SUPPLY SIDE ECONOMICS

ALTERNATIVE TO KEYNESIANISM

RESPONSE TO THE “STAGFLATION” OF THE 1970S – BOTH HIGH INFLATION AND HIGH UNEMPLOYMENT

SOME ECONOMISTS SAID NEEDED A NEW MODEL OF THE MACROECONOMY

ELEMENTS OF SUPPLY SIDE ECONOMICS

KEYNES FOCUSED ON THE DEMAND SIDE – IMPROVING CONSUMERS’ ABILITY TO BUY

SUPPLY SIDE ECONOMICS FOCUSES ON THE SUPPLY SIDE – ON THE COST TO BUSINESSES TO PRODUCING AND HIRING

THREE ELEMENTS OF SUPPLY SIDE ECONOMICS

PURPOSE: “UNTIE” BUSINESSES SO ARE MOTIVATED TO INCREASE PRODUCTION AND HIRING

FOCUS ON: * LITIGATION * REGULATION * TAXATION

LITIGATION

FOCUS ON COSTS OF LAWSUITS

BALANCE BETWEEN PROTECTING THE CONSUMER AND ENCOURAGING “FRIVOLOUS” LAWSUITS

LAWS SHOULD CONSIDER THEIR COSTS AND BENEFITS

REGULATION

SAME IDEA – FOCUS ON THE BENEFITS AND THE COSTS OF REGULATION

“OHSA” – OCCUPATIONAL HEALTH AND SAFETY ADMINISTRATION

“SMART” REGULATIONS

TAXATION

COULD HIGH TAX RATES DISCOURAGE SO MUCH ECONOMIC ACTIVITY THAT ACTUALLY BRING IN LESS REVENUE?

TAX REVENUE = TAX RATE * TAX BASE

TAX RATE AND TAX BASE MAY BE INVERSELY RELATED

THE “LAFFER” CURVE

SHOWS RELATIONSHIP BETWEEN TAX RATE AND TAX REVENUE

LEFT PART OF CURVE – TAX REVENUES RISE AS TAX RATES RISE

BUT BEYOND A CERTAIN TAX RATE, TAX REVENUES FALL BECAUSE SO MUCH BUSINESS ACTIVITY IS DISCOURAGED

QUESTION – WHERE IS THAT TAX RATE, BEYOND WHICH, TAX REVENUES FALL?

VARIES BY THE TYPE OF TAX, BUT A COMMON FINDING IS 60% - SO TAX RATES ABOVE 60% ARE COUNTERPRODUCTIVE

NOTE: THIS DOESN’T MEAN THE TAX RATE SHOULD BE 60% - JUST THAT 60% WOULD YIELD MAXIMUM TAX REVENUES

TERMINOLOGY USED IN TAX IMPACT STUDIES

STATIC ANALYSIS – ASSUMES NO RELATIONSHIP BETWEEN TAX RATE AND TAX BASE

DYNAMIC ANALYSIS – ASSUMES A RELATIONSHIP BETWEEN TAX RATE AND TAX BASE

HOW TO MEASURE “TAX INCIDENCE”

TAX INCIDENCE: IMPACT OF TAX CHANGES FOR HOUSEHOLDS OF DIFFERENT INCOME LEVELS

ONE WAY: CHANGE IN AMOUNT OF DOLLARS PAID

SECOND WAY: CHANGE IN % OF TAX PAID

OFTEN DIFFERENT ANSWERS

AN ALTERNATIVE TAX FAVORED BY SOME “SUPPLY-SIDERS”

A BUSINESS TAX ON VALUE-ADDED

VALUE-ADDED = $ VALUE OF PRODUCT MINUS $ VALUE OF NON-LABOR INPUTS

DIFFERENT THAN PROFIT: PROFIT = $ VALUE OF PRODUCT MINUS $ VALUE OF ALL (NON-LABOR AND LABOR) INPUTS

SOME WANT TO REPLACE INCOME TAXES (INDIVIDUAL AND CORPORATE) WITH THIS

MIS-USE OF SUPPLY SIDE ECONOMICS

SOME WANT TO CLAIM TAX REVENUES RISE EVERY TIME TAX RATES ARE REDUCED

“CAKE AND EAT IT TOO”

ONLY HAPPENS IF BEGINNING RATE IS ABOVE THE RATE FOR MAXIMUM REVENUE

AGREEMENTS ABOUT SUPPLY-SIDE ECONOMICS

THAT TAX RATES DO IMPACT ECONOMIC GROWTH

THAT TAX RATES CAN BE “TOO HIGH” – MEANING THEY RESULT IN LESS REVENUE THAN WITH LOWER RATES

THAT BOTH THE ECONOMIC BENEFITS AND COSTS OF LITIGATION AND REGULATION SHOULD BE CONSIDERED

BUT DISAGREEMENTS ABOUT SUPPLY SIDE ECONOMICS

WHAT IS THE MAXIMUM RATE?

HOW TO MEASURE BENEFITS AND COSTS

ACCOUNTING FOR THE BENEFICIAL IMPACTS OF GOVERNMENT SPENDING