One
major criticism of fiscal policy is that it ignores the supply side of the economy. One argument is that raising taxes to reduce
Aggregate Demand will have a disincentive effect on workers and will affect the level of aggregate supply in the economy as a result. If
income tax is raised then the reward for work is reduced and fewer workers may offer themselves for work.
As a result, the AS curve may shift to the left as firms find themselves unable to produce the same output as before because they have fewer workers to help them produce goods and services. It has been argued in recent years that tax rates should be kept down, even if this not what managing the level of AD requires, because it encourages people to supply themselves for work. So fiscal policy may conflict with policies aimed at increasing incentives in the economy.