Chris
11-19-2012, 11:03 AM
The Laffer Curve is easy to understand if you understand goat economics...
Since raising goats is a rather simple economic activity, it is easy to model the impact of taxation on goat farming. Assuming the government comes and takes various numbers of the new goats (income) each year in goat taxes, one can easily calculate the impact of the size of the herd, and ultimately how much total revenue the government would receive over 10 years at various tax rates. It turns out that the optimum tax rate is in the 20-30% range to maximize total 10 year revenue.
The reason the tax revenue drops above a 30% rate is simple. If the government takes more new goats in taxes, the goat farmer has fewer goats to breed the following year. The smaller herd produces fewer new goats to tax each subsequent year. As a farmer, it also greatly reduces the size of the herd (wealth). Below is the cumulative ten year tax revenue when starting with 10 female goats, the tax collected in year 10, and the herd size after ten years:
http://i.snag.gy/wT6KQ.jpg
This type of revenue curve is exactly what Arthur Laffer would predict with the Laffer Curve....
It should also be noted that the curve listed above is not the Laffer Curve, but rather the physical limit for goat herding. The Laffer curve would suggest the actual goat herding activity would drop as tax rates go up due to a disincentive to work. On this basis, the optimum tax rate would be lower than the physical limit peak. This is a significant point in light of the current debate around increasing tax revenues. The Democrats only want to increase tax rates on the wealthy who are already on the downward slope of the curve while doing nothing to increase tax rates on the famous 47% who pay no income taxes. Based on this curve, one would expect income tax revenues to drop if they are successful....
@ Goat Economics: Why the Laffer Curve Is No Joke (http://www.realclearmarkets.com/articles/2012/11/16/goat_economics_why_the_laffer_curve_is_no_joke_999 92.html)
Since raising goats is a rather simple economic activity, it is easy to model the impact of taxation on goat farming. Assuming the government comes and takes various numbers of the new goats (income) each year in goat taxes, one can easily calculate the impact of the size of the herd, and ultimately how much total revenue the government would receive over 10 years at various tax rates. It turns out that the optimum tax rate is in the 20-30% range to maximize total 10 year revenue.
The reason the tax revenue drops above a 30% rate is simple. If the government takes more new goats in taxes, the goat farmer has fewer goats to breed the following year. The smaller herd produces fewer new goats to tax each subsequent year. As a farmer, it also greatly reduces the size of the herd (wealth). Below is the cumulative ten year tax revenue when starting with 10 female goats, the tax collected in year 10, and the herd size after ten years:
http://i.snag.gy/wT6KQ.jpg
This type of revenue curve is exactly what Arthur Laffer would predict with the Laffer Curve....
It should also be noted that the curve listed above is not the Laffer Curve, but rather the physical limit for goat herding. The Laffer curve would suggest the actual goat herding activity would drop as tax rates go up due to a disincentive to work. On this basis, the optimum tax rate would be lower than the physical limit peak. This is a significant point in light of the current debate around increasing tax revenues. The Democrats only want to increase tax rates on the wealthy who are already on the downward slope of the curve while doing nothing to increase tax rates on the famous 47% who pay no income taxes. Based on this curve, one would expect income tax revenues to drop if they are successful....
@ Goat Economics: Why the Laffer Curve Is No Joke (http://www.realclearmarkets.com/articles/2012/11/16/goat_economics_why_the_laffer_curve_is_no_joke_999 92.html)