Laffer Curve: Explaining Taxation, Theoretically
The Laffer Curve is an graphic representation of the theory of Taxable Income Elasticity. It was more proposed by Jude Wanniski in the 1970s, yet it is still names after Arther Laffer, a supply-side economist who the work was all based off of. Translation for the rest of us: The Laffer Curve tells the government how much money it can charge in tax debt before revenue starts going down.
The math behind the Laffer Curve
For those of us who don’t have degrees in math or theoretical economics, here is how the Laffer Curve works. It is a theory of economics that states taxpayers will change their behavior based on taxes. For example, at 0 percent tax, taxpayers will be motivated to earn as much money as they can, but the government receives no money. There is no motivation to earn money if the government taxes at 100 percent making the government earn no money. This means that the tax rate needs to stay between 0 and 100 percent. Usually, this is a percentage represented on the graphic Laffer Curve as 50 percent, but that is not necessarily the ideal tax rate. Some studies have put the ideal tax rate at anywhere between 30 and 40 percent
How the Laffer Curve affects U.S. policy
The 1970s was when the Laffer curve was first proposed. The underlying theory is, however, used by US tax policies often. In 1924, Andrew Mellon made the argument that by lowering the tax rate, the government would bring in more money. The top income tax bracket was reduced from 73 percent to 24 percent between 1921 and 1929. At the same time, income tax rose from $ 719 million to $ 1 billion. Reganomics in the 1980s and the Bush Tax Cuts of the early 2000s also had a very heavy basis in the Laffer Curve theory.
Laffer Curve arguments
Like most economic theories, the Laffer Curve does not exist in an economic bubble. Income tax is only supposed to be like a small loan to the government from the taxpayers to make sure of the economy of scale. Many historians point out that at near-100 percent tax rates, countries such as Russia were able to maintain a productive economy. Progressive taxation will make it much more complicated to get calculations from the Laffer Curve.
