18.1 Supply-side economics and tax reforms

Supply-side economics prioritizes boosting production incentives to drive growth. This approach, popularized during the Reagan era, emphasizes tax cuts, deregulation, and reduced government intervention to stimulate the economy's supply side.

Reagan's major tax reforms slashed rates across income brackets and simplified the tax code. These policies aimed to increase business investment and productivity, but also led to widening income inequality and ballooning federal deficits, sparking ongoing debates about their long-term economic impact.

Supply-Side Economics Principles and Policies

Principles of supply-side economics

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• Prioritizes boosting aggregate supply over demand stimulated economic growth through production incentives
• Laffer Curve illustrates optimal tax rate maximizes government revenue (sweet spot between 0% and 100%)
• Trickle-down theory posits benefits for high earners and businesses eventually reach lower-income groups (tax cuts, job creation)
• Advocates reduced government intervention promotes economic efficiency (deregulation, privatization)
• Monetary policy controls money supply manages inflation (interest rates, reserve requirements)

Reagan's major tax reforms

• Economic Recovery Tax Act (1981) slashed marginal tax rates across income brackets top rate dropped from 70% to 50%
• Tax Reform Act (1986) simplified tax code reduced brackets from 15 to 4 lowered top rate to 28%
• Corporate tax rate cut from 46% to 34% aimed to boost business investment
• Accelerated Cost Recovery System allowed faster depreciation of business assets increased cash flow

Economic Impact and Evaluation

Impact of supply-side policies

• GDP growth initially surged business investment and productivity increased
• Federal tax receipts decreased short-term long-term revenue effects remain debated
• Income inequality widened tax burden shifted across income groups
• Labor force participation rates rose work incentives changed due to lower marginal tax rates

Long-term effects of Reagan's reforms

• Federal budget deficits ballooned national debt increased significantly
• Tax code simplification persisted sparked ongoing flat vs. progressive tax rate debates
• Productivity and innovation trends shaped long-term economic growth patterns
• Influenced subsequent administrations' economic policies supply-side economics efficacy remains contested
• Impacted U.S. global economic competitiveness shaped international tax policy trends