GLOBAL FINANCE
84
GLOBAL FINANCE
100
0
Ta
x
R
a
t
e
(
%
)
Tax Revenues
B
A
Fig. 8.1
The Laffer Curve a depiction of the idea that the size of the total
tax revenues varies with both the level of taxation and the consequent level of
willingness to work.
except for one year, tax revenues rose throughout the 1980s. Was this
a vindication of supply-side economics?
Some people think not. The reduction in inflation may have been
a delayed effect of the recession of 1980 and 1981. Tax cuts may
encourage people to feel that their financial needs are being met more
easily, so they can afford to work less rather than more in fact, some
studies in the 1980s found that the increase in labor supply was quite
small in the US.
Reaganomics claimed that the government could increase expen-
diture despite the tax cuts and still balance the budget. This did not
occur; the US government deficit increased by almost $2trn between
1983 and 1992.
The recovery that began in 1982 might be accounted for by the
effect that supply-side measures had on demand, and also because the
Fed increased the money supply by 20% between 1981 and 1983 and
interest rates dropped dramatically.
ALAN GREENSPAN
Alan Greenspan is the chairman of the Federal Reserve Board (the Fed),
the central bank of the USA. Most famous for his 1996 remark about the
