Laffer curve

From Issuepedia

About

The Laffer curve is a largely-discredited figure showing the relationship between tax rate and the resulting levels of revenue. It argues that tax revenue will decrease -- due to people having less incentive to earn income -- as the tax rates go up, and that maximum revenue is therefore achieved somewhere between tax rates of 0% and 100%, rather than right at 100% (assuming this is the maximum) as a simpler model might suggest.

It was popularized by Arthur Laffer, an economist with ties to the American Legislative Exchange Council (see SourceWatch), a former member of Reagan-Chairman (with Larry Kudlow) of the Free Enterprise Fund .

Flaws

The model used by the Laffer curve makes the fallacious assumption that no revenue would be collected at a 100% tax rate, based on the idea that nobody would have any incentive to make income at that level, and that incentives are reliably reflected by actual income.

It also is based on the idea of a single tax rate, which is almost never used, rather than the more common progressive taxation in which a 100% rate might be imposed as a marginal tax in order to cap income at some maximum level.

See RationalWiki for a more complete analysis.

Links

Reference