The Laffer Curve Lives

Art Laffer is a genius. This man created the Laffer Curve as seen below. This curve is the basis behind the supply-side economics. It sates that if you lower tax rates, you get MORE (not less) tax revenue. Conversely, if you move tax rates higher, you receive LESS (not more) tax revenue.

This is not the conventional wisdom nor does it seem logical. So how does it work. First, think about a world where you are taxed 100%. Are you going to work? Of course not. Why should you work hard if all your money will wind up going to the government? You might work, but you will hide all your money so that the government doesn't take it all. Also, if you had a 0% tax rate, the government would receive NO money. Obviously! (Even leftists agree to that)

The middle of the curve is where people get confused. The Laffer curve states that there is some optimum level of tax rates that net the government the most tax revenue it could possibly ask for. Let's think about you, the worker making $100,000 a year. Let's say that the tax rate is 40% and you were offered a raise of $50,000 a year with the caveat of working an extra 10 hours per week. With this tax rate, you would only see $30,000 of that raise and you might not take the promotion because the extra money does not merit extra hours at work. On the other hand, let's say that the tax rate is 15%. Now that raise will net you an extra $42,500 (an extra $1,000 a month over the raise at a 40% tax rate). This type of money might merit the extra work and you accept the promotion.

With the lower tax rate, now the government receives the extra taxes ($7,500) because you took the raise. Now lets apply this back to the Laffer Curve. The curve states that the government will receive higher revenues as it lowers taxes until it reaches the optimum tax rate. So what does this tell us about today. Well, Bush has based the economic side of his presidency on tax cuts. The highest tax rate on income has been lowered to 35% and the capital gains tax has been lowered to 15% (from the absurd 30% level pre-Bush). The results show that we are still at tax rates ABOVE the optimum as evidenced by yesterday's FT article on tax receipts ("Surge in US tax receipts eats away at budget deficit").

Figures from the Treasury and the Congressional Budget Office, the non-partisan
body advising US lawmakers, showed revenues climbing by 13 per cent to $1,545bn
in the first eight months of the fiscal year to May. A month ago, estimates suggested revenues were rising at 11 per cent.

The 13 per cent rise is the second-highest rate of growth for that period in the past 25 years, surpassed only by last year's 15.5 per cent.

So much for the leftist argument of "Tax Cuts for the Rich." In fact tax cuts for the rich (the job creators) make EVERYONE (including the government) wealthier.