The Laffer Curve is a representation of the theory of Taxable income elasticity in a graphic form. It is named after Arther Laffer, a supply-side economist that had work based off of him by Jude Wanniski in the 1970s. Translation for the rest of us: The Laffer Curve tells the government how much money it can charge in tax debt before revenue starts going down.

the Laffer Curve math

For people like me who don’t have degrees in theoretical economics or math, this is how the Laffer Curve works. Taxpayers will change their behavior based off of taxes is what the theory of economics states. When the government doesn’t tax, the people are more likely to earn as much money as they can while they government gets nothing. If the government taxed at 100 percent then they wouldn’t get any money since there would be no motivation to earn money. The ideal tax rate would then be somewhere between 1 and 10 percent. Usually, this is a percentage represented on the graphic Laffer Curve as 50 percent, but that is not necessarily the ideal tax rate. Many studies suggest the ideal tax rate is between 30 and 40 percent

The Laffer Curve affecting US policy

The Laffer curve was suggested first in the 1970s. US tax policies tend to make use of the underlying theory. In 1924, Andrew Mellon made the argument that by lowering the tax rate, the government would bring in more money. The top income tax bracket was reduced from 73 percent to 24 percent between 1921 and 1929. Right after doing that, the tax coming in changed from $ 719 million to $ 1 billion. Reganomics in the 1980s and the Bush Tax Cuts of the early 2000s also had a very heavy basis in the Laffer Curve theory.

Laffer Curve arguments

Like most economic theories, the Laffer Curve does not exist in an economic bubble. Income tax is only supposed to be like a small loan to the government from the taxpayers to make sure of the economy of scale. Many historians point out that at near-100 percent tax rates, countries such as Russia were able to maintain a productive economy. Progressive taxation practices also complicate how the Laffer Curve would be calculated.