The Laffer Curve

Arthur Laffer is an economist who became very influential in the Reagan Administration. Laffer is best known for the Laffer Curve, a curve illustrating tax elasticity which asserts that in certain situations, a decrease in tax rates could result in an increase in tax revenues. In other words, tax rates affect the incentives for people to work save and invest, and therefore affect economic growth. That is not to say that tax cuts always pay for themselves, but they do not always “cost” as much in tax revenue as you might expect. For example if you cut marginal tax rates 10%, tax revenue may fall, but it will fall less than 10% and lead to more economic growth in the long term.

I could try to explain this further, but the Cato Institute’s Center for Freedom and Prosperity Foundation has put together an excellent 3-part video series explaining it.

Part 1: Understanding the Theory



Part II: Reviewing the Evidence



Part III: Dynamic Scoring



I know that Dan Mitchell used a lot of big words and may give the math phobic a headache. But if you can get through it, it will explain why Republicans who favor tax cuts are not looking to give the rich a handout. Economic growth and pro-growth policies favor everyone. It’s unfortunate that explaining this can be more difficult than arguing the rich don’t need or deserve tax cuts.