Question

The Laffer curve models – as a function of a single – . In a progressive scheme, one has to look separately at the revenue from different segments of taxpayers, corresponding to different rates. The data in the table suggests that tax cuts in the early 1980s led to – revenue from lower-income taxpayers but – revenue from the highest-income taxpayers. This would mean that reductions in the – rate, at least, made fiscal sense.

Answer 1

Laffer curve models tax revenue as a function of a single tax rate.

Given the table above, it suggests that the tax cuts led to less revenue from the lower income groups ie there was a reduction in the taxes from the bottom 50%. But it led to more revenue from higher income group people ie the top 1%.

This implies that the reduction in the top marginal rate made atleast fiscal sense.

What is the laffer curve?

The Laffer Curve is based on supply-side economist Arthur Laffer's theory. It was developed in 1974 to illustrate the relationship between tax rates and the amount of tax revenue collected by governments.

The curve is frequently used to demonstrate the point that lowering tax rates can result in increased total tax revenue.

The Laffer Curve is a tax theory that proposes an inverted-U-shaped relationship between tax rates and government revenue.

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