It is officially tax season, and while gathering all my financial documents to get ready to prepare them, I started to wonder how things would officially pan out for me this year. I was reminded of a study I read in an accounting course regarding the Laffer Curve and wanted to hit on a few points regarding it.
The Laffer Curve illustrates the two most important things we need to know about taxes: how much money the government can raise from taxes and at what level of tazation the government might start getting less, not more, revenue.
The Laffer Curve is illustrated by a normal graph. The horizontal line is the tax rate that the government chooses, and the vertical line is the revenue that the government receives from that tax rate.
If the tax rate is zero, the government receives zero revenue. Accordingly, point (0,0) is the first point on the curve. And if the government keeps raising the rate, then revenue will continue to go up, at least when we're in the low tax rate part of the graph.
If the government charges a 100% tax rate, no one would work, and the national income would be zero. This means that government revenue would be 100% of zero. So another point on the curve must be all the way to the right on the tax rate line at 100% where revenue equals zero.
A study by Christina Romer and her husband David Romer, both economics professors at University of California Berkeley, was written and published in the American Economic Review. This study examined how the national income responds to tax rates. It was calculated that the hump on the Laffer Curve occurs where the tax rate is around 33 percent.
No matter what your politics, you should not want tax rates to be above around 33 percent. Obviously, conservatives and many moderates think the rate should be lower than that. But even if you are an extreme left-winger and your only goal is to make government as big as possible, you should oppose a tax rate more than 33 percent because when taxes go higher than that, the government actually gets less money.