Which economic theory argues that reducing the marginal rate of taxation will promote work and investment?

Which economic theory argues that reducing the marginal rate of taxation will promote work and investment?

• A. Welfare State
• B. Laissez-faire
• C. Keynesian economics
• D. Supply-side economics

Answer: (D)

Supply-side economics holds that lowering marginal tax rates boosts incentives on the production side of the economy. When people keep more of what they earn, the after-tax payoff to work increases, so individuals may work harder or longer. Similarly, lower taxes on capital raise the after-tax return to investment, encouraging firms to invest more, expand production, and hire. The idea is that a stronger economy expands the overall tax base, potentially offsetting revenue losses and fueling further growth. Welfare-state approaches focus on redistribution and social programs, Keynesian economics emphasizes demand management through spending and stabilization policies, and laissez-faire is about minimal government intervention in markets. None centers on reducing marginal tax rates as the primary lever to spur work and investment in the same direct way.

Supply-side economics holds that lowering marginal tax rates boosts incentives on the production side of the economy. When people keep more of what they earn, the after-tax payoff to work increases, so individuals may work harder or longer. Similarly, lower taxes on capital raise the after-tax return to investment, encouraging firms to invest more, expand production, and hire. The idea is that a stronger economy expands the overall tax base, potentially offsetting revenue losses and fueling further growth.

Welfare-state approaches focus on redistribution and social programs, Keynesian economics emphasizes demand management through spending and stabilization policies, and laissez-faire is about minimal government intervention in markets. None centers on reducing marginal tax rates as the primary lever to spur work and investment in the same direct way.