In my latest FEE article, I clarify the legacy of Reaganomics and I correct a popular misconception about the Laffer Curve. An excerpt:
Critics like to deride the Laffer curve as “voodoo economics” by pointing to counterexamples, say of tax rate reductions that didn’t increase total revenue, or by pointing to tax rate hikes that brought in more revenue. But these possibilities were contained in the original Laffer curve itself. Specifically, if the tax rate starts below the inflection point, then a tax rate reduction will shrink receipts, while a tax rate hike will increase receipts. Laffer never drew his curve with the inflection point hovering above 1 percent, so how in the world did critics get the idea that Laffer thought “tax cuts always pay for themselves”? Did the critics think Laffer couldn’t read his own curve?
Now what Laffer did stress — and I can speak with authority here, because at his firm I had occasion to read plenty of his old papers going back to the early 1980s — is that a tax rate reduction would have a smaller impact on tax receipts than a “static” scoring analysis would indicate. So, for example, if California cut its marginal personal income tax rates across the board by one percentage point, the drop in total tax receipts would be smaller than one percent. The increase in economic activity would not only increase the base of the personal income tax, but it would also increase receipts from sales taxes, property taxes, and so on. Depending on how onerous the initial tax rate was, it was even theoretically possible that the drop in revenue would be negative — meaning that total tax receipts would actually increase — but that was never a blanket prediction of the Laffer approach.