Question

State a reason(s) why supply-side economics has not reduced income inequality?

Answer 1

Supply side economics advocates that production is the prime driver of economic growth. It focusses on policies to augment production of the economy. It also advocates that tax cuts can induce the people to save and invest more ion the economy. It largely calls for a free market with very little govt intervention which is opposite to Keynesian economics focusing on demand-side of economy.

Why Supply side economics has not reduced income inequality ?

1. THE FAULTY TRICKLE DOWN THEORY - The supply side economics rests on an important pillar i.e Trickle down effect. It assumed that the corporate tax cuts to big corporates would leave them with more income which they will save and invest back to the economy. This will create a trickle down effect and the benefit will be passed on to lower sections of society. However, this has not been true as the corporates keep on building their own wealth and their needs become insatiatble , further lowering trickle down effect. Hence, rich become more richer and poor more poorer.
2. WRONG USE OF FISCAL POLICY- Supply side economics largely advocates a fiscal policy with the tool of tax cut to higher brackets ignoring other tools such as govt spending (as it assumes very low govt intervention in market) . This caters only for the supply side/production activities and leaving the demand side unadressed. Putting more money into the hands of consumer would automatically increase production due to more demand but this aspect is ignored here . Therefore, it creates income inequalities by only catering to the income of sellers and not the buyers.