Question

6c) Why did the experience of the 1980's following the massive Reagan tax cuts discredit supply side theory in the eyes of many economists?

Answer 1

Answer : In 1980 the reagan tax rate cuts helped the economy to come out from the phase of the recession but did not help the supply side. As we know supply side economics means that there is increase in the production which drives economic growth. Reagan cut the tax rate so that it boost an economy. But it was not happened in 1980 as there is decrease in the tax rate in US but economic growth rate cannot increase. The reasons are :

• Rate of saving had been decreased as a result people decrease savings and increases consumpation.
• Investment in business capital had not been grown.
• Decrease in investment and increase in government deficit resulted in slower economic growth.
• Large government deficit lead to increase in AD and increased in price.
• It resulted in widening the gap between rich and poor.
• Crowding out of the private investment

RESULT :These reasons shows that in 1980 the regan tax rate can resulted to disregret supply side economics. As with decrease in tax rate these all were effect in an economy. As this shows that the relation between supply side economics and decrease in tax rate did not applicable in 1980 (US)