The Laffer Curve

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The Laffer Curve simply says this:

  1. At 0% taxes, the government makes no revenue.
  2. At 100% taxes, the government makes no revenue because there is no economic activity.
  3. Somewhere between 0% and 100%, there is an optimum tax rate that generates the maximum revenue. No one knows where this is, exactly, and it may change all the time. However, this point is somewhere between 0% and 100%.
  4. If the tax rate is between 0% and this magical optimum rate, then a tax cut will lower revenue, while a tax increase will raise revenue.
  5. If the tax rate is on the other side, between this optimum rate and 100%, then the opposite is true: A tax cut will raise revenue, and a tax increase will lower revenue.
  6. Regardless, tax cuts always tend to encourage economic activity, while tax increases tend to smother it.

Here are some false claims that you may hear about the Laffer Curve. All of them are obviously wrong.

  1. Tax cuts will always increase revenue. (This isn’t true because if you cut taxes to 0%, you get no revenue.
  2. Tax increases will always increase revenue. (This isn’t true because if you raise taxes to 100%, you get no revenue.)

There really isn’t much more to say on this.

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