by Stephen Pate

Created on: December 17, 2009   Last Updated: December 18, 2009

Is supply-side economics correct and does lowering taxes increase a country’s economic health? No, not necessarily. This is because supply-side economics is not necessarily the same as lower taxes. Supply-side economics is an economic theory that favors lowering taxes for the top brackets of income earners. This is much different from tax cuts that target the middle-class.

Supply-side economics is a theory of macroeconomics that states economic growth can be most effectively created by giving incentives for people to produce and supply goods and services. 

By reducing taxes, specifically income taxes and capital gains taxes, producers will supply more goods which will lead to greater consumption.  This greater consumption means that tax revenue can increase because even though taxes are lower, the people are purchasing more goods.

Supply-side economics came to be known in the 1980’s under the administration of U.S. President Ronald Reagan. He signed into law across-the-board tax cuts, allowing more people to keep more of their money to spend on goods of their choosing. 

He also severely reduced the number of social programs funded by tax dollars and reduced government regulation of the economy.  These policies, known as “Reaganomics,” were enacted to counter the stagnant economy and inflation of the 1970’s.

It seemed to work. The 1980’s was a period of industrial and corporate growth for the United States. People were getting jobs and the stagflation of the ‘70s ended. However, this wasn’t necessarily because supply-side economics worked.

Instead, it was because the United States increased it’s national deficit.  During the 1980’s, the U.S. was still heavily involved in the Cold War with the U.S.S.R.  Reagan campaigned hard on a strong national defense, and so he increased defense spending.  But he couldn’t pay for that spending with tax revenue because of all the tax cuts he signed.

So he paid for it with the national debt. Reagan increased the national debt from $700 million to $3 billion by borrowing heavily domestically and from foreign nations. This shows that he cut taxes to spur consumer spending by having the U.S. government run on the largest debt a government has ever operated on. 

Reaganomics did not spur tax revenues just by cutting the taxes paid for by the top income earners; it also spurred economic

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