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Unformatted text preview: The Laffer Curve and Supply Side Economics TAX RATE A B C TAX REVENUES = TAX RATE x TAX BASE 100% t A t C t B The concept of the Laffer Curve was popularized by an economist named Arthur Laffer in the early 1980’s. The idea is a very simple one. Tax revenues are equal to the tax rate times the tax base and the point is that the tax base is not a constant number. The tax base is “endogenous” – it depends upon the tax rate. The higher the tax rate, the less inclined are businesses to start or expand and the less inclined are people to work instead of enjoying leisure. Also, as mentioned in our discussion of the underground economy, at higher tax rates people are less honest and less income gets reported to the Government – either way the tax base declines. Static tax analysis assumes that the base remains constant whatever the tax rate – experience shows that that is not true. The Congressional Budget Office attempts to be more realistic in their tax revenue estimates by using “Dynamic Scoring” which tries to anticipate how the tax base will change when Congress changes tax rates....
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This note was uploaded on 04/04/2012 for the course ECON 200H taught by Professor Staff during the Winter '11 term at Ohio State.
- Winter '11