Question

Both Keynes with his view of Fiscal Policy and Supply-Siders are in favor of tax cuts, but for different reasons. What is the reason that each would want a tax cut? Which makes the most sense to you? Would you consider the latest Tax Cut that Congress passed to be a Keynesian or Supply-Side Policy?  In other words, will it stimulate spending (Keynesian Theory) or worker productivity and output (Supply-Side). If you were to choose one of the policy options to implement (Fiscal Policy, Monetary Policy, or Supply-Side Policy) which would it be? Why?

Answer 1

The reason behind the tax cut of two different theories are different from each other. The Keynesian theory support the tax cut from demand side because due to tax cut there will be higher disposable income. This higher level of demand will create additional demand. This rise in aggregate demand will stimulate the economy to produce more and more output will be produced and employment generation will be created and as a economy will boost up.

On the other hand supply side economy support the tax cut because of tax cut the company will have more fund to invest and this new investment will generate more employment and create demand and at the same income tax cut will stimulate the demand. So producer will be interested to supply more and this higher supply will create employment and the demand will be generate through income tax cut and more employment.

Both are make sense but these are effective in different situations and conditions of the economy. In developed nation the supply side may be more effective but demand driven policy is effective when the economy is not in good condition and the investors are not in a position of high expectation of the future. So the theoretical sense of two different approach can be more acceptable on the basis of state of the economy.

The latest tax cut that Congress passed is a kind of supply side policy. In the supply side policy there boost up the investment through corporate tax cut. Because the company will have more fund in hand and this higher investment will create employment. This is more effective when the supplier and investors are more positive about future economic condition.

I support the Keyensian point of view more because of demand driven economy will help the all section of the employee. It does not depend on how much employment has created. If overall income generation is possible then it would help in more production. It is more useful than supply side. Because we always look for expenditure level to determine the income. The level expenditure makes more sense to earn income and produce more because of surity of matching supply and demand. Though it is a debatable issue. There is also logic in favour of supply side policy.