Economics Primer: The Laffer Curve

For those of you interested in a lesson about the Laffer Curve, here you go. I think it’s necessary to bring the topic of tax rates – and those of tax increases and tax decreases – a bit more into focus since the topic comes up so frequently.

I’ll tap the knowledge and experience of Dan Mitchell from the Center for Freedom and Prosperity. Mitchell discusses the confusion about the ideal point on the Laffer Curve, pointing out early in August that the goal of tax policy should not be to maximize revenue. He goes on to introduce his January 2008 three-part video series, which I have included below.

[M]y three-part video series on the Laffer Curve is a good summary of the key issues. Part I addresses the theory, and explicitly notes that policy makers should target the growth-maximizing tax rate rather than the revenue-maximizing tax rate. Part II reviews some of the evidence, including analysis of the huge increase in taxable income and tax revenue from upper-income taxpayers following the Reagan tax-rate reductions. Part III looks at the Joint Committee on Taxation’s dismal performance.

Part I

Part II

Part III

10 replies
  1. Dimsdale
    Dimsdale says:

    That was long overdue.  It should be mandatory viewing by Congresscritters.  And the president.  Folllowed by a test.

  2. sammy22
    sammy22 says:

    Nice. But I think that having jobs is on the top of most people's agenda. As for me, the only thing I care about is if the S&P500, the Dow and NASDAQ are ending the day in the green.

  3. sammy22
    sammy22 says:

    TomL: the more I make the more I get to keep. I've learned that much over the years. I don't feel sorry for those who make a whole lot and would like to keep a whole lot more.

  4. JollyRoger
    JollyRoger says:

    "The way of paradoxes is the way of truth." Oscar Wilde.  (Things are never as they appear)  Our first clue that America taxes too much- the Irish going back to Ireland.  The second clue, the Mexicans going back to Mexico!

  5. Dimsdale
    Dimsdale says:

    Sammy: you said: "TomL: the more I make the more I get to keep. I’ve learned that much over the years. I don’t feel sorry for those who make a whole lot and would like to keep a whole lot more."

     

    Aren't those conflicting statements?  YOU want to make more to keep more, but resent those that have the same sentiment but happen to make more than you.

     

    The rich don't put all their money in a big fat Uncle Scrooge like money bin.  Remember the Luxury Yacht lesson?  George Will had something to say about that and other "fair" taxes in 1999 (http://www.jewishworldreview.com/cols/will102899.asp)

  6. Steve M
    Steve M says:

    sammy22 misses a significant part of the economics … "the more I make the more I get to keep. I’ve learned that much over the years."

    If that is the case, I have a few jobs that need to be done around my yard, the pay is $10 per day, $40 per week. It's a 40 hour week and you get one hour for lunch. I'm not sure what your tax bracket is, but you'll get to keep at least half of it. (I'm just using this as an analogy, don't go quoting minimum wage laws to me…)

    It's not just that if you make more you keep more, there is a certain point where it does not make sense to put the extra effort in to expanding, growth, productivity… Certainly, many find it not worthwhile to work that extra 10 hours a week trying to grow a part-time home business – after you've already put in a full time week – since the government takes 45 cents of every dollar in after expense profit for middle class households. That fact puts pressure on the economy to keep it slow.

    Hence … the Laffer Curve.

  7. sammy22
    sammy22 says:

    Steve, I am not missing any point. The more money I make the more money I have, unless the tax rate is over 100%. Sure I may have to work more hours to get more money OR I could simply make better investments OR skim off more OR bill more(phantom hours) OR game the system as it has become  national pastime. The rest is theory.

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