To evaluate the best way to stimulate the economy by supply side economists.
Explanation of Solution
Supply-siders assert that the macroeconomy is influenced by three main aspects:
- Labor supply, which is calculated by salaries and incomes following abolition of taxes.
- Saving, which is calculated by the rate of
return to invest after tax. - Business investment which is measured by the rate of return on capital investment after tax.
The idea is that personal income tax cuts trigger a rise in labor supply as people increase their work effort and working hours. Tax cuts on savings are helping people money. For this cause, supply-siders are supporting decreases in
A few supply siders favor a flat tax. A flat tax is proportional, so all companies and individuals would be paying the same tax rate. Theoretically, a truly proportional tax should improve economic productivity but it would make the tax system less progressive. This exemplifies the repeated economic trade-off between effectiveness and equity. Some experts see a flat tax as a Trojan horse intended to slash tax rates and overall tax revenues. That is why tax reforms are often intended to be neutral.
Introduction: In the 1980s, a new form of neoclassical economics became common, which was supply-side economics. Supply siders assume that after-tax exposure to that sector were driven by economic growth. Thus, people are drawn to well-paying jobs and companies are drawn to high-profit sectors. In addition, tax cuts are increasing economic growth.
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