What is Supply Side Economics?

 

lowering income tax

Taxable Income

Efraim Landa is an entrepreneur that has founded Effi Enterprises to assist early-stage businesses in obtaining the funding and managerial assistance necessary to propel them into a public company in ten years or less.  Effi Enterprises understands the importance of investment and production efficiency to the success of a business and the economy as a whole.  These are the principles that underlie Supply-Side Economics.

Introduction to Supply-Side Economics

Supply-side economics is a macroeconomic theory that emphasizes the importance of increasing the efficiency of production, or supply, as the key to an economy’s potential for long term growth.  It maintains that aggregate supply constitutes the primary driving and stabilizing forces in the economy.  Focusing on alleviating barriers to higher productivity in supply, supporters of this theory advocate for lowering marginal taxes and deregulating heavily regulated industries.

History of Supply-Side Economics

In response to the failure of demand-side dominance of economic policy to stabilize the Western economy after the oil crisis of 1973, supply-side economics emerged with emphasis on production as the key to economic prosperity.  The theory was heavily influenced by ideas of Arthur Laffer, then seen in action under the Kennedy administration, and was fully endorsed and implemented by President Ronald Reagan’s administration in the 1980s.  During this time, it acquired the nickname “trickle-down” economics.  Reagan called for a return to constitutional limited-government along with a free-market economic policy that included reducing personal income tax rates, deregulating key industries like energy, financial services, and transportation, and expanding free trade.  President George W. Bush also embraced supply-side tax cuts in 2003.

How Does Supply-Side Economics Work?

In supply-side economics, supply creates its own demand.  An economy must first produce and generate income to be able to demand.  In increase in supply will result in an increase in output and the lowering of prices on consumer goods.  When coupled with lower marginal tax rates, economic growth can be achieved.  When taxes are cut, individuals and businesses have more money to invest and spend.  Not only does this lead to increased spending on goods by consumers, but also individuals and corporations now have the ability to expand their businesses and hire more employees, creating jobs for the unemployed.  By providing incentives for people to produce and supply goods and services, economic growth can be created.  Proponents of supply-side economics believe increased private investment brings higher productivity and can lower costs to consumers.  Crucial to this economic theory is the expansion of free trade and free movement of capital.  In order to experience economic growth, barriers to international trade and obstacles to the highest efficiency of productivity need to be erased.

Policy Recommendations of Supply-Side Economics

Supporters of supply-side economics maintain policy recommendations of lowering marginal tax rates, decreasing intervention in the free market, and little interference in the currency circulation from the Federal Reserve.  High marginal tax rates only serve to encourage investors to be more conservative and to seek tax shelters or other forms of tax avoidance.  When taxes are low, corporations and individuals are aggressive with investing and can afford to take greater risks.  In the long run, the government can make up for loses in total revenue from tax cuts because the lower rates will be offset by a higher tax revenue base due to greater employment and productivity. Supply-side economics strongly supports small business startups and in an economy with lower tax rates, investors and venture capital firms such as Effi Enterprises can afford risky financial investments that can lead to exponential growth.

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About Efraim Landa

My name is Efraim Landa I am an entrepreneur and an expert in venture capital. I am the co founder of Effi Enterprises, a venture capital firm as well as the co founder and CEO of Gluco Vista, a company that is in the process of developing a non invasive glucose meter for those with diabetes.

Posted on April 17, 2013, in Business financing, economics, Finance, Money, personal finance, the economy and tagged , , . Bookmark the permalink. Leave a comment.

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