Which economic approach advocates lowering taxation to stimulate production?

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

Answer: (A)

The main idea here is how tax policy affects incentives to produce. Supply-side economics argues that lowering taxes on individuals and especially on businesses reduces the cost of work and investment, encouraging more effort, production, and capital formation. When people keep more of their earnings and firms face higher after-tax profits, they’re more likely to work harder, invest in equipment and technology, and hire more workers. This boost in productive activity is claimed to expand the economy’s overall output and, in theory, broaden the tax base even at lower rates.

Laissez-faire is a broader philosophy of minimal government intervention and free markets, but it doesn’t specify lowering taxes to stimulate production as its sole or main tool. The welfare state emphasizes redistribution and public programs funded by taxes, which is the opposite direction from cutting taxes to spur production. COLAs adjust wages for inflation, not policy designed to boost productive output.