Unless you are a student of Ronald Reagan or plan on specializing in Economics as a career path, most likely you have never heard of Arthur Laffer and his infamous “Laffer Curve”. Yet this simple theory has been the root of most of our political struggles within this nation for the last two generations. Even today, you can hear the different political parties blaring from the various news channels their unending calls to adjust the tax code to the levels they feel are appropriate on the curve.
What exactly is the “Laffer Curve”? In simple terms it is a method of explaining that when a government taxes the economy of a nation, it will continue to increase its total revenue as it increases its rate of taxation until that magical point where the economy can no longer support the increasing taxation and then the government will then begin to see decreasing total revenues as the rate continues to rise or in other words, diminishing returns. Imagine for a moment a bell curve where at one end there is a tax rate of 0% and on the other side a tax rate of 100%. On a graph, both rates will show zero revenue, but between the two points you will see a bell shaped curve that represents the estimate revenues at each rate of taxation. Not so simple of an explanation! Try this; imagine you’re a farmer who raises corn. You start out with a bushel of corn and as you harvest each crop the bushels of corn in your possession increases. Then the landlord steps in and demands that in order to continue farming you will need to give him 10% of each harvest. As you are producing a good crop, you have no trouble doing so and the bushels of corn stored continue to increase, as does the total amount of corn the landlord receives. Increase that is until the landlord decides the rate is now 40% of all harvested corn. At this point the amount of corn left over from each harvest begins to shrink and so does the amount of corn that the landlord collects.(read more here)
Redgage Picture of the day-----A caged Bird
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