Smaller percentage of a larger sum

[worlder]

I've heard a few arguments about how cutting taxes actually raises the revenue from taxes.

I can see where they are coming from.

Suppose it is 5% of 300. The revenue would be 15.

Then it is cut to 3%. But the individual's income is increased to 550. We get 16.5 as tax revenue.

Of course this always assumes that the taxable income always increases when cutting the tax rate as it allows more circulation via spending paychecks.

[Haseen]

This is known as the Laffer curve. As tax rates go up, revenue goes up, but eventually reaches a max and starts to drop again (due to a damper on the economy and more loophole seeking). Of course, revenues won't actually go back down until marginal tax rates are extremely high, which is why right wingers conveniently neglect to put actual numbers on the graph. It wouldn't do much for their case if it shows we're nowhere near the peak.

[ltfred]

The tax rate does curve- at about 97%. Laffer theorised that it curved at X%, where X is whatever the tax rate is right now.

As John Quiggan quipped, nothing he said was both new and right.

[Armand Tanzarian]

Sept 28, 2011 3:29:25 GMT -5 ltfred said:

The tax rate does curve- at about 97%. Laffer theorised that it curved at X%, where X is whatever the tax rate is right now.

As John Quiggan quipped, nothing he said was both new and right.

I think I've heard several different places where the Laffer Curve peaks. Also its always pertinent to remember the peak is very much dependent on many different factors, meaning there is no absolute "peak" for all circumstances.

At the same time, no source I've seen ever pegs the peak any lower than 50%. The most common statistics I know of tend to fall around 70%; this Forbes article cites the lowest I've ever heard of at 56%. Even accounting for local taxes and other items like sales taxes and VAT, its still a substantial gap between what is being taxed now in the US and the peak.

But of course, the Laffer curve argues for an optimal balance between private sector and public; the Teabaggers want to murder the public sector.