A graphic representation of the theory of Taxable Income Elasticity is what Laffer Curve is.
It was more proposed by Jude Wanniski within 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 shows what the government is able to charge in tax debt before revenue begins going down.
Math involved in the laffer curve
This is how the Laffer curve works for those of us who don’t have degrees in theoretical economics or math. The theory of economics states taxpayers change behavior depending on taxes. When the government doesn’t tax, the people are more likely to earn as much money as they can while they government gets nothing. At 100 percent tax, the government will also receive no money, because there is no motivation for taxpayers to earn money. Therefore, the ideal tax rate for government is somewhere between percent and 100 percent.
The Laffer curve would suggest this is somewhere around 50 percent even though we all know that isn’t an ideal tax rate. Many studies say the perfect tax is someone around 30 or 40 percent
US policy being affected by the Laffer Curve
The Laffer Curve was first proposed in the 1970s. US tax policies tend to make use of the underlying theory. 1924 was when Andrew Mellon first made the argument that lowering taxes might really bring in more money. 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 within the 1980s and the Bush Tax Cuts of the early 2000s also had a very heavy basis within the Laffer Curve theory.
Laffer Curve arguments
Like most economic theories, the Laffer Curve does not exist in an economic bubble. Income tax is designed 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 practices also complicate how the Laffer Curve would be calculated.
