The Failures of Supply-Side Economics

The trouble with the perception by Left media is that they vilify the Right as supporting complete deregulation as a bad thing, while the Left supports failed Keynesian economic theory, which presents more spending and planning (contributing to an even larger government) as a practical solution to economic instability. We can't prop up our failing industries with taxpayer-backed subsidies for products that the market no longer demands. Those sort of bailouts are part of the reason we are heading toward an economic depression. Increasing the marginal tax rate only allows government to grow bigger and spend more of the individual's income on things which rarely benefit the general population. As the individual retains less of their earned income, their ability to contribute to the economy in a positive manner is reduced.

The term “supply-side economics” is used in two different but related ways. Some use the term to refer to the fact that production (supply) underlies consumption and living standards. In the long run, our income levels reflect our ability to produce goods and services that people value. Higher income levels and living standards cannot be achieved without expansion in output. Virtually all economists accept this proposition and therefore are “supply siders.”

“Supply-side economics” is also used to describe how changes in marginal tax rates influence economic activity. Supply-side economists believe that high marginal tax rates strongly discourage income, output, and the efficiency of resource use. In recent years, this latter use of the term has become the more common of the two and is thus the focus of this article.
The marginal tax rate is crucial because it affects the incentive to earn. The marginal tax rate reveals how much of one’s additional income must be turned over to the tax collector as well as how much is retained by the individual. For example, when the marginal rate is 40 percent, forty of every one hundred dollars of additional earnings must be paid in taxes, and the individual is permitted to keep only sixty dollars of his or her additional income. As marginal tax rates increase, people get to keep less of what they earn.

An increase in marginal tax rates adversely affects the output of an economy in two ways. First, the higher marginal rates reduce the payoff people derive from work and from other taxable productive activities. When people are prohibited from reaping much of what they sow, they will sow more sparingly. Thus, when marginal tax rates rise, some people—those with working spouses, for example—will opt out of the labor force. Others will decide to take more vacation time, retire earlier, or forgo overtime opportunities. Still others will decide to forgo promising but risky business opportunities. In some cases, high tax rates will even drive highly productive citizens to other countries where taxes are lower. These adjustments and others like them will shrink the effective supply of resources, and therefore will shrink output.

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Supply-Side Economics: The Concise Encyclopedia of Economics | Library of Economics and Liberty