Supply-side’s take on Fiscal Policy Jill Student Jack Deskoccupier Dan Intheclouds Joanie Willgraduatesoon Austrian Economics May Term 2015 Professor Hal Snarr Westminster College

Name 2 supply siders and briefly discuss their biography, life history, each’s seminal work, and whether he/she won a Noble Prize in Economics Supply-side’s take on Fiscal Policy

tax rate (percent) Tax Revenue (in trillions of $) If tax revenue is 0 when the tax rate is 0% or 100%, there is a tax rate where tax revenue reaches a maximum value. This tax rate generates $2.5 trillion in tax revenue. According to the diagram below, the optimal tax rate is 30%. Supply-side’s take on Fiscal Policy

2.5 tax revenue is $1.7 trillion tax rate (percent) Tax Revenue (in trillions of $) If the tax rate is 60%, tax revenue increases to $2.5 trillion If the tax rate is cut to 30%, Supply-side’s take on Fiscal Policy

2.5 tax revenue is $2.5 trillion tax rate (percent) Tax Revenue (in trillions of $) If the tax rate is 30%, tax revenue decreases to $1.7 trillion If the tax rate is raised to 60%, Supply-side’s take on Fiscal Policy

tax rate (percent) Tax Revenue (in trillions of $) The Laffer Curve also suggests that when tax rates are “low,” a tax cut lowers tax revenue Supply-side’s take on Fiscal Policy

Y1Y1 SRAS LRAS AD A permanent cut in the supply-side tax rate raises the incentive to earn and increases resources efficiency. SRAS and LRAS increase, which is followed by an increase in AD (Say’s Law) If the government temporarily cuts T or temporarily raises G, AD and SRAS will expands but LRAS doesn’t. resulting in inflation. PL Y0Y0 SRAS AD P 0 Over time permanent lower (competitive) taxes promote more rapid (sustainable) growth. Supply-side’s take on Fiscal Policy LRAS AD