Arthur B. Laffer, an economist and sometime adviser to President Ronald Reagan, noted that when tax rates are zero, the government collects no revenue. He also noted that when tax rates are 100 percent, the same might be true: no one would work, he theorized. In between, along the curve he famously scribbled on a napkin, the amount of revenue collected first rises along with tax rates. Then, after a crucial point is passed, it falls back to zero, as it must under his theory.It turns out that the Republicans were wrong. It really was voodoo economics. The article continues.
One motivation for Mr. Reagan's tax cuts was a guess that the United States was on the right side of the curve - that is, that lowering rates would actually yield more tax revenue over all.
Early last month … the Congressional Budget Office released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates." … The author of the analysis, Ben Page, estimates how an across-the-board cut in income tax rates could generate higher levels of economic activity, potentially replacing lost tax revenue. …So much for Laffer. But as we know, freedom isn't free, no matter what the Republican's say. But then does anyone still believe that Republicans tell the truth?
The [paper] dismisses the idea that tax cuts may actually improve the government's fiscal situation. Even in his most generous scenario, only 28 percent of lost tax revenue is recouped over a 10-year period. The United States, it seems, is firmly planted on the left side of the Laffer Curve.
Recent experience corroborates this prediction. In the second quarter of 2001, just before the first of President Bush's tax cuts took effect, federal receipts from personal taxes accounted for 10.3 percent of the economy. By the end of the post-recession slump, receipts had dropped to 6.4 percent. But in the third quarter of 2005, with the economy booming, they were still under 7.5 percent - an enormous difference. In dollar terms, federal receipts from personal income taxes, at $802 billion in 2004, are still lower than they were in 1998 ($826 billion) and much lower than in 2001 ($994 billion).