Compare the common perception of how a tax rate cut affects tax revenues with economists Laffer's theory?

Answer 1

Laffer's curve (which was incidentally first drawn on a cocktail napkin) looks like a bulge. it states that when there are no taxes, as you increase the tax rate you also increase the tax revenue. However, he argued there was an apex, a point were if you continued to increase the rate, tax revenues started decreasing. He argued during the early Reagan period that the US was already beyond that apex and that, counter-intuitively, reducing the tax rate would increase tax revenues.

Answer 2

As the above answer demonstrates the Laffer curve is counter-intuitive. We expect a cut in taxes to lead to reduced tax money. However if your tax rates were high, cutting them stimulates more people to invest, or otherwise make their money grow. This growth in the economy leads to increased tax money coming in.

Actually the Reagan tax cuts helped pave the way for the eventual economic growth and budget surpluses of Clinton.

So in other words, the perception is the opposite of reality.