Does cutting taxes boost the economy and lead to more taxes?

Cutting taxes does not boost economic growth nor lead to more taxes being collected. The notion that it does, known as the Laffer Curve hypothesis, has been widely discredited. Late President George H.W. Bush described the hypothesis as “voodoo economics”.

The Laffer Curve – named after economist Arthur Laffer who drew his theory in the form of a graph on the back of a napkin for Dick Cheney, who would later become U.S. Vice-President and popularise the hypothesis – predicts that cutting taxes ultimately increases tax revenues by creating an explosion of economic dynamism and reduces tax avoidance.

If you plot a graph with tax rates on one axis, and tax revenues on the other, you will theoretically get a curve. At zero tax rates, you will get no revenue. At 100 per cent tax rates, the theory goes, you will also get no revenue, because nobody will do any work. In the middle is the ‘sweet spot’ of maximum revenue.

This graph’s simplicity and elegance gained wide support from many politicians and even a few economists. In the face of all the evidence that tax cuts seems to have no impact on growth, it is now regarded as a laughing stock among economists. Greg Mankiw, former chairman of George W. bush’s council of economic advisers, called its adherents “charlatans and cranks”.