The Economics Book

270

TA X CUTS

CAN INCREASE

THE TAX TAKE

TAXATION AND ECONOMIC INCENTIVES

C

ommon sense tells us that

if a government wants to

raise more money to spend

on public services, it must raise

taxes, however unpopular that may

be. Likewise, cutting taxes seems to

imply cutting public services.

However, some economists have

suggested that this is not always

the case, and that cutting

taxes can result in governments

collecting more, not less, money.

This is a key idea of 1980s

“supply-side” economists. The

supply side is the part of an

economy that makes and sells

things, as opposed to the demand

side, which is the buying of goods.

IN CONTEXT

FOCUS

Economic policy

KEY THINKERS

Robert Mundell (1932– )

Arthur Laffer (1940 – )

BEFORE

1776 Adam Smith suggests

that moderate taxes might

bring in more revenue than

high ones.

1803 French economist

Jean-Baptiste Say argues

that supply creates its

own demand.

AFTER

1981 US President Ronald

Reagan cuts top-rate tax and

capital gains tax.

2003 US President George W.

Bush ignores criticism from

leading economists and

pursues a policy of tax cuts.

2012 In January the US

government deficit hits an

unprecedented $15 trillion.

If the government

takes no tax, it

receives no revenue.

If taxes are set too high,

workers are encouraged to

work less and so pay less tax

overall, so revenues decline.

Somewhere between

0 and 100 percent lies the

point where tax revenues

are at a maximum.

If the tax rate is 100 percent,

the government receives

no revenue because

no one will bother to work.

But if taxes are lowered, it

encourages workers to work

more and revenues increase.

Tax cuts can increase

the tax take.