AN ANALYSIS OF THE SUPPLY-SIDE EFFECTS OF TAX CUTS IN AN IS-LM MODEL

1 December 1979

journal article
research article
Published by University of Chicago Press in National Tax Journal

Vol. 32 (4) , 493-499
https://doi.org/10.1086/ntj41862268

Abstract

This paper introduces a new curve in the familiar IS-LM graph. The points on this curve correspond to long run equilibria in the capital and labor factor markets. A graphical analysis is developed to analyze the long run supply-side effects of tax cuts. It is demonstrated that a tax cut may reduce the equilibrium price level. Furthermore, the tax cut need not reduce the government's budget deficit (in real terms) in order to achieve this reduction in prices. It is of course possible that the supply-side effects of a tax cut will be so strong that both prices and the deficit will be reduced or so weak that prices and the deficit both increase.

Keywords

This publication has 1 reference indexed in Scilit:

CAN INCOME TAX INCREASES BE INFLATIONARY? AN EXPOSITORY NOTE
National Tax Journal, 1973