What Is the Laffer Curve?

The Laffer curve depicts the relationship between the government's tax revenue and tax rate. When the tax rate is below a certain limit, increasing the tax rate can increase the government's tax revenue, but when it exceeds this limit, increasing the tax rate will cause the government's tax revenue to decrease. Because higher tax rates will inhibit economic growth, reduce the tax base, and reduce tax revenue. Conversely, tax reductions can stimulate economic growth, expand the tax base, and increase tax revenue.

Laffer curve

In economics, the United States

American Economist

Theoretically, the Laffer curve lacks the integrity of the system. It is only a countermeasure for "stagflation". It has certain limitations, mainly reflected in the following points.

First, the establishment of the Laffer curve must meet certain prerequisites.

The Laffer curve refers to the tax rate (precisely the average tax rate), not the marginal tax rate, but it is easy to confuse the two. Victor Cantor and Jude Win

The Laffer curve has not been proven by past history. In 1982, D. Fullerton examined several examples of how hard work responds to tax rates. After econometric studies, the actual Laffer curve in the United States was made. As shown in Figure 4, the largest tax point appears to appear in Far from the right of the tax rates that have been applied by the economy over the past few decades. "" The prediction made by this review is that tax cuts will cause tax revenues to decrease almost proportionally. "

At the same time, the Laffer curve does not guide policy properly. The focus of the Laffer curve's supporters and opponents' concerns and controversies lies not in the general theoretical connotation of the curve but in its policy implications. For the 1970s (1973-19)

Laffer curve and taxes

(82) The stagflation phenomenon that occurred, the supply school proposed a tax reduction policy based on the Laffer curve. They believe that tax cuts can help the US economy get out of the stagnation quagmire, and while promoting total output, government revenue will not be affected. Tax cuts are fully practiced in the United States. However, the economic data of the United States in the 1980s (see Table 1) can fully evaluate the effect of tax cuts.

The US tax cuts of the 1980s improved the problem of stagflation, but at the cost of a huge fiscal deficit. It can be seen that the Laffer curve theory does not guide policy correctly.

The applicability of the Laffer curve in the field of personal income tax is limited, and it is weak as a theoretical support for reducing the marginal tax rate of personal income tax. An appropriate personal income tax rate mechanism is to get the most taxes while ensuring that the least people are harmed. This goal can be achieved or approached through a scientific combination of exemptions, starting tax rates, marginal tax rates, etc. At least it can be said with certainty that through the scientific design of the personal income tax rate mechanism, a near reasonable choice can be made between fairness and efficiency, rather than simply opposing the two. On the other hand, we also need to help those who need it most through negative income tax to maximize economic benefits.