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.