In the economy, the Laffer curve represents the theoretical relationship between the tax rate and the level of government revenue generated. This illustrates the concept of taxable income elasticity - that is, the change in taxable income in response to changes in tax rates. The Laffer curve assumes that no tax revenue is raised at the extreme tax rate of 0% and 100%, and that there is a rate between 0% and 100% that maximizes government tax revenue. The Laffer curve is usually represented as a graph starting at 0% tax with zero income, rising to the maximum level of income at the medium tax rate, and then falling again to zero income at 100% tax rate. However, the shape of the curve is uncertain and debated among economists. Assuming that income is a continuous function of the tax rate, then the maximum described by the Laffer curve is due to Rolle's theorem, which is the standard result in calculus.
One of the implications of the Laffer curve is that an increase in tax rates beyond a certain point is counter-productive to increase tax revenue further. The hypothetical Laffer curve for a given economy can only be estimated and such estimates are controversial. The New Palgrave Dictionary of Economics reports that tax revenue maximization estimates have varied considerably, with a middle range of about 70%. However, a study conducted by Christina and David Romer, who is a member of the Economic Advisory Council for the Obama Administration, has suggested that maximizing optimal income tax rates will be at 33%.
The Laffer curve was popularized in the United States by policymakers following an afternoon meeting with Ford Administration officials Dick Cheney and Donald Rumsfeld in 1974, in which Arthur Laffer reportedly sketched a curve on a napkin to illustrate his argument. The term "Laffer curve" was coined by Jude Wanniski, who was also present at the meeting. The basic concept is not new; Laffer himself notes the introduction in the writings of 14th century social philosophers, Ibn Khaldun and others.
Video Laffer curve
History
Origin
Laffer does not claim to have found the concept; he notes that there were earlier predecessors, including in Muqaddimah by the 14th century Tunisian scholar Ibn Khaldun, and in the writings of John Maynard Keynes.
It was not until the 1970s that Laffer's name began to be associated with the idea. The term "Laffer curve" was reportedly invented by Jude Wanniski (an author for The Wall Street Journal) after a dinner meeting in 1974 at Two Continents Restaurant at the Washington Hotel with Arthur Laffer, Wanniski, Dick Cheney, Donald Rumsfeld, and his press secretary, Grace-Marie Arnett. In this meeting, Laffer, against President Marcald Ford's tax hike, reportedly sketched a curve on a napkin to illustrate the concept. Cheney did not accept the idea immediately, but he captured the imagination of the people present. Laffer claims he does not remember this napkin, but writes: "I use what Laffer Curve calls all the time in my class and with anyone who will listen to me".
Precedent
There is a historical precedent other than quoted directly by Laffer. For example, in 1924, Finance Minister Andrew Mellon wrote: "It seems difficult for some people to understand that a high level of tax does not necessarily mean substantial revenues for the government, and that more income can often be earned at a lower rate". Trained his understanding that "73% is nothing", he pushed the reduction of income tax on from 73% to 24% eventually (as well as lower tax breaks for brackets). Mellon was one of the richest men in the United States, the third highest income taxpayer in the mid-1920s, behind John D. Rockefeller and Henry Ford. When he served as Secretary of the US Treasury, his fortune reached about US $ 300-US $ 400 million. Personal income tax revenues increased from US $ 719 million in 1921 to over US $ 1 billion in 1929, an average increase of 4.2% per annum over a period of 8 years, supported by proponents of interest rate cuts. David Hume also expressed similar arguments in his essay Of Taxes in 1756, as did Scottish economist Adam Smith, twenty years later.
The Democrat Party made a similar argument in 1880 when high revenues from import tariffs raised during the Civil War (1861-1865) led to a federal budget surplus. The Republicans, later based in the northeastern region of the protectionist industry, argue that cutting interest rates will lower revenues. But the Democrats, rooted in Southern agriculture, argue that tariff reductions will increase revenues by increasing the amount of taxable imports.
In 2012, economists surveyed by the University of Chicago dismissed the view that Laffer Curve's postulation of increased tax revenues through interest-rate cuts applies to US federal income taxes at that time in the medium term. When asked whether "federal income tax cuts in the US will now raise enough tax revenues so that the total annual tax revenue will be higher within five years than without tax cuts", none of the economists surveyed agreed and 71% disagreed.
Maps Laffer curve
Empirical data
One of the conceptual uses of the Laffer curve is to determine the rate of taxation that will increase maximum revenue (in other words, "optimize" revenue collection). Earnings that maximize tax rates should not be confused with the optimal tax rate, which economists use to describe tax rates in the tax system that increase the amount of certain income with the smallest distortion to the economy.
Tax rates where earnings are maximized
The New Palgrave Dictionary of Economics reports that comparative academic studies result in various levels of maximizing revenues centering around 70%. In the early 1980s, Edgar L. Feige and Robert T. McGee developed a macroeconomic model from which they acquired Laffer Curve. According to the model, the shape and position of the Laffer Curve depends on the strength of supply side effects, tax system progressiveness and unobserved economic size. Economist Paul Pecorino presented a model in 1995 that predicted the peak of the Laffer curve occurs at a tax rate of about 65%. A draft paper by Y. Hsing who saw the US economy between 1959 and 1991 placed a federal tax rate that maximized revenue between 32.67% and 35.21%. A 1981 article published in the Journal of Political Economy presents a model that integrates empirical data which indicates that the point of maximum tax revenue in Sweden in the 1970s was 70%. A 2011 paper by Trabandt and Uhlig published in the Journal of Monetary Economics estimates a 70% maximization rate, and estimates that the US and most of the European economy are on the left of the Laffer curve (in other words, that raising taxes will increase further revenue).
Analysis of the Congressional Budget Office
In 2005, the United States Congressional Budget Office (CBO) released a paper called "Analyzing Economic Effects and Budget from 10 Percent Pieces in Income Tax Rates This paper considers the impact of a 10% reduction in force in then there is a marginal rate of federal income tax in the US (for example, if they face a 25% marginal federal income tax rate has lowered it to 22.5%.) Unlike previous research, the CBO paper estimates the budget impact of the macroeconomic impact of the tax policy, ie, tries to explain how the reduction in individual income tax rates can affect future economic growth as a whole, and therefore affect future government tax revenues, and ultimately, impact deficits or surpluses. In the most generous growth scenario growth scenario, only 28% of lost revenues are projected from the tax rate yan g will be recovered over a 10-year period after a thorough 10% reduction in all personal income tax rates. In other words, the deficit will increase by almost the same amount as the tax cut in the first five years, with limited feedback revenue thereafter. Through an increase in budget deficits, tax cuts primarily benefit the rich to be paid - plus interest - with taxes being paid relatively evenly by all taxpayers. The paper suggests that the projected flaws in these revenues should be made by federal loans: the paper estimates that the federal government will pay an additional US $ 200 billion in interest for a decade covered by paper analysis.
United Kingdom
After the reduction of the highest income tax rate in the UK from 50% to 45% in 2013, HMRC (the UK Government department responsible for tax collection) estimates the tax deductibility cost to around Ã,  £ 100 million (from earnings for this group around à ,  £ 90 billion), but with great uncertainty on both sides. Robert Chote, chairman of the UK Office for Budget Responsibility commented that Britain "runs across the top of the Laffer curve", implying that the UK tax rate is nearing optimal levels.
More
Laffer has presented examples of Russia and the Baltic countries, which apply a flat tax at rates lower than 35% around the same time as their economies begin to grow. He also referred to the economic results of the Kemp-Roth tax cuts, the Kennedy tax cuts, the 1920 tax cuts, and changes in the structure of the US capital gains tax in 1997. Some also cite Hauser's Law, which postulates that the US federal government revenues, as a percentage of GDP, remained stable at around 19.5% during the period from 1950 to 2007 despite changes in marginal tax rates over the same period. However, others refer to Hauser's Law as "misleading" and argue that tax changes have a major impact on tax revenues.
Recently, based on the Laffer curve argument, Kansas Governor Sam Brownback greatly reduced the country's tax rate in 2012. The country, which previously had a budget surplus, experienced a budget deficit of around $ 200 million in 2012. Drastic cuts to state funding for education and infrastructure has been implemented due to budget deficit.
In the US political discourse
Use in supply-side economics
The supply-side economy is a school of macroeconomic thinking that argues that overall economic well-being is maximized by lowering the barriers to producing goods and services (the "Supply Side" of the economy). By lowering these barriers, consumers are perceived to benefit from greater supply of goods and services at lower prices. A typical supply-side policy would advocate generally lower income taxes and capital gains tax rates (to increase labor and capital supplies), smaller governments and lower regulatory burdens on firms (to lower costs). Although tax policies are often mentioned in relation to supply-side economies, supply-side economists are concerned with all barriers to the supply of goods and services and not just taxation.
In their economics textbook Principles of Economics (7th ed.), Economist Karl E. Case of Wellesley College and Ray Fair of Yale University stated "The Laffer curve shows the relationship between tax rates and tax revenues. - side economists use it to argue that it is possible to generate higher revenues by cutting tax rates, but evidence does not seem to support this.The lower tax rates by the Reagan administration cut tax revenues significantly and contribute to a massive increase in debt federal during the 1980s. " Reaganomics
The Laffer curve and supply-side economics inspired Reaganomics and the 1989 Kemp-Roth Tax Withholding. Proponents of the tax-deductible supply side claimed that lower tax rates would result in more tax revenues because the US government's marginal income tax rate before the law was in side right side of the curve. This statement was ridiculed by George H. W. Bush as "the voodoo economy" while nominating Reagan for the presidential nomination in 1980. During Reagan's presidency, the marginal rate of taxation in the United States fell from 70% to 31%.
David Stockman, budget director of Ronald Reagan during his first reign and one of the early supporters of supply-side economics, is worried that the government is not paying enough attention to government spending cuts. He argues that the Laffer curve does not have to be taken literally - at least in the economic environment of the United States of the 1980s. In The Triumph of Politics , he writes: "The entire California group has taken [the Laffer curve] literally (and primitively). The way they speak, they seem to expect that once the inventory of withholding taxes is in effect, additional income will begin to fall, like manna, from heaven. Since January, I have explained that there is no literal Laffer curve. "Stockman also said that" Laffer is not wrong, he just is not far enough "(in paying attention to government spending).
Some people criticize Reaganomic elements on the basis of justice. For example, economist John Kenneth Galbraith believes that the Reagan administration actively uses the Laffer curve "to lower taxes on the rich". Some critics point out that tax revenues are almost always up each year, and during the two Reagan periods, the rise in tax revenues is more superficial than the increase during the presidency in which the upper marginal tax rate is higher. Critics also point out that since Reagan's tax cuts, revenues have not increased significantly for the rest of the population. This statement is supported by research showing that the top 1% income nearly doubled during Reagan's years, while income for other income levels only slightly increased; revenues actually decreased for the bottom quintile.
During Reagan's presidency, national debt grew from $ 997 billion to $ 2.85 trillion. This caused the US to move from the world's largest international lender to the world's largest debtor country.
Bush tax cut
The Congressional Budget Office estimates that extending the Bush tax cuts in 2001-2003 after 2010 ends will increase the deficit by $ 1.8 trillion over the next decade. Economist Paul Krugman argues that the offer-side adherents do not fully believe that US income tax rates are on the "back-side" side of the curve and yet they still advocate lowering taxes to encourage private savings investment.
Theoretical issues
Justification
Laffer describes the model in two tax interaction effects: "arithmetic effects" and "economic effects". "Arithmetic effect" assumes that the tax revenue generated is the rate of tax multiplied by the available income for taxation (or tax basis). Thus, R income equals tÃÆ' â € "B where t is the tax rate and B is the taxable base ( R = tÃÆ' â €" B ). With a 0% tax rate, the model states that no tax revenue is raised. "Economic securities" assume that the tax rate will affect the tax base itself. At an extreme 100% tax rate, governments collect zero income because taxpayers change their behavior in response to tax rates: whether they lose their incentive to work, or they find ways to avoid paying taxes. Thus, the "economic effect" of the 100% tax rate is to lower the tax base to zero. If this is the case, then somewhere between 0% and 100% is the tax rate that will maximize revenue.
The graphical representation of the curve sometimes appears to place a rate of about 50%, if the tax base reacts to the tax rate linearly, but the theoretical revenue maximization rate can be each percentage greater than 0% and less than 100%. Similarly, curves are often presented as parabolic shapes, but there is no reason that this needs to happen. The effect of a change in taxes can be reduced in terms of elasticity, in which the income maximizing elasticity of the tax base in respect of taxes equals 1. This is done by differentiating R with respect to t and grouping of terms to reveal that the rate of change R in respect of t is equal to the amount of elasticity of the tax base plus one all multiplied by the tax base. Because elasticity exceeds one absolute value, income begins to fall. The problem is similar to monopolies that never raise prices beyond the point where the elasticity of demand exceeds one in absolute value.
Wanniski noted that all economic activity would not be possible to stop at 100% tax, but would shift from exchange of money to barter. He also notes that there are special circumstances under which economic activity may continue for a period at a tax rate of almost 100% (eg, in a war economy).
Efforts have been made to measure the relationship between tax revenues and tax rates (for example, in the United States by the Congressional Budget Office). While the interaction between tax rates and tax revenue is generally accepted, the exact nature of these interactions is debated. In practice, the hypothetical Laffer curve shape for a given economy can only be estimated. The relationship between tax rates and tax revenue tends to vary from one economy to another and depends on the elasticity of labor supply, as well as various other factors. Even in the same economy, curve characteristics may change over time. Complexities such as progressive taxes and possible differences in incentives to work for different income groups make the task of estimation difficult. The structure of the curve can also be changed by policy decisions. For example, if tax loopholes and tax shelters are made more readily available by law, the point at which income begins to decline with increasing taxation tends to be lower.
Laffer presented the curve as a pedagogical tool to show that in some circumstances, a reduction in tax rates would actually increase government revenues and should not be offset by a decrease in government spending or an increase in lending. For tax rate reductions to increase revenue, the current tax rate should be higher than the maximize revenue level. In 2007, Laffer said that the curve should not be the only basis for raising or lowering taxes.
Criticism
Laffer assumes that government revenue is a continuous function of the tax rate. However, in some theoretical models, the Laffer curve can be interrupted, leading to the inability to devise a tax revenue maximizing solution. In addition, the Laffer curve relies on the assumption that tax revenues are used to provide public goods that can be segregated in utilities and separate from the supply of labor, which may not be true in practice.
The Laffer curve as presented is simple as it assumes a single tax rate and a single labor supply. The actual public finance system is more complex, and there are serious doubts about relevance considering a single marginal tax rate. In addition, income can be a multivalued tax function; for example, the increase in tax rates to a certain percentage may not generate the same income as the tax rate reduction to the same percentage (sort of hysteresis). Furthermore, the Laffer curve does not take into account the explicit nature of tax evasion that occurs. It is possible that if all producers are endowed with two viability factors in the market (the ability to produce efficiently and the ability to avoid taxes), then revenues generated under tax avoidance can be greater than without avoidance, and thus the maximum Laffer curve is found. become much better than the mind. The reason for this result is that if producers with low productive capability (high production costs) tend to have strong evasion skills as well, uniform taxes on producers actually become taxes that discriminate against paying ability.
See also
- Losing weight
- Dynamic scoring
- List of economic topics
- Rahn curve
- Independence
- Trickle-down economics
Note
External links
Media related to Laffer curve in Wikimedia Commons
- Jude Wanniski, "Taxes, Income, and 'Laffer Curve'," Public Interests, Number 50, Winter 1978
- Arthur Laffer describes Laffer Curve
- In PBS NewsHOur Solman explores the relationship between economic activity and tax rates.
Source of the article : Wikipedia
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