- Makes changes in AS but not AD and it determines the level of inflation, unemployment, and economic growth.
- Lower marginal tax rate induce more work this AS increases.
- Makes leisure more expensive and make work more attractive.
Supply Side Economics
- Support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transferred payment
- Ex. Unemployment compensation,
- Welfare Programs that provided disincentives to work, invest, innovate and undertake entrepreneur inventions.
Incentive to save and invest
- High Marginal Tax Rate can reduce the rewards for savings and investments
- Consumption might increase, but investment depend upon savings
- Lower Marginal Tax Rates encourage saving and investment
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