-Determins the level of inflation, Unemployment rates and economic growth
-supply side economist support policys that promote GDP growth by arguing that high marginal tax rates along witht he current system of transfer payments such as unemployment compensations or welfare programs, provide disensentives to save, work, innovate and undertake entrepreural ventures
-lower marginal tax rates induce more work thus causing AS to increase
-lower marginal tax rates also make leasure more expencive and work more attractive
Incentive to save & invest
1. High marginal tax rates reduce the rewards for savings and investments
2. Consumption might increase but investment depends upon savings
3. Lower marginal tax rates encourage savings and investment
Laffer curve
-theoretical relationships between tax rates and government revenue
-as tax rates increase from zero, government revenues increase from zero to some maximum level and then decline
Criticism
-research suggests that impact of tax rate on incentives to work, save, and invest are small
-tax cuts also increase demand which can fuel inflation and demand can exceed supply
-where the economy is actualy located on the curve is difficult to determine
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