Rasmussen became involved with Denmark's Liberal Party at an early age, founding and leading a Young Liberals group at Vibong Cathedral School (1970–72) and eventually becoming the national chairman of this group (1974–76). In 1978 he received a masters degree in economics from the University of Århus and was elected to the Folketing (the Danish parliament) as a representative for the Liberal Party. He subsequently held various posts within the national party organization, including vice-chairman (1985–98), political affairs spokesman (1992–98), and chairman (beginning in 1998). He served as minister of taxation from 1987 to 1992 and as minister for economic affairs from 1990 to 1992.

Elected prime minister of a minority government in November 2001, Rasmussen lowered taxes and undertook major reforms in local government, welfare, and education. In the same year, the Liberal Party became the largest party in the country, a distinction long enjoyed by the Social Democrats. Following his reelection in 2005 and 2007, Rasmussen focused his efforts on education, research, and job growth. Although he was criticized for supporting the U.S.-led Iraq War (2003), he remained popular among voters. Rasmussen also published several books on economic and political topics.