Which of These Is a Supply-Side Fiscal Policy?

Supply-side fiscal policy aims to boost economic growth by encouraging production, investment, and job creation. Instead of increasing demand through government spending, these policies focus on making it easier and more profitable for businesses and individuals to produce goods and services. Proponents argue that reducing barriers like high taxes or restrictive regulations leads to greater efficiency, innovation, and overall prosperity.

Lower Marginal Tax Rates

Lowering marginal tax rates increases incentives for work, investment, and entrepreneurship. The marginal tax rate applies to an individual’s or business’s next dollar of income. When these rates drop, individuals retain more earnings, encouraging labor force participation and productivity. For businesses, lower tax rates on higher earnings promote expansion, hiring, and reinvestment.

The United States has implemented marginal tax rate reductions multiple times. The Tax Cuts and Jobs Act (TCJA) of 2017 lowered the top individual income tax rate from 39.6% to 37%, aiming to provide relief to high earners and small business owners. The Reagan-era tax cuts in the 1980s reduced the top rate from 70% to 28% over several years. Proponents argue these reductions can spur economic growth and potentially increase overall tax revenue, a concept known as the Laffer Curve.

States also adjust tax rates to attract businesses and workers. Texas and Florida, which have no state income tax, often see population and business growth compared to high-tax states like California and New York. North Carolina has gradually lowered its income tax rates to remain competitive, influencing migration patterns, job creation, and economic performance.

Corporate Tax Reductions

Lowering corporate tax rates stimulates business investment, increases global competitiveness, and encourages domestic job creation. By reducing the tax burden on corporations, policymakers aim to free up capital for expansion, research and development, and higher wages. Supporters argue that lower corporate taxes make it more attractive for companies to operate domestically rather than shifting profits or headquarters to lower-tax jurisdictions.

One of the most significant corporate tax reductions in recent U.S. history was the TCJA of 2017, which lowered the federal corporate tax rate from 35% to 21%. Before this change, the U.S. had one of the highest corporate tax rates among developed nations. Countries like Ireland, with a 12.5% corporate tax rate, have long drawn multinational corporations seeking a more favorable tax environment. The TCJA also introduced a territorial tax system, allowing U.S. companies to repatriate foreign earnings without facing additional domestic taxation.

States also compete on corporate tax policy. North Carolina reduced its corporate tax rate to 2.5%, the lowest among states that levy such a tax, enhancing its appeal to businesses. In contrast, California’s 8.84% corporate tax rate has contributed to companies relocating to lower-tax states.

Corporate tax reductions also affect shareholder returns. Lower taxes can lead to increased dividends and stock buybacks. Following the TCJA, many large corporations used tax savings to repurchase shares, boosting stock prices. Critics argue that such policies disproportionately benefit shareholders over workers, but some companies, including Apple and Walmart, announced employee bonuses and wage hikes after the tax cuts.

Capital Gains Adjustments

Capital gains taxes apply when an asset is sold for more than its purchase price. Short-term capital gains—profits from assets held for one year or less—are taxed as ordinary income, while long-term capital gains benefit from lower tax rates, which in 2024 range from 0% to 20%, depending on taxable income.

One proposed policy change involves indexing capital gains for inflation, preventing investors from paying taxes on gains resulting purely from currency devaluation rather than real appreciation. Without this adjustment, an asset purchased decades ago may appear to have a substantial gain, even if its purchasing power remains unchanged.

Exemptions and rate reductions for specific asset classes also shape investment decisions. The Qualified Small Business Stock (QSBS) exemption under Section 1202 of the Internal Revenue Code allows certain investors to exclude up to 100% of capital gains from the sale of eligible small business shares if held for at least five years. This provision incentivizes entrepreneurship by reducing the tax burden on startup investors, particularly in industries like technology and biotechnology.

Investment Tax Credits

Investment tax credits (ITCs) reduce tax liability in exchange for qualifying expenditures, encouraging businesses to allocate capital toward specific activities. Unlike deductions, which lower taxable income, ITCs directly offset the amount of tax owed. These credits are commonly used to promote infrastructure development, renewable energy adoption, and technological innovation.

One widely used ITC in the U.S. is the federal Investment Tax Credit for renewable energy projects, codified under Section 48 of the Internal Revenue Code. This credit allows businesses to claim a percentage of eligible project costs, such as solar panel installations and wind turbine construction. The Inflation Reduction Act of 2022 extended and modified these incentives, introducing bonus credits for projects meeting domestic manufacturing or prevailing wage requirements. By lowering the effective cost of capital-intensive projects, these credits accelerate deployment and encourage private sector participation.

Accelerated Depreciation Schedules

Depreciation rules influence how businesses allocate capital by determining the speed at which they can recover costs for tax purposes. Accelerated depreciation schedules allow companies to deduct a larger portion of an asset’s cost in the early years of its useful life, reducing taxable income and improving cash flow. This policy encourages investment in equipment, machinery, and infrastructure by making capital expenditures more financially viable. Unlike straight-line depreciation, which spreads deductions evenly over an asset’s lifespan, accelerated methods front-load deductions, providing immediate tax benefits.

Bonus depreciation is one of the most impactful provisions in this area, permitting businesses to deduct a significant percentage of an asset’s cost in the year it is placed in service. The TCJA temporarily increased bonus depreciation to 100% for qualified property acquired and placed in service between 2018 and 2022, with a phasedown beginning in 2023. This provision applies to tangible assets like manufacturing equipment, vehicles, and computers but excludes real estate.

Section 179 expensing is another mechanism that allows businesses to deduct the full cost of qualifying assets, subject to annual limits. In 2024, the Section 179 deduction cap stands at $1.22 million, with a phase-out beginning at $3.05 million in total equipment purchases. These policies provide flexibility for businesses to manage tax liabilities while incentivizing reinvestment in productive assets.