Morgan Kimbarow, et al. “Morgan Kimbarow.” Global Liberty Media The Counter Narrative, 18 Feb. 2018, http://globallibertymedia.com/the-laffer-curve-applied-to-the-gop-tax-plan/.
The government’s revenue comes from taxes, and taxes in turn fund government spending. Higher taxes mean that the government can spend more on government programs such as infrastructure, defense and social programs.
Lower taxes cause the government to spend less on these programs, or if they do not cut spending, increase the deficit. While the math on taxes, government spending and budget deficits appears simple, it is anything but.
There is an economic theory called the Laffer curve, which claims that there is an optimal amount of taxes that the government can collect to maximize revenue. The curve is shaped like a parabola: at one end, a tax rate of zero percent will yield zero government revenues, and at the other rate, a government tax rate of 100 percent will also yield zero revenue, as the government will own all the wealth and therefore will have gained nothing from taking what it already has.
Somewhere between one percent to 99 percent tax rate is the tax rate that brings in the highest amount of revenue. Starting from zero, as the tax rate increases, the government brings in more taxes because they are taking a higher percentage.
However, at some point, the rate at which consumers and businesses spend on goods and services will decline due to the higher tax rate. This means that even though the government is taking a higher percentage of all transactions, there are fewer transactions overall, and so the amount of money the government makes decreases.
Higher business costs, whether that be wages, taxes, regulations or utilities, drive businesses to invest and conduct operations elsewhere. Lower taxes mean consumers and corporations stay in America, growing the economy and increasing tax revenue. However, cutting taxes too low can also diminish tax revenue. A balance is required for optimal tax revenue.
Mark Streiber was an Economics intern for ONC during the Summer 2022 semester.
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