Download I was on the Laffer curve.

The Laffer Curve
& Supply-side economics
Alban William Housego Phillips
1914-1975
• When engaged in a lesson on the Laffer curve, the
learner will evaluate the pros and cons of supplyside economics. The Laffer Curve will be presented
in an active board lesson and student participation,
with 100 percent mastery.
“Supply-side economics stress that shifts in AS are the
main determinant for inflation rates, unemployment, and
GDP growth. So it should be the policy of government to
promote the rightward shifts of AS.
“Supply-siders” (supporters of supply-side economics)
argue that the U.S. tax system decreases the incentive to
work, save, and invest. High tax rates hurt productivity,
LRAS
thus slows the expansion of LRAS.
Compare supply-side views with a story of Robin Hood,
who stole from the rich to give to the poor. The people
traveling through Sherwood Forest are the U.S. taxpayers,
whereas Robin Hood and his band of merry men
represent the U.S. government.
As taxpayers passed through the forest,
Robin Hood and his men intercepted
them and forced them to hand over
their money. “Do you think that
travelers continued to go through
Sherwood Forest?”
Of course not, they would
simply find a way around
the forest in order to
keep their money.
Supply-side economists argue that if tax rates were
lowered, then people would supply more labor by
working harder and longer, which will increase
aggregate supply.
Why? If people kept more of their pay check then
the opportunity cost of leisure would increase,
making work more attractive to them.
The result would be an increase in tax revenue.
“I was on the
Laffer curve.”
Reaganomics
The Laffer Curve illustrates the
relationship between tax rates and tax
revenues. As tax rates increase from
zero to a higher percentage rate, the
government will increase its tax
revenues.
Tax rate (percent)
100
l
0
Tax revenue (dollars)
Tax revenue will continue to increase up
to some maximum level. Once that
maximum level is reached, any further
increase in tax rates will actually
decrease government revenues.
Tax rate (percent)
100
m
l
0
Tax revenue (dollars)
As tax rates increase tax payers will find
ways to not pay taxes, or they will
simply work less, since the opportunity
cost of work is directly
related
to
tax
n
rates.
Tax rate (percent)
100
m
l
0
Tax revenue (dollars)
Tax rate (percent)
As you can see
if government
increases tax
rates to 100%,
people will
simply not
work. And the
government
will collect zero
in tax revenue.
100
n
m
m
Maximum
Tax
Revenue
l
0
Tax revenue (dollars)
Criticisms of the Laffer Curve
1. Higher after-tax pay enables people to “buy more leisure, because tax
cuts allow people to earn the same pay for less work.
2. It is not clear where the maximum tax rate level is located between
zero and 100.
3. Tax cuts can be more stimulating to AD than to AS causing
demand-pull inflation to occur.
A Word From Arnold
Learn economics.
Don’t be “economic
girlie men.”