For years it was a punch line. Now the Laffer Curve — which purports to show that tax cuts can increase revenue — is making a kind of comeback. This time around, it is providing more of an intellectual than a policy framework, but that is a useful role as some states and city governments appear eager to test the proposition that no tax is too high.
Famously (or infamously?) drawn on a napkin by the economist Art Laffer in 1974, the Laffer Curve is a concave shape plotting the relationship between tax revenues and the tax rate. It shows that at a certain point, tax cuts lead to greater revenue. When the tax rate is too high, people work less, thus reducing tax revenue.
The Laffer Curve was part of the justification for the tax reform of the 1980s, which lowered rates and got rid of many deductions. But then a funny thing happened: Revenue fell after the tax cuts. There are plenty of rationales for cutting taxes, such as efficiency or fairness, but more revenue did not appear to be one of them.
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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