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Unformatted text preview: Notes 14--The "Laffer Curve" See the text on this. The point is that an increase in tax rates is not necessarily the same as an increase in tax revenues. Raising rates can cause taxpayers to avoid taxes (reduce their taxes by legal means) by using tax shelters to take advantage of deductions (remember, one man's loophole is another man's write-off), shifting income around to take advantage of more favorable rates, and simply working and hence earning less. Higher rates also encourage evasion. Hence, as rates rise, (1) the government collects more of each dollar of income earned, which raises revenues, but also (2) the amount of income which can be taxed declines, which reduces revenues. Up to a point, (1) dominates (2) and revenues rise, but beyond some percentage tax rate--probably 40 to 50 percent--(2) dominates (1), and revenues fall. So, it is possible to cut tax rates but increase tax revenues , as appears to have happened for high income earners in the US as a result of the 1981 tax law, which greatly reduced the marginal tax rates on that group. income earners in the US as a result of the 1981 tax law, which greatly reduced the marginal tax rates on that group....
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This note was uploaded on 11/23/2011 for the course ECON 231 taught by Professor Staff during the Fall '09 term at Calhoun Community College.
- Fall '09