Supply Side Theory – Definition

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Supply-side Theory Definition

The supply-side theory refers to an economic theory mentioning that if an economy supplies more goods and services, it would be the best way to achieve economic growth. Considering the fiscal level, the supply-side theory emphasizes on taxation and deregulation. But at the economic level, the core influencers are human capital and entrepreneurship.

A Little More on What is Supply-side Theory

As per supply-side economists, the factors like decrease in corporate income tax, drive economic growth. If companies will be paying less taxes, they will have adequate money to invest in research and development, human resources, capital, etc. which would ultimately increase the production of goods and services. Supply-side economics is also known as trickle-down economics, which means that anything that is feasible for corporate sector will flow down the economy, and offer benefits to everyone.

The Laffer Curve, devised by Arthur Laffer, has a huge influence on the supply-side theory. According to the Laffer Curve, tax receipts and federal expenditure are directly related to one another. This theory is easily visible in conservative right-wing rule that states if there is a decrease in tax revenue, it will be balanced by the rise in economic growth. Hence, minimizing tax rates can be good for economic growth and federal expenditure.

History of Supply-side Economics

President Ronald Reagan applied this theory in the 1980s for controlling price related problems that led to the recession in the initial years of the decade. Ronald reduced the tax rate as well as the corporate tax. This helped the economy in coping recession though, but increased the country’s debt.

In the year 2017, President Donald Trump regulated a tax bill, that was influenced by the supply-side theory of economics. Its emphasis is to reduce income tax as well as corporate tax with a view to achieve economic growth. The supporters of the bill said that this trickle-down approach will be helpful for Americans, while there were facts proving that the upper class will enjoy most of the tax advantages.

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