The Laffer Curve is a representation of the theory of Taxable income elasticity in a graphic form.
First proposed by Jude Wanniski in the 1970s, the Laffer Curve is named after Arther Laffer, a supply-side economist who Wanniski based his work on.
Translation for the rest of us: The Laffer Curve helps the government decide how much cash they want to charge in tax debt before revenue goes down.
the Laffer Curve math
For those of us who don’t have degrees in math or theoretical economics, here is how the Laffer Curve works. The theory of economics states taxpayers change behavior depending on taxes. At percent tax, tax payers are motivated to earn a lot of money when the government will get no cash. If the government taxed at 100 percent then they wouldn’t get any cash since there would be no motivation to earn money. The perfect tax rate would then be someplace between 1 and 10 percent.
Usually, this can be a percentage represented on the graphic Laffer Curve as 50 percent, but that is not necessarily the perfect tax rate. Many studies suggest the ideal tax rate is between 30 and 40 percent
How the Laffer Curve affects U.S. policy
The Laffer curve was suggested first in the 1970s. However, U.S. taxation policies have often made use of the underlying theory. Andrew Mellon made the argument that lowering the tax rate would bring in more money in 1924. Between 1921 and 1929 the top income bracket tax was changed from 73 percent to 24 percent.
At the same time, income tax rose from $ 719 million to $ 1 billion. Reganomics within the 1980s and the Bush Tax Cuts of the early 2000s also had a very heavy basis within the Laffer Curve theory.
Arguments against the Laffer Curve
The Laffer curve doesn’t exist in an economic bubble like most economic theories. Income tax is only designed to be like a short term 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 practices also complicate how the Laffer Curve would be calculated.
