Wednesday, March 16, 2011

The Laffer Curve

It seems that conservatives are maintaining a stranglehold on the theory of the Laffer Curve, while liberals are maintaining their staunch opposition to its ideas. The Laffer Curve is a theory of economics and taxation that says that the revenue received from taxation caps at X% tax rate (X% is constantly changing and open for discussion or dispute). The idea is that, when you have a 0% tax rate, the fed has no tax revenue (obviously), but that at 100%, no one will work because there is no incentive, bringing the fed tax revenue back to 0. The curve therefore represents the federal income based on the assumption that it is 0 at the extremes, and therefore maximized somewhere in the middle. The trick, accordingly, is to find the balance where the Fed receives the max amount of money while workers simultaneously have the lowest possible tax rate to create a work incentive.

The problem with this theory is that it is arbitrary, simplistic, and too open to interpretation. For example, conservatives tend to argue that the crest of the Curve is somewhere around 30%, so they continually argue for a tax rate as close to 30% as possible. Liberals tend to argue for a higher percentage, at least for the upper class. That's the other issue: the Curve does not take economic disparity into account, an issue that has become vastly more important as the gap between rich and poor has widened dramatically over the last few years.

By the theory of the Laffer Curve, all income levels should be able to thrive on a low, flat tax rate. The problem is that the "low flat" tax model favors the rich disproportionately, and still requires the lower classes to pay themselves into poverty. It also means that, if taxes are raised then they are raised on everyone, not just on those who can afford it. There's no flexibility in the Curve and so its model could not successfully be implemented, but it is still used as a model for conservative tax plans.

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