An Overview on Laffer Curve

The laffer curve given in 1974 by Arthur Laffer which is the interrelation between the rate of tax and the government collected tax revenue. It depicts that the increment in tax rates will also increase the tax revenue of the government. 

The Laffer Curve economy is difficult as the most significant accusation of the laffer curve is that when there is much increment in the rates of tax will become productive for the government tax revenues by but after a specific point the tax revenue will remain same i.e. it will not increase or may either falls down because of the reasons like;

• Evasion of the taxes.
• Work disincentives
• Emigration

The shape of the laffer curve is U-shaped and the top of the curve depicts the optimal or exact tax rates in order to generate the maximum revenue. The Laffer Curve formula is given by the expression;

R= τ(z0(1 – τ)ε – b)

where, z0 is the potential income; b is the top threshold; R is the government tax revenue; τ is the tax rate and ε is the taxable income elasticity.

History of Laffer Curve

Laffer does not claim the invention of the curve as his invention; instead he said that it was mentioned in Muqaddimah, in writings of Adam Smith or John Maynard Keynes. Treasury Secretary Andrew Mellon in 1924 gave the clear gist of this Laffer Curve.

When the article in National Affairs was published in the year 1974 then the name of Laffer begans to get associated with the concept of Laffer Curve. John Quiggin, the economist distinguishes the Laffer Curve from the Analysis of Laffer of tax revenues and he further said that the curve as “correct but unoriginal” while the analysis of Laffer is “incorrect but original”.

Andrew Mellon, Treasury Secretary from the United States in 1924 explained that high tax rate does not make it compulsory for the increase in the tax revenue but it can be obtained even by low tax rates also or after a specific point the excess increase in the tax rate may not increase the government tax revenue.

The University of Chicago survey by the economist in the year 2012 rejected the vision of the curve’s postulates of increased revenue of tax by a rate cut which is applicable to the income tax of the federal United States. According to Jeffrey Frankel, the economist of the Harvard University most of the economists refused that the in United States the taxes are so huge that the cut in taxes will only pay for themselves.

Laffer Curve in Discourse of United States Political

There is great popularity of supply side economics, the Laffer Curve economics from the year 1977 onwards among the politicians of the Republican Party. Supply side economics is the macroeconomics vision school which argues that by decreasing the producing services and goods barriers, the overall economics may get increased which in turn will benefit the customers from the large good and services supply at less price. The other discourse it includes are; reaganomics and bush tax cuts.

Conclusion

The Laffer Curve is a theory which helps in interrelating the tax rate and the government tax revenue and was given by Arthur Laffer in 1974. The U-shape is the shape of the Laffer Curve. This concept of Laffer is opposed by many economists including the discourse in the politics of the United States (supply side economics, Reaganomics and Bush tax cuts).