Supply-Side Economics
The theory that cutting taxes on the wealthy grows the economy for everyone — and forty-five years of evidence on whether it does.
The short version
- Supply-side economics holds that reducing taxes on businesses and high-income individuals stimulates investment, economic growth, and job creation in ways that ultimately benefit everyone — a concept popularized as 'trickle-down economics.'
- The theory predicted that the Reagan tax cuts of 1981 and similar cuts since would pay for themselves through increased economic growth; they have not — federal debt has grown substantially following every major supply-side tax cut.
- Kansas became an inadvertent controlled experiment in supply-side theory between 2012 and 2017: its governor implemented the largest state tax cut in U.S. history, revenue collapsed, public services were gutted, and economic growth underperformed neighboring states before the cuts were reversed.
- The empirical consensus among economists — including many on the right — is that the extreme version of supply-side theory (tax cuts pay for themselves) is false; the debate is about the magnitude of growth effects, not their existence.
What it is
Supply-side economics is a macroeconomic theory that emphasizes the productive capacity of an economy — its supply side — rather than consumer demand. The central claim is that economic growth is best promoted by reducing barriers to production: cutting marginal tax rates on income, capital gains, and corporations; deregulating industries; and reducing government spending and intervention. Proponents argue that when taxes on high earners and businesses fall, the retained capital is invested productively — in expansion, new equipment, research, and hiring — generating economic activity and job creation that benefits workers at all income levels. This transmission mechanism — benefits flowing from tax cuts for the wealthy downward through investment and employment to lower-income workers — is the 'trickle-down' formulation that supply-siders generally reject as a caricature, even as they endorse the underlying theory.
Supply-side economics entered mainstream U.S. policy through a combination of academic work and political advocacy. Economist Robert Mundell at Columbia, Arthur Laffer at the University of Chicago and later USC, and journalist Jude Wanniski developed the intellectual framework in the 1970s. The Laffer Curve — the relationship between tax rates and tax revenue, which must peak somewhere between 0% and 100% — became the theoretical centerpiece: if tax rates are above the revenue-maximizing point, cutting them could increase revenue by stimulating enough additional economic activity. Arthur Laffer reportedly sketched the curve on a napkin during a 1974 dinner with Dick Cheney and Donald Rumsfeld; the napkin story, whether true or apocryphal, captures how quickly an academic idea became political currency. Ronald Reagan's 1980 campaign adopted supply-side economics as its economic platform, and the Economic Recovery Tax Act of 1981 — cutting the top marginal income tax rate from 70% to 50% (and eventually to 28% by 1988) — was the first large-scale supply-side policy experiment.
The concept of tax cuts paying for themselves through increased economic growth — the strong version of the Laffer Curve argument — requires that the economy be operating at tax rates above the revenue-maximizing point. Whether the U.S. economy has ever been at such rates is an empirical question, and the empirical answer among economists across the ideological spectrum is that it has not been — at least not for overall income taxes. The top marginal rate in the U.S. fell from 91% in the early 1960s to 37% today; over that range, economic theory and evidence suggest rates have generally moved toward, not away from, the revenue-maximizing point. The dynamic scoring models used by supply-side advocates to project growth effects from tax cuts have consistently overestimated the resulting growth in ways that non-partisan analyses have documented after the fact.
Supply-side economics should be distinguished from more moderate claims about taxation and growth that command broad economic agreement. Most economists agree that very high marginal tax rates can reduce work and investment at the margin; that capital gains taxes affect the timing of asset sales; that corporate taxes are partially borne by workers through effects on capital formation; and that tax policy design affects economic efficiency. These are calibration questions about where rates should be set to balance revenue needs, equity, and efficiency. They are different from the strong supply-side claim that tax cuts at current rate levels pay for themselves through growth, a claim that the evidence has repeatedly failed to support.
Why it matters
The empirical record of supply-side tax cuts in the United States is now substantial enough to evaluate. The Reagan tax cuts of 1981 were followed by the largest peacetime deficits in American history to that point — Reagan tripled the national debt during his two terms, from approximately $994 billion to $2.9 trillion. Economic growth in the 1980s was strong but driven in part by massive deficit spending and a Federal Reserve that cut rates aggressively from their Volcker-era highs; separating the supply-side effect from these other factors is methodologically difficult. The George W. Bush tax cuts of 2001 and 2003 were projected by supporters to lead to budget surpluses; instead, combined with the Iraq and Afghanistan wars, they produced the largest peacetime deficits since Reagan. The Tax Cuts and Jobs Act of 2017 was projected by the Trump administration to generate growth sufficient to keep deficits flat; the Congressional Budget Office projected it would add $1.9 trillion to the deficit over ten years; actual results have been consistent with the CBO projection.
The Kansas experiment between 2012 and 2017 offers the clearest recent test of supply-side theory at the state level. Governor Sam Brownback, working with Arthur Laffer as an advisor, implemented what he called a 'real live experiment' in supply-side economics: eliminating state income taxes on business income entirely and cutting individual income tax rates sharply. Laffer predicted robust economic growth. What happened instead: state revenues fell by hundreds of millions of dollars annually, producing successive budget shortfalls. The legislature gutted funding for schools, roads, and social services. Economic growth in Kansas significantly underperformed neighboring states and the national average. In 2017, the Republican-controlled state legislature overrode Brownback's veto to repeal most of the cuts and restore tax rates — a rare legislative reversal of a governor's signature initiative by his own party. The experiment is now taught in economics courses as a cautionary case study.
Supply-side economics has had asymmetric political consequences for debt and spending. The political logic of supply-side theory has made it easy to cut taxes and politically difficult to cut spending to match — because the theory predicts the spending cuts are unnecessary (growth will pay for everything). The result has been that supply-side tax cuts have reliably increased deficits, while the spending reductions that supply-side advocates also favor have been politically unsustainable when the public understands concretely what they entail. Dick Cheney's reported statement in 2002 — 'Reagan proved deficits don't matter' — captures how the political success of supply-side rhetoric decoupled tax policy from fiscal responsibility in Republican governance. The national debt has grown under every Republican president since Reagan and declined or grown more slowly under Clinton and Obama, a pattern inconsistent with the claim that supply-side governance is fiscally conservative.
The distributional consequences of supply-side tax policy have been documented extensively and are stark. Federal income tax cuts weighted toward upper-income households — which is what supply-side tax cuts structurally are, because upper-income households pay higher rates and thus benefit more from rate reductions — have contributed to the acceleration of income and wealth inequality since the 1980s. The share of pre-tax income going to the top 1% fell from roughly 12% in the late 1970s to about 10% in 1980, then rose steadily to approximately 20% by the 2000s before the financial crisis. The economic theory predicts this pre-tax divergence would be offset by the growth benefits flowing to lower-income workers; the evidence suggests the offset has been partial at best. Economist Emmanuel Saez and his collaborators have documented that income growth in the decades since the supply-side turn has been heavily concentrated at the top of the distribution, with median worker incomes growing far more slowly than productivity.