Before you read on: in early 1979, what was Britain's top rate of income tax on earned income?
It was 83 per cent. Supply-side economists argue that rates this high hold back work and enterprise.
- Emerged
- The United States in the 1970s
- Key figures
- Arthur Laffer, Robert Mundell, Paul Craig Roberts, Norman Ture; the journalist Jude Wanniski spread the ideas
- The name
- Spread by the journalist Jude Wanniski in the mid-1970s
- Key works
- Jude Wanniski, The Way the World Works (1978)
- Where it shaped policy
- Ronald Reagan's US tax cuts from 1981; its arguments also appear in British budgets cutting top tax rates
- Critics' label
- Trickle-down economics, a name coined by opponents, says Kent Smetters of Wharton
What it was reacting to
After 1945, Keynesian demand management, using taxes and public spending to steer total spending, guided US policy. In the 1970s inflation rose. Because tax brackets were fixed in money terms, it pushed people into higher bands even when their real income was flat.
Paul Craig Roberts, Norman Ture and Arthur Laffer argued that high marginal tax rates were a major drag on growth. Robert Mundell, an ally of the group, also backed low marginal rates.
The key ideas
Can you name the four key ideas of the school?
The share of the next pound earned that goes in tax. Supply-siders hold that high marginal rates weaken the reward for extra work, saving and investment.
Can you think of an example?
At a 75 per cent rate, a surgeon keeps 25p of each extra pound. At 50 per cent she keeps 50p.
A curve linking tax rates to revenue. A zero rate raises nothing; at very high rates, people earn and report so little that revenue falls again.
Can you think of an example?
Supply-siders argue that cutting a 70 per cent rate may cost little revenue, while cutting a 15 per cent rate loses revenue almost in step.
Removing or relaxing rules on business, such as price controls, so that firms can produce more at lower cost.
Can you think of an example?
Reagan's government eased controls on oil and gas prices and on interstate buses.
Almost every economist agrees that production drives living standards. The school makes the narrower claim that marginal tax rates strongly affect work and output.
Can you think of an example?
Spending on education and training counts as an A-level supply-side policy. The 1970s school focuses mainly on tax rates.