Discuss the meaning of the phrase of supply-side economics, discussing

Discuss the meaning of the phrase of supply-side economics, discussing how it is similar and different from the traditional classical model. Make sure to discuss the role of the Laffer curve in supply-side theory.

What will be an ideal response?

ANSWER

Classical economists did not pay much attention to the supply-side effects of changes in income tax rates because, at that time, the marginal income tax rate was very low and pertained only to the relatively wealthy. On the other hand, Supply-side economics focuses almost exclusively on the negative supply effects of changes in tax rates. The Laffer curve says that past a certain level, higher marginal tax rates create such a large disincentive to work and investment that production would begin to significantly fall. This leads to a fall in tax revenue as marginal tax rates rise.