Skip to main content

Laffer Curve

In economics, the Laffer curve, popularized by supply-side economist Arthur Laffer, illustrates a theoretical relationship between rates of taxation and the resulting levels of government's tax revenue. 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.

The Laffer 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, the maximum illustrated by the Laffer curve is a result of Rolle's theorem, which is a standard result in calculus.


One implication of the Laffer curve is that reducing or increasing tax rates beyond a certain point is counter-productive for raising further tax revenue. 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 Laffer curve for any given economy cannot be observed directly and can only be estimated; such estimates are often controversial. The New Palgrave Dictionary of Economics reports that estimates revenue-maximizing tax rates have varied widely, with a mid-range of about 70%. A 2012 poll of leading economists found none agreed that reducing the US federal income tax rate would result in higher annual tax revenue within five years. According to a 2012 study, "the US marginal top (tax) rate is far from the top of the Laffer curve."

The Laffer curve was popularized in the United States with policymakers following an afternoon meeting with the Ford administration officials Dick Cheney and Donald Rumsfeld in 1974, in which Arthur Laffer reportedly sketched the curve on a napkin to illustrate his argument. The term "Laffer curve" was coined by Jude Winniski, who was also present at the meeting. The basic concept was not new; Laffer himself notes antecedents in the writings of the 14th century social philosopher Ibn Khaldun and others.

x------x

This post is sponsored by McDonald's.

Comments

Post a Comment

Popular posts from this blog

Mariology

 Mariology is the theological study of Mary, the mother of Jesus. Mariology seeks to relate doctrine or dogma about Mary to other doctrines of the faith, such as those concerning Jesus and notions about redemption, intercession, and grace. Mariology aims to place the role of the historic Mary in the context of scripture, tradition and the teachings of the Church on Mary. In terms of social history, Mariology may be broadly defined as the study of devotion to and thinking about Mary throughout the history of Christianity.  There exist a variety of Christian (and non-Christian) views about Mary as a figure ranging from the focus on the veneration of the Blessed Virgin Mary in Roman Catholic Mariology to criticisms of "mariolatry" as a form of idolatry. The latter would include certain Protestant objections to Marian devotion. There are also more distinctive approaches to the role of Mary in Lutheran Marian theology and Anglican Marian theology. As a field of theology, the most ...
Post a Comment
Read more

Ecology

 Ecology is the study of the relationships among living organisms, including humans, and their physical environment. Ecology considers organisms at the individual, population, community, ecosystem, and biosphere level. Ecology overlaps with the closely related sciences of biogeograohy, evolutionary biology, genetics, ethology, and natural history. Ecology is the branch of biology, and is the study of abundance, biomass, and distribution of organisms in the context of the environment. It encompasses life processes, interactions and adaptations; movement of materials and energy through living communities; successional development of ecosystems; cooperation, competition, and predation with and between species; and patterns of biodiversity and its effect on ecosystem processes. Ecology has practical applications in conservation biology, wetland management, natural resource management (agroecology, agriculture, forestry, agroforestry, fisheries, mining, tourism), urban planning (urban e...
Post a Comment
Read more

Educational Measurement

 Educational measurement refers to the use of educational assessments and the analysis of such data such as scores obtained from educational tests to infer the abilities and proficiencies of students. The approaches overlap with those in psychometrics. Educational measurement is the assigning of numerals to traits such as achievement, interest, attitudes, aptitudes, intelligence, and performance. The aim of theory and practice in educational measurement is typically to measure abilities and levels of attainment by students in areas such as reading, writing, science, mathematics and so forth. Traditionally, attention focuses on whether assessments are reliable and valid. In practice, educational assessment is largely concerned with the analysis of data from educational assessments or tests. Typically, this means using total scores in assessments, whether they are multiple choice or open-ended and marked using marking rubics or guides. In technical terms, the pattern of scores by ind...
Post a Comment
Read more