Laffer Curve.
What Is the Laffer Curve?
The Laffer Curve is based on a theory by supply-side economist Arthur Laffer. Created in 1974, it visually shows the relationship between tax rates and the amount of tax revenue collected by governments.
The curve is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue.
KEY TAKEAWAYS
- American economist Arthur Laffer developed a bell-curve analysis in 1974 known as the Laffer Curve.
- The Laffer Curve shows the relationship between tax rates and total tax revenue.
- The Laffer Curve states that total tax revenue is most likely not maximize when tax rates are at 100%, as this disincentives workers from earning wages.
- The Laffer Curve was used as a basis for tax cuts in the 1980s during the Reagan Administration.
- Critics argue that the Laffer curve is too simplistic and uses a single tax rate.
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Laffer Curve
Understanding the Laffer Curve
American economist Arthur Laffer developed a bell-curve analysis that plotted the relationship between changes in the government tax rate and tax receipts, known as the Laffer Curve. It suggests that taxes could be too low or too high to produce maximum revenue and both a 0% income tax rate and a 100% income tax rate generate $0 in receipts.
Arthur Laffer argued that tax cuts have two effects on the federal budget, both arithmetic and economic.
Arithmetic
The arithmetic effect is immediate and every dollar in tax cuts translates directly to one less dollar in government revenue as well as decreases the stimulative effect of government spending by exactly one dollar.
Economic
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
Image by Julie Bang © Investopedia 2019
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.
If the current tax rate is to the right of T*, lowering the tax rate will stimulate economic growth by increasing incentives to work and invest and increasing government revenue.
Blogger: By and large this works as a general principle. The higher the taxation levels - the fewer are the £s entering the Exchequer. The lower the taxes - the more monies the government collects. High taxation is the ultimate deterrent factor for entrepreneurs WHO TAKE THEIR CASH TO NATIONS WITH A LOWER TAX BURDEN.
High taxation kills growth, employment and taxes collected as well as making everybody poorer.
The leftist folly of always wanting to 'punish the wealthy' is both self-defeating and idiocy undiluted.
The trouble is now what the left-wing Tories are doing!
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