The Laffer Curve is a representation of the theory of Taxable income elasticity in a graphic form.
It was more proposed by Jude Wanniski in the 1970s, yet it is nevertheless 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 cash it can charge in tax debt before revenue starts going down.
The math behind the Laffer Curve
For those of us who do not have degrees in math or theoretical economics, here is how the Laffer Curve works. The theory of economics states taxpayers change behavior based on taxes. At percent tax, tax payers are motivated to earn numerous money while the government will get no money. At 100 percent tax, the government will even receive no cash, because there is no motivation for taxpayers to earn cash. Therefore, the perfect tax rate for government is somewhere between percent and 100 percent.
On the Laffer Curve this is usually someplace around 50 percent even though that would not be the ideal tax rate. Many studies say the ideal tax is someone around 30 or 40 percent
The Laffer Curve affecting US policy
The Laffer Curve was first proposed 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. The income tax bracket at the top was reduced from 73% to 24% between 1921 and 1929.
Right after doing that, the tax coming in changed from $ 719 million to $ 1 billion. Reganomics in the 1980s and the Tax Cuts Bush implemented within the 2000s had a heavy basis in the Laffer Curve theory.
Laffer Curve arguments
The Laffer curve doesn’t exist in an economic bubble like most economic theories. Income tax is designed to be a short term loan from the taxpayers to the government to help make use of the economy of scale. Historians are quick to point out that countries like Russia have a near 100 tax rate and nevertheless have a working economy. Progressive taxation practices also complicate how the Laffer Curve would be calculated.
