Principles of Economics- Mankiw (5th) 167

Principles of Economics- Mankiw (5th) 167 - on the wrong...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 8 APPLICATION: THE COSTS OF TAXATION 173 was less tax revenue, not more. Revenue from personal income taxes (per per- son, adjusted for inflation) fell by 9 percent from 1980 to 1984, even though av- erage income (per person, adjusted for inflation) grew by 4 percent over this period. The tax cut, together with policymakers’ unwillingness to restrain spending, began a long period during which the government spent more than it collected in taxes. Throughout Reagan’s two terms in office, and for many years thereafter, the government ran large budget deficits. Yet Laffer’s argument is not completely without merit. Although an overall cut in tax rates normally reduces revenue, some taxpayers at some times may be
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: on the wrong side of the Laffer curve. In the 1980s, tax revenue collected from the richest Americans, who face the highest tax rates, did rise when their taxes were cut. The idea that cutting taxes can raise revenue may be correct if applied to (a) Deadweight Loss Deadweight Loss Tax Size (b) Revenue (the Laffer curve) Tax Revenue Tax Size Figure 8-7 H OW D EADWEIGHT L OSS AND T AX R EVENUE V ARY WITH THE S IZE OF A T AX . Panel (a) shows that as the size of a tax grows larger, the deadweight loss grows larger. Panel (b) shows that tax revenue first rises, then falls. This relationship is sometimes called the Laffer curve....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online