What it means
The term grew out of a debate about supply-side economics, which holds that lower taxes and fewer regulations encourage people to work, save and invest more. Supporters argue that this can lift growth enough to recover some or all of the lost revenue.
Critics say the effect is usually much smaller than claimed, and they used the label voodoo economics to mock the idea. The argument is often illustrated with the Laffer curve, a theoretical diagram that shows tax revenue rising as rates increase from zero, reaching a peak, and then falling if rates become so high that people avoid, evade or stop earning.
The disagreement is not about whether such a peak exists in theory, but about where an economy currently sits relative to it. If rates are already below the peak, a cut reduces revenue.
Evidence on the question is mixed and depends on the tax, the country and the time. Cuts to very high rates may recover a large share of lost revenue, while cuts to moderate rates generally recover only a small part.
The result also depends on how the cut is designed and what else is happening in the economy. For business readers, the phrase is a reminder to test the assumptions behind any forecast.
A proposal that depends on a big, fast behavioural response should be stress-tested by asking what happens if the response is only half as large. Projections built on optimistic growth hide risk.
The label is political as well as analytical, and it is used by people on different sides. Supporters of lower taxes argue that critics underestimate how people respond to incentives, while critics argue that supporters overstate it.
A careful analyst separates the rhetoric from the numbers. Outside tax policy, the phrase now appears in many settings, such as a business plan that assumes huge growth from a small marketing spend.
In each case it is shorthand for a claim that sounds persuasive but lacks supporting evidence.
In practice
Real-world examples.
Example
A finance minister proposes cutting the corporate tax rate and claims the policy will pay for itself through faster growth. An independent budget office models the effect and finds that only about a quarter of the lost revenue would return. Critics call the claim voodoo economics.
Example
A start-up founder projects that a $20,000 advertising campaign will bring $2,000,000 in sales, because a few viral posts last month did well. The board asks for the evidence behind the conversion rate and calls the forecast voodoo economics until a test is run.
Example
A city council debates cutting a local business tax in the hope of attracting new firms. The finance team models three outcomes, from a small to a large response, and shows that the policy only breaks even in the most optimistic case, so the council adds a review clause.
Formula
Calculation
Break-even tax base = Old revenue / New tax rate
Suppose a tax applies at 40% to a base of $1,000,000,000, producing revenue of $1,000,000,000 x 40% = $400,000,000. The government cuts the rate to 32%. To collect the same $400,000,000, the base would need to grow to $400,000,000 / 0.32 = $1,250,000,000, which is growth of 25%. If the base grows only 10% to $1,100,000,000, revenue is $1,100,000,000 x 32% = $352,000,000, a shortfall of $48,000,000.Case study
Seen in the real world.
Brightwater Provincial Government is an illustrative, fictional regional authority with income tax revenue of $2,000,000,000 a year. A new administration proposed a rate cut that it promised would pay for itself within three years.
The treasury's analysts built a model with three scenarios. The proposed cut would lose $250,000,000 a year before any growth response. In the optimistic case, growth recovered 90% of the lost revenue, in the central case 40%, and in the cautious case 15%. In the central case, the cut left a gap of about $150,000,000 a year.
The cabinet adopted a smaller, phased cut with a review after two years. The fictional episode illustrates why independent modelling matters: it turned a slogan into a range of outcomes the government could plan around.
Watch out
Common mistakes.
- Assuming every tax cut pays for itself, when the evidence suggests that the amount recovered varies widely and is often partial.
- Dismissing all supply-side ideas as voodoo, when lower taxes can encourage investment and work in some circumstances.
- Treating the phrase as a technical economic term, when it began as a political insult.
Questions
People also ask.
Who coined the term?
George Bush, later the 41st US president, used it in 1980 when he was competing against Ronald Reagan for the Republican nomination.
What is the Laffer curve?
It is a theoretical curve showing that tax revenue rises with the tax rate up to a point and then falls, used in debates about whether cuts raise revenue.
Why does it matter to businesses?
Tax policy affects planning, investment and pricing, so it helps to separate evidence-based forecasts from optimistic claims.
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