Reagan unleashed a 37-year bulldozing of middle/working/poor progress.
The main argument using the Laffer curve to cut taxes is as follows:
1. If the income tax rate were 0 percent, the government gets zero revenue because it isn't collecting any money.
2. If the income tax rate were 100 percent, nobody has an incentive to work in taxable jobs[1] because nobody gets to actually keep any money they earn. So nobody works in taxable jobs. When nobody works in taxable jobs, nobody has taxable income to tax. Therefore, the government gets zero revenue in this instance also.
3. Given 1 and 2, the government revenue is maximized at some tax rate between 0 and 100 percent. The Laffer curve is a plot of government revenue as a function of tax rate. It is zero at 0% and 100% tax rates, and it looks something like a parabola (you should know this from mathematics class). Where the maximum occurs is a wild-ass guess. (Or, one could try to use some method like binary bisection or graphing means to find the maximum. We've done this with interesting results, see below.)
4. Given 3, taxes should therefore be slashed.
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Premise 2 is easily challenged. Obviously a country can't have a 100% tax rate; if nobody works in a taxable job, this would mean nobody is working any jobs other than subsistence farming, thereby setting the country back by roughly ten thousand years (though it could also be held to reflect an economy where all wealth distribution was managed directly by the government). However, even if the top-earner tax rate was very high (say, 90%), people would still work. After all, keeping 10 percent of your wages is better than earning nothing at all. Indeed, the highest income tax bracket rate in the United States was close to 90% during World War II, and everything seemed to work just fine then (albeit, this was for those making $100K then, before inflation[2]).
Point 4 above does not necessarily follow from the prior points. Assuming the Laffer curve's assumptions are correct, cutting taxes would only increase government revenue if the current tax rate is greater than the "optimal" tax rate (where "optimal" means the rate that maximizes government revenue, not necessarily the optimal tax rate for the overall economy and society). If the current tax rate is on the wrong (left) side of the maximum in the Laffer curve, cutting taxes decreases revenue, which counteracts the whole point of mentioning the curve in the first place. To justify cutting taxes on the basis of raising revenue, the Laffer curve's proponents have to, first, define the "ideal" tax rate that maximizes revenue (which requires doing your math homework); and, secondly showing that the current tax rate is on the high side of the "optimal" (as defined above) tax rate. You can't just shout "Laffer curve!" decrease taxes, and expect everything to be great. (And that's what Saint Ronnie actually did.)
Doing the actual work required shows the Laffer curve calls to increase taxes right now. One study of the United States between 1959 and 1991 placed the revenue-maximizing tax rate (the point at which another tax rate increase would decrease tax revenue) at between 32.67% and 35.21%.[3] In 1991 the "average" tax rate was 19.58%. The US is currently on the lower side of the maximum tax rate predicted by Laffer's curve. Hsing also concluded that Reagan's tax cuts reduced revenue, since the average tax rate at the time was only 20.41%. This means Laffer's curve has completely backfired in what it was said it was supposed to do (increase government revenue).
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