The Laffer Curve & Tax Cuts

The Laffer Curve & Tax Cuts

The Laffer Curve & Tax Cuts: After reading some of the comments in The Left Should Take A Tip From Freud On War & Taxes post, I thought I should explain why cutting taxes often leads to an INCREASE in government revenues despite what the Democrats in Congress would have you believe. The best way to do that is to introduce you (well, at least some of you) to the Laffer Curve.

Now obviously, if the tax rate is too low, the government will take in a minimal amount of revenue, that’s a given. However — and this is a concept that many people on the left often have trouble grasping — if taxes are TOO HIGH, revenue will FALL as well.

Now why is that? Well, just imagine what would happen if the government took 100% of the money that you made — would you even go to work tomorrow? Few people would and even if they did, they’d find a way to do their work “off the books” so the government wouldn’t get a piece of it.

Of course, a 100% tax is an extreme example, but the principle is the same even for lesser (yet still high) tax rates. As the tax rates go higher, more people will choose not do extra work, look for tax shelters, & will try to cheat on their taxes.

So how does a government know that taxes have gotten too high to maximize revenue? Truthfully it doesn’t, but by watching incoming revenue and the behavior of the populace, a government can make an educated guess and then adjust the tax rate.

Naturally, it does take a while for these tax cuts to have an impact. The law has to be changed, the checks have to cut and sent out, people have to receive the money and spend it, businesses have to see their revenues increasing and make changes, etc, etc, all across the economic spectrum. So you can probably assume that it’ll take 12-18 months for a change in tax policy to really impact the economy. In the interim, revenue may FALL and the government should ideally cut spending to keep from running a deficit and to get lean and mean (unfortunately, this part of the equation is often left out).

The Bush tax cut is gong to stimulate the economy and increase government revenue just like the Harding, Kennedy, and Reagan administration tax cuts did. Now if only we had a Balanced Budget Amendment to keep the government from frittering away large portions of the new tax money that’s going to come rolling in…

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