a question about the laffer curve

Question

One real world application of a rational function is the Laffer Curve, as made famous by economist Arthur Laffer. According to Laffer, the elasticity of taxable income for the government changes in relation to the rate of taxation. Essentially, raising the tax rate can cause a decrease in government revenue.

What are your thoughts about Laffer's assertion? Given today's taxation (sales tax, income tax, etc.), how can a government effectively raise revenue without raising its people's taxes? Feel free to share specific current event news items that you came across while researching this topic. Be sure that your comments remain in an academic tone.

Answer 1

Hey Daniel -- Laffer is about lowering tax RATES to actually increase taxes ...

 

the idea is that a lower tax RATE encourages more people to work harder.

 

extreme case: 100% tax rate (the entire salary goes to gov't.) Why work? 100% of 0 is 0.

LOWERING tax RATES here clearly raises gov't. revs ...

 

extreme case: 0% tax rate (entire wage goes home.) Lots of work, but 0% of lots is zero.

RAISING rates in this case is the only way to increase gov't. revs ...

 

ex: Currently, on-line shoppers pay no sales tax. What might happen with an Etax?

 

analogy: tax rates are frictional ... how high can it go without overly slowing the machine?

 

Best regards, sir :)