Laffer Curve
July 12, 2012
This is the original graph that
Art Laffer wrote on a napkin.
There is nothing wrong with this graph, but we want to
make it easier to understand, because graphs can become
confusing.

The only thing the Laffer Curve addresses
is the tax rates.
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Economics is very complicated because it is
effected by many factors, such as:
Tax Rates
Regulations
Deductions
Exemptions
Stability of Currency
Total Spending
Tax credits.
What is Taxable GDP?
Taxable GDP stands for Gross Domestic
Product that is taxable.
 Taxable Gross Domestic Product is all the
product made and services provided for a
country in a given year that can be taxed.
 In the Laffer Curve we only talk about
taxable GDP.

What is Taxable GDP?
•
Taxable GDP is the money you make that
can be taxed by the government.
•
This does not include income that is
deducted, exempted, or labor you do
yourself.
Taxable GDP
100
100
100
100
100
100
The Laffer Curve
does not assume This graph is
saying that the
this.
100
100
100
100
100
90%
100%
This line is
the taxable
GDP.
taxable GDP will
stay the same as
the tax rates
increase.
These numbers are
the tax rates.
0%
10%
20%
30%
40%
50%
Tax rate
60%
70%
80%
Taxable GDP
100
100
100
100
100
100
100
100
100
100
100
90
80
The Laffer
Curve does not
assume this.
70
60
50
40
30
Congressional
This graph is
This assumes
tax
This
line that
represents
Budget
Office
saying
that
the
payersthe
thoughts
amount and
of actions
(CBO)
uses
this
taxable
GDP
will
money
government
is
do not change with
getting
from
taxes.as
stay
the
same
chart.
changing
tax
rates.
the tax rates
increase.
20
10
0
0%
10%
20%
30%
40%
50%
Tax Rates
60%
70%
80%
90%
100%
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The Laffer Curve believes that tax payers
thoughts and actions do change with
changing tax rates.
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As the Tax Rate increases, the benefit of
the profit is reduced; thus entrepreneurs
are less likely to start, expand, or might
even close a business.

Pros of a Business
1.

Profits

Cons of a Business
1. Your own labor
and time
2.Expenses
As tax rates increases, the weight or worth
of profits are greatly reduced.
Back to the Basics
A trade of product or labor only happens
when two people agree on a mutual cost
that benefits both people.
 If they both decide that it’s fair to trade
ten chickens for ten stalks of corn, and the
government has a 50% tax rate, then
each person will give ten of their items
away, and only receive five of the other
persons product.

Back to the Basics
The government is taking the other five
products from each person.
 The more the government taxes, the less
people are willing to trade.
 If people stop trading completely, the
governments income would cease to exist.

Now we are going to look at the logic of
the Laffer Curve.
 Its shows us that people’s thoughts and
actions do change with increasing tax
rates.

Laffer Curve
100
90
80
100
When
tax rates
70
represents
increase,
people
the
do not see worth in
maximum
If the
tax and
rate stands
buying
goods
amount
of$60
services.
So,
theyis the full
at 40%,
taxable
try
to
do things
on
taxable
GDP.
there
own, which is
GDP
not
nearly as
without
the
productive. This is
affect of tax
comparable
rates.
advantage.
Unlike the
other graphs,
this graph is
what the
Laffer taxes
Curve
100%.
So, we are no
40
assumes.
longer willing
The reason why
Labor you do yourself is not
thePeople
taxablewill
GDP
taxed. Buying things is
is diagonal
have
a hardis
important,line
because
because
people’s
it allows people
to focus
on
seeing
Lets first look at time
this line
so
one thing and get goodtoatwork
that the Lafferwillingness
Curve
makes
the
potential
Zero
doing that.
The
higher
the tax
rate,
is
increasingly
less
a little bit more sense.
represents
the less willing
people
are to work.
unrealized.
as
the
government
60
when
taxes us. government
50
30
to work.
20
10
0
0%
10%
20%
30%
40%
50% 60%
Tax Rates
Taxable GDP
70%
80%
90%
100%
We are going to take
the amount of taxable
Lets look at
We haveGDP
already
talked
100
we
are willing to
30%
of
$70=$21
the math! 70% of $30=$21
about
the blue diagonal
0%
of
$100=$0
make.
90
line. It shows
us Then
how subtract
willing we
arepercent
toAt
work
when
the
that
theraterate
70%
taxation
81
At
100%
taxation
80
At
30%
taxation
the government
taxes
us.
At
you
0%
are
taxation
willing
rate
to
government
is
taxing
you
are
willing
The
green
line
shows
usto
rate
you
are
willing
70
youthat
are
make
willing
$30.
to
make
$0.
us.
After
we
will
to
make
$70.
how much
money
64
make
$100.we
60
70%
ofthe
$30
isthe
$21.
be
left
with
100%
of
$0
is $0.
get
to
keep
after
30%
of
$70
is
$21.
Shows the income
0%we
ofget
$100
to is
keep
$0.get
$9.
We
Both
the
government
money
the
people
50
We
get
to
keep
government
taxes
us.
from the taxes.
49
get
to us
keep
$100
Taxation
by
the
and
only
keep $0
This is the actual
to keep.
$49.
40
Laffer Curve.
government
36
Laffer Curve
100% of $0=$0
16
21
24
25
30
24
16
9
21
9
0
0%
10%
20%
30%
40%
50% 60%
Tax Rates
70%
20
16
4
80%
10
9
1
0
90%
100%
Lessons Learned
We have to know when to stop taxing.
 As we saw, if the government taxes us too
much, then it is no longer worth working.
 People then start trying to do things on
their own.
 This is not nearly as productive.
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Lessons Learned
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The higher the rate of welfare, the less
economic activity.
If the government gives us things, we are less
willing to work for it.
The total amount of people in America on
welfare is approximately 15,000,000 people!
$132 billion are spent on welfare alone each
year (not including food stamps or
unemployment)!
This forces the tax rate higher, thus reducing
GDP.
Lessons Learned
Exemptions and deductions are
counterproductive.
 Exemptions and deductions are when
government makes exceptions on what
GDP is taxed and what is not.
 When government makes exceptions on
too many circumstances, they realize they
aren’t getting enough tax revenue.
 So, they raise tax rates.
 Now, as we learned, they aren’t going to
raise enough tax revenue.
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Lessons Learned
If you have 30% taxation rate and you
have a taxable GDP of $70 the
government collects $21.
 If you then exempt 50% of the GDP, the
governments income drops to $10.50.
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Lessons Learned
You will never be able to raise rates high
enough to get back to $21 because the
taxable GDP drops as you raise the rates.
 It is far superior to lower tax rates instead
of using deductions and exceptions.
 Having progressive tax rates are similar to
large deductions.

One low, flat rate with no
exemptions or deductions will
result in a much higher GDP
100
90
81
This will result in
higher employment
and higher pay.
80
70
64
60
50
49
40
36
16
21
24
25
30
24
16
9
21
9
0
0%
10%
20%
30%
40%
50% 60%
Tax Rates
70%
20
16
4
80%
10
9
1
0
90%
100%