Posted on 09/16/2009 1:27:09 PM PDT by Admiral_Zeon
The Laffer Curve is a simple idea: a government cant raise taxes forever and expect to increase revenue along the way. Eventually youre taking so much in taxes that people dont have any reason to earn income. The argument is simple (and correct): if you have zero tax rate you get zero tax revenue. If you raise taxes just a bit, nobody will be discouraged from working, and you will collect some amount of revenue; therefore, the curve of revenue versus tax rate starts at zero and initially rises. But if the tax rate is 100%, nobody has any reason to work, and your total revenues will be back at zero. By the wonders of math, there must therefore be a maximum of the curve somewhere in between 0% and 100% tax rate.
An important question is, where are we on the curve? The notion of the Laffer curve has been used to justify all sorts of tax cuts, under the assumption/claim that we are to the right of the maximum, so that cutting taxes will actually increase revenues. Serious economists generally dont believe this holds true in the U.S. right now, but the lure of the idea is undeniable: lose weight by eating more ice cream!
Via Marginal Revolution, heres a study by Mathias Trabandt and Harald Uhlig that tries to get it right. Obviously they have models that make various assumptions, and I have no idea how realistic those assumptions are. They study the U.S. and several European countries, and find that Denmark and Sweden are just a bit on the wrong side of the curve for the specific case of capital income taxation. For the most part, however, tax rates lie to the left of the maximum. In the U.S., especially, we are significantly on the left.
(Excerpt) Read more at blogs.discovermagazine.com ...
First, at least at the federal level, we have to dump the concept that taxation is about revenue. It isn’t. The federal government could just print more money - creating an implicit tax on everyone through inflation and get by perfectly well. Taxation is about control. For every dollar the government takes from you, it takes away the freedom to spend that dollar as you wish. You lose a little bit of liberty with each tax dollar taken.
Do you play Evony?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.