Supply-side economics is a macroeconomic theory that argues economic growth can be most effectively created by investing in capital and by lowering barriers on the production of goods and services. It was started by Robert Mundell, who won the 1999 Nobel Prize for Economics, during the Ronald Reagan administration. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices; furthermore, the investment and expansion of businesses will increase the demand for employees and therefore create jobs. Typical policy recommendations of supply-side economists are lower marginal tax rates and less government regulation.
The term "supply-side economics" was thought, for some time, to have been coined by journalist Jude Wanniski in 1975, but according to Robert D. Atkinson's Supply-Side Follies, the term "supply side" ("supply-side fiscalists") was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell and Arthur Laffer.
The Laffer curve is one of the main theoretical constructs of supply-side economics. It is the idea that lowering tax rates may generate more government revenue than would otherwise be expected at the lower tax rate because moving off of a prohibitively high tax system could generate more economic activity, which would lead to increased opportunities for tax revenues. However, the Laffer curve only measures the rate of taxation, not tax incidence, which is a stronger predictor of whether a tax code change is stimulative or dampening. In addition, some studies have shown that tax cuts done in the US in the past several decades seldom recoup revenue losses and have minimal impact on GDP growth.