The Laffer Curve and the Failure of Stimulus Spending


Economic Affairs

We need an entirely new approach to regulation across the financial sector which is based on transparency, market discipline and simple and stable legal frameworks


Trade expert Sushil Mohan, in a paper published by the IEA, argues that non-tariff barriers are an important impediment to trade for less developed countries and need to be brought to the forefront of the trade debate.

Housing and Planning

Former Senior Reagan economist warns against US stimulus spending Curve2-1.pdf
Executive Summary

  • If there is a Republican administration after the November presidential elections, we can expect a significant change of policy on tax, spending and stimulus.

  • There is a rich variety of data from the USA that demonstrates that raising tax rates often reduces revenues and vice versa. This is especially so when raising taxes from the high rates that we currently have.

  • There are many examples over the last century when tax rates were reduced, economic growth increased and the proportion of the tax take from rich people increased.

  • So-called fiscal stimulus policy does not work. A stimulus has to be financed and the income effects on those benefiting from the stimulus are cancelled by the “destimulus” from those financing it.

  • To make matters worse, a fiscal stimulus will normally raise taxes – at least in the long term – and may well be used to provide benefits to those not paying taxes. This reduces work incentives, gives better off people incentives to hide income by avoidance and evasion and reduces economic growth. The better off are particular adept at finding ways not to pay taxes.

  • During George W. Bush’s last two years in office the USA had the biggest ever increase in federal government spending in peacetime – from around 21 per cent of GDP to 27.5 per cent of GDP. The Great Recession began in that period.

2012, Current Controversies No. 38

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