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

How to Create a Richly Imagined World

For someone who likes fantasy and sci-fi fiction, most of the time, a lot of people ask me about how to create a richly imagined world. Fantasy and sci-fi elements rest heavily on how an author weave the setting and the world in which the heroes dwell in, and it helps to make the novel to be imagined vividly in the readers' minds. A convincing world should be relatable, something that we can associate ourselves with. For us to be associated with a world an author created in his mind, and wrote on the pages of a book, this world has to be close to the real thing. It has to be systematic, real and alive, and very convincing. A real world has certain elements, and an author must consider them in writing a vividly imagined world: Cartography - a fantasy or sci-fi world depend heavily on geography and maps, especially if the plot requires war and the belligerents occupy so much space in the plot. A convincing world has the world separated in territories, and every part of the...
Post a Comment
Read more

Simple Machine

A simple machine is a mechanical device that changes the direction or magnitude of a force. In general, they can be defined as the simplest mechanisms that use mechanical advantage (also called leverage) to multiply force. Usually the term refers to the six classical simple machines that were defined by Renaissance scientists: Lever Wheel and axle Pulley Inclined plane Wedge Screw A simple machine uses a single applied force to do work against a single work load. Ignoring friction losses, the work done on the load is equal to the work done by the applied force. The machine can increase the amount of the output force, at the cost of a proportional decrease in the distance moved by the load. The ratio of the output to the applied force is called the mechanical advantage. Simple machines can be regarded as the elementary "building blocks" of which all more complicated machines (sometimes called compound machines) are composed. For example, wheels, levers, and pulleys are all use...
Post a Comment
Read more

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