The Laffer Curve is a representation of the theory of Taxable income elasticity in a graphic form.
It is named after Arther Laffer, a supply-side economist that had work based off of him by Jude Wanniski in the 1970s.
Every person else’s translation: The Laffer curve shows what the government is able to charge in tax debt before revenue begins going down.
Math involved in the laffer curve
For people like me who don’t have degrees in theoretical economics or math, this is how the Laffer Curve works. The theory of economics states taxpayers change behavior based on taxes. For example, at percent tax, taxpayers could be motivated to earn as much money as they can, but the government receives no cash. If the government taxed at 100 percent then they would not get any money since there would be no motivation to earn cash. Therefore, the ideal tax rate for government is someplace between percent and 100 percent.
On the Laffer Curve this is usually somewhere around 50 percent even though that wouldn’t be the ideal tax rate. Many studies say the ideal tax is someone around 30 or 40 percent
How the Laffer Curve affects U.S. policy
The Laffer curve was suggested first within the 1970s. The underlying theory is, however, used by US tax policies often. Andrew Mellon made the argument that lowering the tax rate would bring in more money in 1924. The top income tax bracket was reduced from 73 percent to 24 percent between 1921 and 1929.
In that very same time period, income tax receipts rose from $ 719 million to $ 1 billion. Reganomics within the 1980s and the Tax Cuts Bush implemented in the 2000s had a heavy basis in the Laffer Curve theory.
Arguments against the Laffer curve working
The Laffer curve doesn’t exist in an economic bubble like most economic theories. Income tax is intended to function as a short term loan from the taxpayers to the government to make use 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.
