Business Glossary

economic theory advocating drastic tax cuts and tax credits to encourage productive investments by corporations and achieve economic targets for growth in national output and employment. Supply side economists argue the importance of lowering marginal tax rates, which they say stimulates aggregate supply encouraging suppliers to produce more, and individuals to earn more, as opposed to stimulating aggregate demand for goods and services by consumers and businesses. In other words, people will work more because they can produce more. Supply siders argue that the economic stimulus of tax cuts and tax credits will offset revenue losses from cuts in marginal tax rates. In the early 1980s, supply side economics was a politically attractive solution to the stagflation (double-digit inflation accompanied by stagnant growth) characteristic of the late 1970s. It is counter to the keynesian economics school; supply siders reject the Keynesian multiplier argument that relates tax cuts to increases in aggregate demand.