The Laffer Curve Hal W Snarr The Laffer

The Laffer Curve Hal W. Snarr

The Laffer Curve describes the relationship between the tax rate and the tax revenue it generates The Laffer Curve implies there is an “optimal” tax rate, a tax rate that maximizes tax revenue. In the movie Ferris Bueller’s Day Off, economist Ben Stein’s character--Bueller’s infamous teacher--drew this curve on the white board and was discussing it as his student’s slept and drooled on their desks. The Laffer curve gets its name from economist Art Laffer even though a 14 th century Islamic scholar named Ibn Khaldun first conceived it. Legend has it that Laffer sketched it on a napkin over coffee to high level advisors to President Reagan

The Laffer Curve People will not work and firms will not produce anything if the tax no onetaxes works andthe nothing is produce, the economy rate is 100%. People pay no If income when tax rate is 0%. Hence, generates no income. Hence, Tax Revenue = 0 2. 5 Tax Revenue 2. 0 (in trillions of $) 1. 5 1. 0 0. 5 0 0 20 40 60 tax rate (percent) 80 100

The Laffer Curve If tax revenue is 0 when the tax rate is 0% or 100%, there is a tax rate where tax revenues reach a maximumvalue. According to the diagram below, the optimal tax rate is 30 30%. This tax 2. 5 trillion in tax revenue. rate generates $2. 5 Tax Revenue 2. 0 (in trillions of $) 1. 5 1. 0 0. 5 0 0 20 40 60 tax rate (percent) 80 100

The Laffer Curve tax revenue is $1. 7 increases trillion. to $2. 5 trillion. If the tax rate is 60%, cut to tax 30%, 2. 5 Tax Revenue (in trillions of $) 2. 0 1. 7 1. 5 1. 0 0. 5 0 0 20 30 40 60 60 tax rate (percent) 80 100

The Laffer Curve taxisrevenue decreases to $1. 7 trillion. revenue $2. 5 trillion. If the tax rate is 30%, raised tax to 60%, 2. 5 Tax Revenue (in trillions of $) 2. 0 1. 7 1. 5 1. 0 0. 5 0 0 20 30 40 60 60 tax rate (percent) 80 100

The Laffer Curve also suggests that when tax rates are too “low, ” a tax cut lowers tax revenue. 2. 5 2. 3 Tax Revenue (in trillions of $) 2. 0 1. 6 1. 5 1. 0 0. 5 0 0 20 10 20 40 60 tax rate (percent) 80 100

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