lectures in macroeconomics- charles w. upton the laffer curve
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Lectures in Macroeconomics- Charles W. Upton
The Laffer Curve
0100%
Revenues
$X
*
The Laffer Curve
Do Tax Cuts Cut Revenues?
0
100%Tax Rate as a % of Y
Revenues
$X
The Laffer Curve
Do Tax Cuts Cut Revenues?
0
100%Tax Rate as a % of Y
Revenues
$X
The Laffer Curve
0% or 100% Rate = Zero
0
100%Tax Rate as a % of Y
Revenues
$X
The Laffer Curve
A 10% Rate
0
100%Tax Rate as a % of Y
Revenues
$X
$Y
10%
The Laffer Curve
A 10% Rate
0
100%Tax Rate as a % of Y
Revenues
$X
$Y
10%
The Laffer Curve
Pushing Our Luck
0
100%Tax Rate as a % of Y
Revenues
$X
$Y
10%
The Laffer Curve
There Comes a Point
0
100%Tax Rate as a % of Y
Revenues
$X
$Y
10% *
“tau”
The Laffer Curve
Its downhill
0
100%Tax Rate as a % of Y
Revenues
$X
$Y
10% *
“tau”
The Laffer Curve
The Laffer Curve
0100%
Revenues
$X
*
The Laffer Curve
The Laffer Curve
0100%
Revenues
$X
*
The logic is flawless. There is some rate that maximizes tax revenues.
The Laffer Curve
The Laffer Curve
0100%
Revenues
$X
*
Are we here?
The Laffer Curve
The Laffer Curve
0100%
Revenues
$X
*
Are we here?
If the tax rate is above *, cutting taxes raises revenue.
The Laffer Curve
The Laffer Curve
0100%
Revenues
$X
*
Are we here?
The revenue decline above * is due to incentive effects and avoidance.
The Laffer Curve
The Laffer Curve
0100%
Revenues
$X
*
Are we here?Or here?
The Laffer Curve
The Laffer Curve
0100%
Revenues
$X
*
Are we here?Or here?
If the tax rate is below *, cutting taxes lowers revenue.
The Laffer Curve
The 1964 Tax Cuts
0100%
Revenues
$X
*
In 1964, the top marginal rate was cut from 91% to 70%. We may have been above *.
The Laffer Curve
The 1981 Tax Cuts
0100%
Revenues
$X
*
In 1981, we cut the top rate to 50%. Some claimed we were above *. Most economists don’t think so
The Laffer Curve
The 1986 Reforms
0100%
Revenues
$X
*
In 1986, we cut the top rate to 31% by eliminating some exemptions. Again, some claimed we were above *.
The Laffer Curve
Today
0100%
Revenues
$X
*
Most economists think overall rates are below *. But perhaps a $1 cut only costs us 67¢
The Laffer Curve
Specialized Taxes
0100%
Revenues
$X
*
There are specific taxes where the Laffer Effect probably works.
The Laffer Curve
Cigarette Taxes
0100%
Revenues
$X
*
A city raising cigarette taxes might get less revenue.
The Laffer Curve
Cigarette Taxes
0100%
Revenues
$X
*
Suppose NYC raised taxes $1 a pack, so cigarettes went from $7 to $8 a pack.
The Laffer Curve
Cigarette Taxes
0100%
Revenues
$X
*
If =-0.2, a 14% rise should reduce demand by 3%. Not enough to reduce revenue.
%D = %P x ()
The Laffer Curve
Cigarette Taxes
0100%
Revenues
$X
*
But what about tax avoidance? Smuggle cigarettes in from NC, NJ, CT?
The Laffer Curve
Capital Gains Taxation
0100%
Revenues
$X
*
If you own common stock, hold it for more than a year before selling it, your top tax rate is 20%
The Laffer Curve
Capital Gains Taxation
0100%
Revenues
$X
*
One of the arguments given for cutting capital gains taxation was the Laffer Curve.
The Laffer Curve
Supply Side Economics
We know taxation has an impact on the demand for GDP; that is how we cut C and I to make room for G.
The Laffer Curve
Supply Side Economics
Supply side economics talks about making the pie bigger.
The Laffer Curve
Supply Side Economics
1tttt LKAY
The Laffer Curve
Supply Side Economics
1tttt LKAY
How do taxes impact A?
The Laffer Curve
Supply Side Economics
1tttt LKAY
How do taxes impact A?
How do taxes impact
K?
The Laffer Curve
Supply Side Economics
1tttt LKAY
How do taxes impact A?
How do taxes impact
K?
How do taxes impact
L?
The Laffer Curve
Supply Side Economics
1tttt LKAY
That requires a detailed look at taxes
The Laffer Curve
Militant Supply Siders
Size of National Pie
% Taken for Taxes
0% 100%
The higher the percent of GDP taken by taxes, the lower the value of GDP
The Laffer Curve
Militant Supply Siders
Size of National Pie
% Taken for Taxes
0% 100%
They have a point. Take 100%, and your remove all incentives.
The Laffer Curve
Militant Supply Siders
Size of National Pie
% Taken for Taxes
0% 100%
GDP will be zero.
The Laffer Curve
Militant Supply Siders
Size of National Pie
% Taken for Taxes
0% 100%
This is simplistic. Different taxes have different incentive effects.
The Laffer Curve
Militant Supply Siders
Size of National Pie
% Taken for Taxes
0% 100%
This is simplistic. Different taxes have different incentive effects.
The Laffer Curve
End
©2003 Charles W. Upton. All rights reserved