Question

The Laffer Curve is ofen cited by economists and politicians.  Research the Laffer Curve. Explain who Laffer is, what the curve means, and comment on it's validity or lack thereof. Is it useful in a practical sense? How does it hold up to rigorous statistical analysis?

Answer 1

Who is laffer?

The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate Laffer's main premise that the more an activity — such as production — is taxed, the less of it is generated.

Meaning of curve

The Laffer Curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T* on the diagram below) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100 percent, shown as the far right on his curve, all people would choose not to work because everything they earned would go to the government. Governments would like to be at point T* because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.

Laffer argues that the more money was taken from a business in the form of taxes, the less money it has to invest in the business. A business is more likely to find ways to protect its capital from taxation or to relocate all or a part of its operations overseas.

What's missing from the chart? Numbers! In other words, the actual tax rates and the percent increase in revenue generated. If Laffer had put numbers on the diagram, the government could say, "Hmm, let's increase the tax rate from 24 percent to 25 percent to get a 2 percent increase in the tax base." If you look at the chart, it appears that the "Prohibitive Range" starts at about a 50 percent tax rate. If that were the case, then the chart would be useless today. Why? The federal government hasn't taxed anyone at 50 percent (or higher) since 1986. (Source: "Historical Tax Rates," Tax Foundation.)

Laffer avoided being specific. Whether tax cuts stimulate the economy (where you are on the curve) depends on six factors:

1. The type of tax system in place.

2. How fast the economy is growing.

3. How high taxes are already.

4. Tax loopholes.

5. The ease of entry into non-taxable, underground activities.

In many of the statistical area Laffer Cure is being used I will give you example

If in some relationship wich is ploted on graph and that relationship showing parabolic pattern then if we want maximum value at that curve then we can used Laffer curve.

If some researcher want see some relationship between two variable which showing some curve pattern then he can analyse that with laffer curve.