An economic theory known as Supply-Side Economics purports that tax reductions will revitalize the economy due to increased purchasing activity by the consumer, which over a period, would create a larger tax base to compensate for the lost government revenue resulting from the tax cut. American economist, Arthur B. Laffer, popularized the idea and drew the famous “Laffer Curve” which illustrates that starting from zero and as the tax rates increase, the government’s revenue increases, but at some point, when the tax rate becomes too high government revenue starts to decrease. Imagine, who would work if their entire income went to paying taxes?
Supply-side economists believe that changes in marginal tax rates exert important effects on aggregate supply. America’s current tax structure for 2012 consists of six levels of tax rates applicable to a range of income called a “tax bracket.” The last percentage rate used calculating your income tax in relation to the range of income earned is your marginal tax rate. (See below table) The marginal tax rate is relevant in personal decision-making. (Gwartney, 2011) Therefore, an increase in the tax rate will decrease consumer buying power and the incentives to produce goods and services.
Single Filing Status Example
Taxable Income $100,000
The Laffer curve is a model demonstrating two realities. First, lowering tax rates does not always increase revenues, nor does raising taxes always increase revenues. Second, it shows there are usually two different rates that will generate the same revenues. (Oliner, 2011) The Laffer curve does not say, “All tax cuts pay for themselves” as many people...