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The Laffer Curve
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5/16/2015 9:18:21 PM
Posted: 1 year ago
The Laffer Curve is a tax curve that plots revenue with tax rates. It displays a maximum tax rate where tax revenue is at a max. This makes sense as Rolle's Theorem of calculus states that when f(a)=f(b), there must be a point c, where a<c<b, in which f'(c)=0. In other words, at a marginal tax rate of 0 percent, there is no tax revenue. At a marginal tax rate of 100 percent, there is also no revenue because no one has incentive to work. Since f(0%) and f(100%) both equal 0, there must be a maximum value between them.
The best feature of the Laffer Curve is the potential for a Laffer Effect. A Laffer Effect is when the government lowers taxes and in turn gets more revenue. This happened from the Harding Tax Cuts, the Kennedy Tax Cuts, the Ford Tax Cuts, and the Reagan Tax cuts.
The important thing to remember about the Laffer Curve is that it looks different and has a different maximum point for every income level. Therefore, it can be concluded that a flat tax would simply not accumulate enough tax revenue because it fails to optimize.
What do you think about this curve?