What Is the Laffer Curve?
When was the Laffer curve used?
Why is the Laffer curve shifting?
When was the Laffer curve first performed?
What would happen if the Laffer curve reached 100 percent?
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Understanding the Laffer Curve - Forbes
Washington is in the midst of a vigorous debate about whether to extend the 2001 and 2003 tax cuts. There are also proposals for a permanent research and development tax credit, temporary ...
Laffer Curve: Definition and Criticisms | Indeed.com
One method some politicians use to influence their tax decisions is the Laffer curve that dates back to 1970s American politics. Learn more about the Laffer curve, its critiques and its advantages and disadvantages.
The Mythical Laffer Curve – Whistling In The Wind
Conservatives everywhere condemn the use of tax increases for fear of the Laffer Curve. This is the idea that if taxes are too high, people will lose the incentive to work and therefore revenue will actually decrease. It is most famous for its counter-intuitive argument that a tax cut could increase revenue. Unfortunately there is…
What Is the Laffer Curve?
The Laffer Curve is a theory formalized by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate the argument that sometimes cutting tax rates can result in increased total tax revenue.
When was the Laffer curve used?
The Laffer Curve was used as a basis for tax cuts in the 1980's with apparent success but criticized on practical grounds on the basis of its simplistic assumptions, and on economic grounds that increasing government revenue might not always be optimal. 1:35.
Why is the Laffer curve shifting?
Even worse, because tax policy changes are made and applied over time, the shape of the Laffer Curve could shift; policymakers could never know if an increase in tax revenue in response to a tax rate change represented a movement along the Laffer Curve toward T*, or a shift in the Laffer Curve itself, with a new T*.
When was the Laffer curve first performed?
The first presentation of the Laffer Curve was performed on a paper napkin back in 1974 when its author was speaking with senior staff members of President Gerald Ford’s administration about a proposed tax rate increase in the midst of a period of economic malaise that had engulfed the country.
What would happen if the Laffer curve reached 100 percent?
Eventually, if tax rates reached 100 percent, shown as the far right on the Laffer Curve, all people would choose not to work because everything they earned would go to the government. It's thus necessarily true that at some point in the range where tax revenue is positive, it must reach a maximum point.
What is the Laffer curve?
The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and that there is a tax rate between 0% and 100% that maximizes government tax revenue. The shape of the curve is a function of taxable income elasticity – i.e., taxable income changes in response to changes in the rate of taxation.
Why is the Laffer curve important?
Laffer presented the curve as a pedagogical device to show that in some circumstances, a reduction in tax rates will actually increase government revenue and not need to be offset by decreased government spending or increased borrowing. For a reduction in tax rates to increase revenue, the current tax rate would need to be higher than the revenue maximizing rate. In 2007, Laffer said that the curve should not be the sole basis for raising or lowering taxes.
How much did Laffer pay for Brownback?
Laffer was paid $75,000 to advise in the creation of Brownback's tax cut plan, and gave Brownback his full endorsement, stating that what Brownback was doing was "truly revolutionary.". The state, which had previously had a budget surplus, experienced a budget deficit of about $200 million in 2012.
Why do conservatives use the Laffer curve?
In the United States, conservatives have used the Laffer Curve to argue that lower taxes may increase tax revenue. However, the hypothetical maximum revenue point of the Laffer curve for any given economy cannot be observed directly and can only be estimated – such estimates are often controversial.
What is the curve of 0%?
As popularized by supply-side economist Arthur Laffer, the curve is typically represented as a graph that starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate. However, the shape of the curve is uncertain and disputed among economists. Under the assumption that the revenue is a continuous function of the rate of taxation, and that zero revenue is collected at the endpoints, Rolle's theorem states that a maximum must exist.
Who is the economist who analyzed the Laffer curve?
Economist John Quiggin distinguishes between the Laffer curve and Laffer's analysis of tax rates. According to Quiggin, the Laffer curve was "correct but unoriginal", but Laffer's analysis that the United States was on the wrong side of the Laffer curve "was original but incorrect."
Who developed the Laffer curve?
In the early 1980s, Edgar L. Feige and Robert T. McGee developed a macroeconomic model from which they derived a Laffer curve. According to the model, the shape and position of the Laffer Curve depend upon the strength of supply side effects, the progressivity of the tax system and the size of the unobserved economy.
What is the Laffer curve?
The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons.
Why do wealthy people use the Laffer curve?
The Laffer Curve is largely a tool used by wealthy people to push tax rates down , not for the good of growth or government or efficiency but because they are greedy.".
What is the Laffer curve?
Laffer Curve is a curve that describes the relationship between tax rate and amount of tax revenue government collect and shows that increasing tax rates do increase revenues for the government but only to a certain extent, after a certain level the tax income starts to decline with an increased tax rate.
How does the Laffer curve work?
Laffer curve as described portrays two effects of tax rates Effects Of Tax Rates Effective tax rate determines the average taxation rate for a corporation or an individual. For both, there is a similar formula only with variation in considering variables. The effective tax rate formula for corporation = Total tax expense / EBT read more on tax revenues namely, arithmetic effect and economical effect.
What are the drawbacks of the Laffer curve?
One of the major drawbacks is that the Laffer curve takes a simple and single rate for the analysis of tax change effects, this is quite the baseless assumption to fit in the current economic and taxation systems for most nations.
What is the economic effect of the Laffer curve?
Economical Effect. This is the controversial effect of the Laffer curve, which means that an increase or decrease in the tax rate will have a respective effect on the tax revenue because of the incentives or disincentives created to meet the work, output, and employment. One assumption this effect holds is that reducing tax rates is a boost up ...
Why is the Laffer curve important?
Lastly, the main take away of the Laffer curve is that it helps to determine the individual’s behavior to different changes in the tax structure system.
Why is the Laffer curve so controversial?
Laffer curve has been in controversy since its inception, the main reason being that the curve is too simple in its assumptions which don’t fit well in the real-world scenario.
What does the vertical line intersecting the curve at points A and B show?
The vertical line intersecting the curve at points A and B shows the symmetric nature of the curve and it proves that two different tax rates can generate the same amount of income for the government.
What is the Laffer curve?
The Laffer Curve is a tax theory suggesting an inverted-U shaped relationship between tax rates and the amount of tax revenue collected by governments. The ideal, or optimal, rate of taxation for an economy is the one that falls right at the top of the inverted-U. The theory argues if tax rates are too high they will discourage taxed activities, ...
Is the Laffer curve legitimate?
Both sides of the debate cite an extensive array of statistics, often referring to the very same events and studies. Neither side agrees with the statistics provided by the other , but both groups generally agree that the Laffer curve is legitimate. Supporters of supply-side economics argue that the economy is always positioned on the Laffer curve in a manner such that tax cuts increase revenue, whereas their counterparts argue the reverse.
Does the Laffer curve provide a numerical answer to the taxation question?
Determining the tax rate at which productivity and revenues are both maximized is the subject of great political debate, as the Laffer curve does not provide a clear numerical answer to the taxation question; it merely suggests that such a hypothetical rate does exist.
What Is the Laffer Curve?
The Laffer Curve is a theory formalized by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate the argument that sometimes cutting tax rates can result in increased total tax revenue.
When was the Laffer curve used?
The Laffer Curve was used as a basis for tax cuts in the 1980's with apparent success but criticized on practical grounds on the basis of its simplistic assumptions, and on economic grounds that increasing government revenue might not always be optimal. 1:35.
Why is the Laffer curve shifting?
Even worse, because tax policy changes are made and applied over time, the shape of the Laffer Curve could shift; policymakers could never know if an increase in tax revenue in response to a tax rate change represented a movement along the Laffer Curve toward T*, or a shift in the Laffer Curve itself, with a new T*.
When was the Laffer curve first performed?
The first presentation of the Laffer Curve was performed on a paper napkin back in 1974 when its author was speaking with senior staff members of President Gerald Ford’s administration about a proposed tax rate increase in the midst of a period of economic malaise that had engulfed the country.
What would happen if the Laffer curve reached 100 percent?
Eventually, if tax rates reached 100 percent, shown as the far right on the Laffer Curve, all people would choose not to work because everything they earned would go to the government. It's thus necessarily true that at some point in the range where tax revenue is positive, it must reach a maximum point.
What Is the Laffer Curve?
- The Laffer Curve is based on a theory by supply-side economist Arthur Laffer. Created in 1974, i…
The curve is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue. - American economist Arthur Laffer developed a bell-curve analysis in 1974 known as the Laffer C…
The Laffer Curve shows the relationship between tax rates and total tax revenue.
Understanding the Laffer Curve
- American economist Arthur Laffer developed a bell-curve analysis that plotted the relationship b…
Arthur Laffer argued that tax cuts have two effects on the federal budget, both arithmetic and economic. - The arithmetic effect is immediate and every dollar in tax cuts translates directly to one less doll…
The economic effect is longer-term and has a multiplier effect. As a tax cut increases income for taxpayers, they will spend it. The increase in demand creates more business activity, spurring an increase in production and employment.
Charting the Curve
- Tax revenue reaches an optimum point, represented by T* on the graph.
To the left of T*, an increase in tax rate raises more revenue than is lost to offsetting worker and investor behavior. Increasing rates beyond T*, however, cause people not to work as much or not at all, thereby reducing total tax revenue.
History of the Laffer Curve
- Arthur Laffer presented his ideas in 1974 to staff members of President Gerald Ford’s administr…
Laffer countered that taking more money from a business in the form of taxes, the less money it will be willing to invest and a business will find ways to protect its capital from taxation or to relocate all or a part of its operations overseas. When workers see a greater portion of their payc… - Laffer argued that this means less total revenue as tax rates rise and that the economic effects …
Laffer's findings influenced President Ronald Reagan’s economic policy known as Reaganomics, based on supply-side and trickle-down economics, resulting in one of the biggest tax cuts in history. During his time in office, annual federal government current tax receipts grew from $34…
Criticisms of the Laffer Curve
- • The Single Tax Rate. The tax system is complex and raising the rate of one tax can impact or o…
• The T* or Ideal Tax Rate Changes. The Laffer Curve sets the ideal tax rate anywhere between 0 and 100. However, this rate may change due to economic circumstances. - • Tax Cuts Required for the Rich. The Laffer curve assumes an exact T* for maximizing governm…
• Assumptions of Individuals and Businesses. The Laffer curve assumes that higher taxes result in lower revenues because corporations may leave and employees will work fewer hours. However, employees may work harder or longer for career progression. Businesses do not rely solely on th…
What Can Prevent Tax Cuts from Stimulating Economic Growth?
- Tax cuts and their effect on the economy depend on the timeline for growth, availability of an underground economy, availability of tax loopholes, and the economy's productivity level.
What Is Trickle-Down Economics?
- Arthur Laffer's idea that tax cuts could boost growth and tax revenue was quickly labeled “ trickle-down .” Both President Herbert Hoover’s stimulus efforts during the Great Depression and President Ronald Reagan's use of income tax cuts were described as "trickle-down," where tax breaks and benefits for corporations and the wealthy will trickle down to individuals and boost t…
What Is Lacking in the Laffer Curve?
- Actual numbers are missing from the curve, so the actual suggested tax rates and the percentage increase in revenue generated are missing, leaving policymakers to guess which rates work and support Laffer's theory.
The Bottom Line
- The Laffer Curve displays the relationship between tax rates and tax revenue collected by governments and is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue. Arthur Laffer claimed that tax cuts have arithmetic and economic effects on the federal budget, however, the curve assumes both a single tax rate and the behavi…
Overview
In economics, the Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of the government's tax revenue. The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, meaning that there is a tax rate between 0% and 100% that maximizes government tax revenue.
Empirical analysis
One of the conceptual uses of the Laffer curve is to determine the rate of taxation that will raise the maximum revenue (in other words, "optimizing" revenue collection). The revenue maximizing tax rate should not be confused with the optimal tax rate, which economists use to describe tax rates in a tax system that raises a given amount of revenue with the fewest distortions to th…
History
Laffer states that he did not invent the concept; citing numerous antecedents, including the Muqaddimah by 14th-century Islamic scholar Ibn Khaldun, John Maynard Keynes and Adam Smith. Andrew Mellon, Secretary of the Treasury from 1921 to 1932, articulated a similar policy idea in 1924.
Laffer's name began to be associated with the idea after an article was publish…
In US political discourse
Supply-side economics rose in popularity among Republican Party politicians from 1977 onwards. Prior to 1977, Republicans were more split on tax reduction, with some worrying that tax cuts would fuel inflation and exacerbate deficits.
Supply-side economics is a school of macroeconomic thought that argues that overall economic well-being is maximized by lowering the barriers to producing goods and services (the "Supply Si…
Theoretical issues
Supply-side economics indicates that the simple descriptions of the Laffer curve are usually intended for pedagogical purposes only and do not represent the complex economic responses to tax policy which may be observed from such viewpoints as provided by supply-side economics. Although the simplified Laffer curve is usually illustrated as a straightforward symmetrical and continu…
See also
• Deadweight loss
• Dynamic scoring
• Fiscal conservatism
• List of economics topics
• Rahn curve
External links
• Jude Wanniski, "Taxes, Revenues, and the 'Laffer Curve'", The Public Interest, Number 50, Winter 1978
• Arthur Laffer describing the Laffer Curve
• On The PBS NewsHour Solman explores the relationship between economic activity and tax rates.