A Serious Take on the Laffer Curve’s Tax Policy Applications

The Laffer curve has helped to shape U.S. tax policy over the past five decades. That said, it’s now time to update this controversial, but influential model to address 21st Century realities in a way that helps bring about better tax policies in an increasingly digital economy.

That’s the argument – a timely and compelling one, to be sure – that Vertex Principal Economist and Tax Policy Advisor George Salis offers up in a new Tax Notes International article. George’s reassessment of the Laffer Curve comes during a year in which U.S. economist Arthur Laffer received the Presidential Medal of Freedom, the highest honor awarded to U.S. civilians. The award recognizes Laffer’s role in shaping economic and tax policy for the past four-plus decades, including the 2017 Tax Cuts and Jobs Act (TCJA). In addition, Dr. Laffer was also the 2019 recipient of the prominent Adam Smith Award given by the National Association for Business Economics (NABE). He is recognized for his leadership in the profession and his extensive work on Supply-Side Economics.

This influence began in 1974 when Dr. Laffer first sketched out a new economic model focused on tax policy. As George explains, “The Laffer curve maintains that there is an ideal income tax rate somewhere between 0 and 100 percent that enables governments to simultaneously lower tax rates, while raising revenues. Laffer therefore asserted that some tax cuts would pay for themselves.” But George also points to new data and research, suggesting it’s time to rethink the Laffer curve’s applicability as a tax-reduction justification amid 21st-century political, economic, and trade dynamics.

While some of this new information questions the model’s value as a tax-cut justification, George notes other research makes a stronger case for the Laffer curve to still be applied as a key consideration of prudent tax policy implementation. This is especially true when the theory is deployed to help draw new insights into relationships among tax fraud and avoidance, tax revenues collected, tax rates, cross-border differences and more.

Given that global tax policy will continue to change, particularly those concerning digital transactions, it makes sense for tax professionals to keep tabs on the underlying dynamics driving those decisions. George’s article serves as a useful primer on that count.