Endogenous growth and the dynamic Laffer curve

Advocates of supply-side economics contend that at least some of the economies are on the negatively sloped portion of the well-publicized Laffer curve, so that a lowering of tax rates will increase tax revenue and, thereby, reduce fiscal deficits in the long run. The purpose of this paper is to provide a simple but fundamentally correct framework - in the context of a convex model of endogenous growth - within which this contention may be analysed. The central finding is that; in the Group of Seven (G7), the issue of the response of deficits to tax rate changes cannot be resolved unless the crowding-out and crowding-in aspects of government intervention are taken into account.