Arthur Laffer argues that a reduction in tax rates can increase the supply of labor and capital, hence of national output and the amount of tax revenue the government collects. In order for tax revenue to increase, however, a one per cent reduction in tax rates must release enough labor and capital to result in a more than one per cent increase in national output.

Peter Gutmann argues that high tax rates not only reduce the supply of labor and capital, but also cause economic activity to shift from the legal to the subterranean economy. In order for a reduction in tax rates to increase the amount of tax revenue collected in the legal economy, however, a one per cent reduction in tax rates must result in a more than one per cent increase in legal output.

In each case, tax revenue is likely to increase only at rates of taxation well in excess of those experienced currently in the U.S. If a shift from the subterranean to the legal economy and an increase in the supply of labor and capital are combined, however, a one per cent reduction in tax rates could result in a more than one per cent increase in national output, even at present rates of taxation. Politicians may yet be able to advocate tax reduction and a balanced budget at one and the same time.