Laffer Curve Business Analysis

Great Essays
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
…show more content…
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

Related Documents

  • Improved Essays

    The government feel that if they tax the rich more then the rich will spend less, the objective with the trickle down effect was to make poor people richer and not rich people poor. The government see taxing society as raising revenue which will raise society. A lot of these economic policies are based around the trickle-down theory and it simply does not work therefore they should be reversed. Although the government have yet to make any concrete changes it seems they are trying to re-adjust the tax system, “We want a simpler, fairer tax system that supports those on low and middle incomes while making sure that those who can best afford it make a fair contribution.” (gov.uk…

    • 851 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    Because the creditor tends to consume less and save more, in order to invest the money in debtors, as a result they have a large proportion of savings. When deflation impairs debtors’ wealth, the decline in consumption will makes debtors suffers more than the…

    • 1183 Words
    • 5 Pages
    Great Essays
  • Improved Essays

    Death Tax Debate

    • 851 Words
    • 4 Pages

    I agree that tax rates on capital gains and dividends should be decreased. Having a high capital gains tax earns the government money but have bad effects on the economy. High capital gains taxes make investing more expensive causing fewer overall…

    • 851 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    Therefore, the private sector will have negative outcomes, and the private sector will borrow less money. With the private sector borrowing less money and less money circulating in the economy, the unemployment rate goes up, aggregate demand decreases, and a recession may occur. The items listed before all slow down economic growth. This is another con of national debt because it affects the private sector, job security, and economic growth in bad ways. A negative of the national debt is taxes may rise in the future to produce higher revenues for the government…

    • 728 Words
    • 3 Pages
    Improved Essays
  • Improved Essays

    The Federal Reserve set the limit to the amount of money that 's allowed to be borrowed from the government to banks. So increasing the interest rates would cause banks to increase their rates as well if they want to make money as well. As a result, consumers spend less, causing prices to drop and slowing down the inflation. Secondly, the reserve requirements must increase. When the reserve requirement increases, it allows banks to hold more money to cover up the costs of withdrawals, thus limiting inflation because consumers will borrow less and decrease spending.…

    • 1320 Words
    • 6 Pages
    Improved Essays
  • Improved Essays

    Robert Frank offered a solution in his chapter “Falling Behind: How Rising Inequality Harms the middle class.” He states that, “government facilitated initiatives can as well decrease or increase inequality. Policy makers and social scientists debate the effectiveness and relative merits of every strategy of inequality regulation.” (26). These typical initiatives by the government can reduce the growing gap between the poor and the rich while increasing public education. This, in turn, can increase the skilled labor supply and reduce the income inequality because of education differentials. Economics implementation of progressive taxation will result in the rich being taxed relatively more as compared to the poor; hence the amount of income inequality in society will be reduced.…

    • 1391 Words
    • 6 Pages
    Improved Essays
  • Superior Essays

    That is to say, the more money in the economy the more customers would buy Aveeno Eczema Therapy. Contracting Monetary Policy: congress and the president create these policies to increase government income while the economy is doing well and to prevent an economic bubble. It is also a policy used by authorities contract the supply of money a deduce economic activities by increasing the interest rate. This is done by a reduction in the money supply in the economy. A higher interest rate would reduce the production and demand of Aveeno eczema therapy as there would be little money in…

    • 1251 Words
    • 5 Pages
    Superior Essays
  • Improved Essays

    1.) This being a progressive tax the lower income group people will pay more taxes which will reduce their income portion making them bear a larger loss. 2.) As the sales taxes will be high a lot of consumers will plan buying items outside the country and this would contribute to increase in Tax Evasion. 3.)…

    • 837 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    President Obama’s and Chairman Rangel’s high taxation policies have made cooperation and upper class expenditures raised by paying significant percentage rates of their income. This leads to damage in economic growth due to low incentives in investing. It discouraged business investors to enter the market, effecting the long term economic growth. This reduced employment, submerging the employment rates. In some cases, Tax hikes did not improved budget balance as high earners primarily paid most of federal income tax burden.…

    • 1077 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    US Dollar Depreciation

    • 828 Words
    • 4 Pages

    "Does depreciation in the US dollar improve the trade deficit? Introduction What is trade deficit? Trade deficit is an economic measure of a negative balance of trade in which a country 's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets. Depreciation in value of US dollar in front of other global currencies can improve or reduce trade deficit as depreciation in dollar can reduce the trade deficit by encouraging exports as not exporters will get better returns and discouraging imports as now imports are more costly which will eventually boost exports and reduce imports.…

    • 828 Words
    • 4 Pages
    Improved Essays