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Supply-side economics and the Laffer curve
1974; Reaganomics 1981· Theory or school
Experts disagreeEconomists or investors genuinely disagree.
The view that lower tax rates and lighter regulation boost work, saving and investment enough to grow the economy, sometimes paying for themselves.
See it on the Money & Finance map →How it works
At a 1974 Washington dinner with Dick Cheney and Donald Rumsfeld, economist Arthur Laffer reportedly sketched a curve on a napkin: at 0% and 100% tax rates revenue is zero, so above some rate, cuts raise revenue. Ronald Reagan's 1981 tax act cut the top income rate from 70% to 50%, and the 1986 reform to 28%. Growth was strong, but deficits widened and federal debt nearly tripled under Reagan. Similar claims accompanied the 2017 and 2025 tax laws.
Why it matters
It underlies the biggest tax debates: whether rate cuts mostly pay for themselves through growth or mostly add to the national debt.
Facts, rules and data
Congressional Budget Office and Joint Committee on Taxation scoring of the 2017 and 2025 laws found growth offsets only part of the lost revenue. The napkin story comes from Jude Wanniski and Laffer himself.
Debates and risks
Where the revenue-maximizing rate sits is disputed: Peter Diamond and Emmanuel Saez estimated about 73% for top incomes, far above current US rates; others estimate lower.
Connections (2)
▸Supply-side economics and the Laffer curve is invoked to support tax cuts like One Big Beautiful Bill Act (2025)Experts disagree
The connection
Backers argued that permanent low tax rates, full write-offs for equipment and the pass-through deduction would spur enough investment and growth to offset much of the lost revenue, the supply-side case dating to the Laffer curve. Independent scorekeepers found growth would offset only part, so this link remains debated.
When and why
Washington, 2025; the White House and Treasury Secretary Scott Bessent argued growth effects, while CBO, the Joint Committee on Taxation and private modelers published cost estimates.
How solid is the link?
CBO estimated $3.4 trillion added to deficits over 2025–2034 before interest; dynamic analyses by CBO and others found added growth offsets only part of that.
Debates and risks
Senate Republicans scored extending the expiring 2017 cuts against a 'current policy' baseline that showed little cost; economists dispute which baseline is appropriate.
▸Supply-side economics and the Laffer curve challenged the demand focus of Keynesian economics (John Maynard Keynes)Experts disagree
The connection
Keynesians focus on boosting demand in slumps. Supply-siders argued the 1970s problem was weak incentives to work, save and invest, worsened by high tax rates and by inflation pushing people into higher brackets. Cut marginal rates and regulation, they said, and output grows, so policy should target supply.
When and why
Washington, 1974–1981: Arthur Laffer, Robert Mundell, Jude Wanniski and Congressman Jack Kemp; adopted in Ronald Reagan's 1981 tax cut.
How solid is the link?
Their writings and the 1981 tax law; economists generally accept that incentives matter but find revenue effects far smaller than early claims.
Debates and risks
How much of the 1980s boom came from tax cuts versus falling inflation and the Fed's later rate cuts is debated.