Supply-Side Theory and Capital Investment

Abstract

In light of the evidence, supply-side theory should by now be dead and buried. According to the supply-siders, all that was needed to turn the economy around quickly was the right kind of tax relief. Their crowning achievement was, as officially titled, The Economic Recovery Tax Act of 1981. This act gave corporations an assortment of tax benefits designed to encourage expansion and improvement of productive capacity. Taxes on the income of wealthy individuals were reduced in order to swell the volume of savings. And, believe it or not, the tax reforms were supposed to get people to work harder and longer hours. All of this, it was solemnly promised, would provide the wherewithal and the incentives for an immediate burst of new investment, which in turn would set off a new and lasting prosperity. But the real world did not behave the way the supply-siders promised it would. Instead of rising, investment, production, and employment in fact kept on declining throughout 1982.

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