Tax Incentives and Economic Growth

UNDER THE LABEL of "supply-side economics," the determinants of the productive capacity of the economy and policies to increase its level and growth have become major policy issues in recent years. Specifically, the current discussion reflects an increased awareness of and concern about the effects of government actions on economic incentives in the private sector.

The term supply-side economics is often used in two different senses: (1) a broad interest in the determinants of aggregate supply--the volume and quality of the capital and labor inputs and the efficiency with which they are used--and (2) a narrower focus on tax reductions as a means of increasing the supply of saving, investment, and labor. This book is primarily about supply-side economics in the broad sense: How is the productive capacity of the nation affected by government policy? What is known about the effects on growth of changes in tax and transfer programs? In the process of reviewing these issues the discussion will also examine the narrower contention of the supply-side "purists" that reductions in tax and transfer benefits will bring about very large increases in supply.

Several forces explain the increased interest in these supply-side issues at this time. First, during the 1970s the traditional policies of demand management failed to reduce inflation without causing widespread unemployment. This failure initiated a search for alternatives; policy proposals that promised to curb inflation through expanded supply rather than depressed demand were particularly attractive. Second, and of more relevance, there has been increasing doubt about the adequacy of the current rate of capital formation as a source of gains in productivity. The collapse of productivity growth threatens to still the historical trend of rising standards of living and reduces the competitiveness of U.S.

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