Laffer Curve Business Analysis

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Introduction

An article written by Eduardo Porter and published by The New York Times titled, “Tax Cuts, Sold as Fuel for Growth, Widen Gap Between Rich and Poor,” describes both the relationship between tax size and tax revenue, as well as the trade-off relationship between efficiency and equity. Arthur Laffer, the creator of the “Laffer Curve,” introduced the idea that decreasing the size of a tax will eventually lead to an increase in tax revenue (Porter, 2017). This idea is vital to economics today. Also, the idea of efficiency and equity is discussed, which is also a major topic in economics. It is stated that cutting taxes for the rich does not foster any more growth or productivity. Porter (2017) also claims that there is actually
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This diagram demonstrates the relationship between the size of a tax and tax revenue. A tax is a wedge between the price buyers pay and the price sellers receive on a good; it raises the price buyers have to pay for that good, and lowers the price sellers receive on that same good. Tax revenue refers to the amount of money received from taxing a good (Mankiw, 2015). The Laffer Curve illustrates that initially, as tax size increases, tax revenue increases. After a while, though, when tax size keeps increasing, tax revenue actually starts to decrease at some point. In short, as tax size rises, revenue from the tax rises in the beginning, but then decreases. The curve’s maximum is the most efficient point, as it is where the tax revenue is the highest. Putting this in a real-world perspective, based on the diagram, if a government raises taxes then more revenue should be made, putting more money towards government-funded programs (education, healthcare, welfare, etc). However, raising the tax rate when it is already high actually reduces tax revenue, reducing the amount of money that could benefit the people as a whole and thus the economy. The article, however, explains that this relationship between tax revenue and tax size is not applicable in reality, since there are many loopholes, such as tax evasion, that can cause revenues for wealthier individuals to rise when …show more content…
Efficiency refers to society getting the most from its scarce resources, while equity refers to prosperity being uniformly distributed among society’s members. These two factors in society have a trade-off relationship because we can’t have the best of both worlds (Mankiw, 2015). To promote efficiency, equity is lessened, but to promote equity, efficiency is lessened. Both of them together cannot be at their maximum. Efficiency is usually promoted by the government by allocating society’s resources in a way that is most effective and beneficial for society and the economy. Meanwhile, governments promote equity by distributing resources equally, usually by taxing the rich and distributing that money to poorer individuals through welfare policies. Usually though, promoting equity reduces efficiency, as redistributing income from the wealthy to the poor lowers the wealthier individuals’ productivity; they won’t work as hard, resulting in less work and less goods and services produced (Mankiw, 2015). Thus, to get more efficiency, equity has to be sacrificed, and vice

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