tax rates encourage saving and investment
Laffer Curve
Depicts the relationship between tax rates and government revenues
As tax rates increase from 0, government revenue increases from 0 to some max level, and then decline
3 Criticisms of Laffer Curve
Research suggests that the impact of tax rates on incentives to work, save, and to invest are small.
Tax cuts increase demand which can fuel inflation and demand may exceed supply.
Where the economy is actually located on the curve is difficult to determine.
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