13 Jan The Laffer Curve
The Laffer Curve is a graph that demonstrates the relationship between how high tax rates are and how much money the government will bring in revenue. If the tax rate is 0, then the government will bring in $0. However, if the tax rate is set at 100%, the government will also bring in $0 because there will be no economy. So, logic suggests the relationship between tax rates and government revenue is an arc, or a curve, and not a straight line. This means there is some percentage at which government revenue is maximized. Any tax rate below that theoretical point and the government brings in fewer dollars. Any tax rate above that theoretical point and the government will bring in fewer dollars as well because the tax rate itself will restrict the overall economy. The Laffer Curve was used to justify Ronald Reagan’s 1981 tax cut, dropping the top tax rate down from 70% to 31%. By 1989, the total dollar amount collected by the federal government had doubled even though the tax rate itself was much lower.
