Laffer curve

The Laffer curve is based on a thesis by the economist Arthur B. Laffer, according to which the tax revenues increase with increasing tax rates up to a peak and falls again at further increasing tax rate. The idea was already in Jonathan Swift's tax basics (1728). The Laffer curve is based on no mathematical formula that will help the concrete vertex could be calculated. In the economic practice of supply-side policies, in particular the Reaganomics was formulated with reference to the theory that the tax revenue could be increased by lowering the tax rate. The thesis is theoretical and economic policy debate. Since it does not allow definite statements, it is not falsifiable. Many economists see the thesis by the reality refuted.

Grounds

If the tax rate, starting from a zero rate, gradually increased, also increasing tax revenues, but only up to a certain point where dodge the taxpayers. If the tax rate increases beyond this point further, the tax revenue will contract again; This phenomenon arises because higher tax rates also increase the control resistance. From this, a reduction of the tax base, for example, by lower consumption of higher -taxed goods, result.

Mathematics can be determined only two points of the curve:

If the tax rate t is equal to 0 %, the tax revenue is T on sales Y therefore also 0

If the income tax rate 100 %, so the tax revenue to a tax on income is also 0

There is no incentive at this taking shape. Therefore, the Laffer curve is at this point also the tax revenue to zero.

History and apex of the curve (where the tax benefit would be maximum) can not be specified exactly. In particular, can be used for a tax does not specify whether it is to the left or right of the vertex. The Laffer curve is only illustrative of the formulated Swift context: If a tax rate or tax rate increases beyond a certain point, this leads to decreasing tax revenues due to the reactions of the taxpayers.

As an example of the effect described by the Laffer tax increases are often written: Although the tax revenue would have on the tax increases on tobacco products, especially cigarettes, rising, they fell in the first half of 2005. Many people consume now alternative, low -taxed tobacco products, such as tobacco cut or contraband obtain ( cf. prohibitive ). This state is described by a point on the Laffer curve to the right of the vertex. Statements, a certain price p ( x) guarantee maximum tax revenue or a certain price p ( y) will all smokers to quit (ie T = 0) bring, can not be derived from the Laffer diagram; support appropriate empirical studies are needed. The consumption of cigarettes also decreases from non- tax reasons since 1991 continuously.

Reception

Laffers theoretical relationship, which he sketched its own account for the first time on a napkin from a Washington restaurants, became popular especially among supply-side economists. The Keynesian fiscal policy, however, based their arguments on the Haavelmo theorem.

Often referred to as Reaganomics economic policies of U.S. President Ronald Reagan was significantly influenced by Laffer. Many economists think the Laffer effect, given the experience of tax policy under President Ronald Reagan refuted. The abrupt tax cuts caused therefore extreme budget deficits. Other economists do not see the Laffer effect to be refuted. The Laffer curve can not verify or falsifisieren certainty as the hypothetical revenue development under different tax rates can always only be estimated.