Supply side economics although controversial , it was supposedly to be a key development on macroeconomic policy design .Was it so ?. Most of the policies analysis and applications in the second half of the twenty century, has been a kind of solving aggregate demand problems. Keynes, Friedman, Tobin, among others XX th century economist, were all aggregate demand economist. The first two, focusing on the fiscal policy and monetary policy side respectively, of the problem. Tobin with his income policy approach, making supply side engineering.-
In the early eighties, following rational expectations macroeconomic revolution, came out Supply side economics as an alternative explanation for economic growth and market behaviour . The book “Wealth and Poverty” , (1983) by George Wilder, made popular the notion of markets driven by supply forces , as much as demand ones.
One of Its key arguments ,was about the importance of tax policies to modify incentives in the decision making process, specially labor supply and investment decision. Although there is evidence about the positive impact that lower taxes have upon economic growth in the long run (World Bank papers) ,there is not too much consensus about its short run implications .A recent paper (IMF, WP 08/7 Thomas Paap and Elòd Takâts :Tax rate cuts and tax compliance :The Laffer curve revisited, January 2008),analyzes how tax rate cuts can increase revenues. It apply the argument to Russia tax policy which cut income tax to a flat 13%, replacing a tier tax model of 12,20 and 30% previous rate. Tax exemption increases, reduced further down the tax burden. So, Personal income tax revenues grew by 46% in nominal terms , and 26% in real terms during the following year. Besides, Personal income tax(PIT) share to the GDP, increased from 2,4% up to 3,3%.Maybe it is not enough and conclusive empirical evidence, but it suggest some guidelines about microeconomic side of tax policies effects.- However, Supply side economics foundations; goes deeper than tax cuts. It says that private allocations of financial resources, get higher productivity than public allocation (Government) of the same resources, because the opportunity cost are different: Higher for the private than the public sector. Having said that, tax cuts might or might not increase revenues, because families and firms have different views about what the highest productivity of their financial resources are .Families and individuals, might save the additional resource into their pockets, such that the final impact on tax revenues, will depend upon the tax applying on saving .Business might decide to invest more, but the effect of additional investment on tax revenues ,will depend on where that investment goes to.