We're going to nerd out for a moment, and we hope you'll go on the journey with us! 🤓
The Laffer Curve might be a humorous name, but it's a serious concept in economics and politics. It's a way of showing the relationship between the tax rate and government revenue. It's not as simple as higher rates = higher revenue, and the Laffer Curve seeks to explain why.
Here are Five Fast Facts on the Laffer Curve:
- 👀 The Origin - The idea was created by Arthur Laffer in 1974, and formed the basis for Pres. Reagan's huge tax cuts in the 1980s. Reagan cut the top marginal rate from 70% to 28%, but revenues almost doubled! The original idea was literally sketched on the back of a napkin!
- 🔔 The Whole Curve - The whole thing is a bell curve - if the tax rate is 0%, the government obviously gets zero dollars in revenue, but if the tax rate is 100%, the government also gets zero dollars in revenue because people decide it is more fun to take a nap or go to the beach than to work for nothing (or they shelter their money somehow).
- ✨ Magical Middle - Obviously, then, there must be a point (i.e. tax rate) somewhere in the middle where the government collects the most cash possible. It's as much a certainty as gravity or the fact that your socks will disappear in the dryer.
- 🤔 Not So Fast - The biggest contention around the Laffer Curve is where that magical middle is. That's where politicians do their thing. Some think taxes are already too high, others think the peak happens at different levels depending on the country, economy, and how motivated people are to avoid paperwork.
- 📝 More Like Guidelines - Because the economy is vastly complex and affected by many things at the same time, it's extremely difficult to measure and predict exactly where tax rates should be. Also, the government is greedy so we can't really expect them to be honest even if there was a specific number, amiright?
🔥Bottom line: Some view the Laffer Curve as central to economic policy, and some think it's got more holes than Swiss cheese. However, it's awfully hard to argue the many instances from history where tax rates and revenue aren't necessarily hitched together! So, while it might not be a precision formula, the Laffer Curve certainly describes a consistent principle of how tax rates and human behavior are related. Smart leaders realize that cutting tax rates can actually result in more money for the government because it makes people want to work harder, start businesses, and stop hiding their gold coins in the backyard. Everything else is, well, up to voters.
What do you think of the Laffer Curve?
Let us know by connecting with us on Facebook and Instagram! Also, remember to share this newsletter with your friends & coworkers!
BTW, If you’ve read this far and haven’t yet signed up for the weekly Paycheckology newsletter, CLICK HERE!
