Supply side economics has as its foundation that individuals are rational and incentives and disincentives matter and affect behaviour on the margin. Out of this arose the famous Laffer curve.
The Laffer curve simply makes sense. At a 0% tax rate the government has no revenue. If tax rates rise, government revenue rises but only to a certain point. Once that point is reached, increases in tax rates actually reduce government revenue. At a 100% tax rate the government has no revenue. Who would work if after-tax income is $0? The Laffer curve states that at high (marginal) tax rates, a reduction in the tax rate actually increases government revenue.
Why? Taxes are a disincentive to earn employment income (or interest income, or dividends, or capital gains). Lower the disincentive to earn income and you get more people who want earn income (work). Lower the disincentive to invest and you get more business, savings (earning interest income), and investment. The two add up to a greater desire to work and a greater demand for workers (more people working harder and more people working).
The criticism about supply side economics is that it is tax cuts for the rich and that this creates a greater inequity between the rich and the poor. The response is ask a poor person what they want, greater equality or more money, and they rationally choose more money every time.
Every time it has been tried (both Kennedy and Reagan slashed taxes, Ireland, New Zealand,…) it has worked. “Worked” is defined as an increase in government revenue after tax cuts. With Ontario’s high marginal tax rates (46% federal and provincial combined rate on income over $126,000), Ontario is a prime candidate for a supply side tax cut. Let's eat the free lunch.
Right On(tario)
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