Question

Explain how tax cuts affect the economy from a Supply-Side economist’s perspective.

Answer 1

According to the supply side view when there is a tax cut, workers experience a rise in their disposable income. This also implies that that take home wages increases. This encourages workers to put more effort in their work so that they can earn more and have a greater after tax income. When all the workers increase their labour hours then this increases production so that supply increases in the short run. In this manner short run aggregate supply curve shifts to the right due to tax cut. Inflation is reduced and real GDP is increased.