Business Glossary

theory of economics contending that drastic reductions in tax rates will stimulate productive investment by corporations and wealthy individuals to the benefit of the entire society. Championed in the late 1970s by Professor Arthur Laffer (see laffer curve and others, the theory held that marginal tax rates had become so high (primarily as a result of big government) that major new private spending on plant, equipment, and other "engines of growth" was discouraged. Therefore, reducing the size of government, and hence its claim on earned income, would fuel economic expansion.

Supporters of the supply-side theory claimed they were vindicated in the first years of the administration of President Ronald W. Reagan, when marginal tax rates were cut just prior to a sustained economic recovery. However, members of the opposing keynesian economics school maintained that the recovery was a classic example of "demand-side" economics-growth was stimulated not by increasing the supply of goods, but by increasing consumer demand as disposable incomes rose. Also clashing with the supply-side theory were monetarist economists, who contended that the most effective way of regulating aggregate demand is for the Federal Reserve to control growth in the money supply.

theory of economics contending that drastic reductions in tax rates will stimulate productive investment by corporations and wealthy individuals to the benefit of the entire society. Championed in the late 1970s by Professor Arthur Laffer (see laffer curve and others, the theory held that marginal tax rates had become so high (primarily as a result of big government) that major new private spending on plant, equipment, and other "engines of growth" was discouraged. Therefore, reducing the size of government, and hence its claim on earned income, would fuel economic expansion.

Supporters of the supply-side theory claimed they were vindicated in the first years of the administration of President Ronald W. Reagan, when marginal tax rates were cut just prior to a sustained economic recovery. However, members of the opposing keynesian economics school maintained that the recovery was a classic example of "demand-side" economics-growth was stimulated not by increasing the supply of goods, but by increasing consumer demand as disposable incomes rose. Also clashing with the supply-side theory were monetarist economists, who contended that the most effective way of regulating aggregate demand is for the Federal Reserve to control growth in the money supply.