02 December 2012

The Laffer Curve

In an earlier post I mentioned the Laffer Curve (named after economist Arthur Laffer). The idea that Laffer popularised was that if the tax rates were at zero percent then the government would take in no revenue, and, likewise, if the tax rates were one hundred percent the government would also take in no revenue because no one wants to work if all their money is taken from them. Somewhere between the two extremes there exists a maximum tax rate where the maximum amount of revenue can be collected. Most economists agree that that maximum rate is 33 percent, which is close to what it is today.

Dan Mitchell of the Cato Institute explains the Laffer Curve in this 21 minute video.