Glamor Economics

Chapter 133

Chapter 17 Section 6 Why Tax Cuts Increase Fiscal Revenue——Laffer Curve

The Laffer curve is a theory about taxation proposed by the supply-side school who was active in the economics circle in the mid-to-late 20s, and its representative is Arthur?Laffer, after whom the theory is named.

In January 1980, Reagan had just run for president, and his campaign team specially arranged for some economists to teach Reagan, allowing him to learn some economics knowledge necessary for governing the country.The first one to teach him was Laffer.Laffer took advantage of this opportunity to give Reagan a good sell on his Laffer curve theory of taxation.When Laffer said that "people don't want to work when the tax rate is above a certain value," Reagan stood up excitedly and said, "Yes, that's it. The surtax on wartime income is as high as 1%. We only need to make four films to reach this tax range. If we make a fifth film, then 90% of the money earned by the fifth film will be paid to the state. We barely made any money. So, after four movies, we quit working and traveled abroad."

It is precisely because Reagan’s own experience fits so well with the theory provided to him by the supply-side school, so after he came to power, he vigorously promoted the tax cut policy, which also made the Laffer curve theory, which did not attract people’s attention at the beginning, appear on the economic system. An elegant hall of learning the mainstream.

The main meaning of the Laffer curve is: when the tax rate is zero, the tax will be zero; and when the tax rate rises, the tax amount will also rise; Optimum tax rate; when the tax rate exceeds this optimal tax rate point, the tax revenue will not increase, but will begin to decline.Because when the tax rate increases beyond a certain limit, the operating costs of enterprises will increase, investment will decrease, and income will decrease, that is, the tax base will decrease, which will instead lead to a decrease in government tax revenue.

The curve drawn by Laffer to describe the relationship between taxes and tax rates is called the Laffer curve.Laffer drew this line to remind the government that lowering the tax rate at the right time can stimulate production, and the total tax revenue will actually increase due to the lower tax rate.As shown in the figure above, this curve is an inverted U-shape with both ends pointing down.When the tax rate exceeds the vertex tA of the parabola in the figure, the disincentive effect will be greater than the income effect, so although the tax rate is raised, the tax revenue begins to decline.

To understand this theory, it is necessary to start with the understanding of ordinary people.It is generally believed that the higher the tax rate, the more tax can be collected for the same amount of tax base.For example, if the income of 100 yuan is taxed, 100 yuan is the tax base. If the tax rate is 5%, then the state can collect 5 yuan of tax from it; Compared with the national treasury, there are 10 yuan more.

However, within a certain range, if the tax rate is increased on the extra income earned by taxpayers, the country can indeed collect more taxes; but once the tax rate increases beyond a certain limit, people's enthusiasm for work will decline, and the enthusiasm for paying taxes will not be high. The motivation for tax evasion increases, which leads to a decline in the tax base, and the tax that the country can collect decreases; if the country raises the tax rate to a higher level, companies will have a decline in investment enthusiasm due to declining profits, and may even be overwhelmed. With the bankruptcy, the tax base further declines, and the tax that the country may collect is further reduced.

Although Professor Laffer is famous for inventing the famous Laffer curve, he became an economic advisor to President Reagan, advising the Reagan administration on tax cuts.But the Laffer curve has been controversial in practical applications.The reason lies in the following aspects:

First, the establishment of the Laffer curve must meet certain prerequisites.A perfectly competitive market system and a closed economic environment must be satisfied, however, neither of these two prerequisites exists in the real economy.A perfectly competitive market is an ideal market system that is hard to find in real life.Under the condition of open economy, it is the capital factor, not the labor force, that is easier to move freely between countries.Capital is inherently chasing surplus value. Investors will choose countries and regions with low tax rates. Low tax rates will bring substantial growth in employment and tax revenue to capital-importing countries and regions.The comparative advantage of capital's low tax rate makes the functional relationship between the tax rate and tax revenue in an open economy appear as a monotonically decreasing curve.The labor force is affected by various factors such as national policies, cultural environment, and historical background, making it difficult to move between countries.At this point, the Laffer curve can only provide a theoretical basis for reducing corporate income tax at most, but cannot provide a theoretical basis for reducing personal income tax.

Second, the Laffer curve describes the impact of tax rates on taxation and the economy under long-term economic conditions.In the short term, various policies have a certain time lag from formulation to implementation to results.It is this time-lag effect that makes the short-term tax rate and tax function a monotonically increasing curve.

Third, the Laffer curve ignores the class analysis method and only pays attention to the relationship between income and taxation, while ignoring the people of different income classes behind the income, and simply abstracting people with different incomes into "people".Progressive tax is divided into two types: excess progressive tax and full progressive tax. Countries generally adopt excess progressive income tax.Progressive taxation means that the more income, the greater the proportion of taxation.Low-income earners do not bear high tax rates and thus do not suffer from high progressive tax rates.What really bears the high tax rate is only the extra high part of the income of the high-income earners, so the high tax rate only has a greater side effect on this part of the income.

Fourth, the Laffer curve view of work is utilitarian and cannot fully explain why people work hard.There are three possible results of high progressive tax rate affecting work: one is that some high-income earners would rather have more leisure than more work as predicted by the Laffer curve; the other is that some people will work harder so that Earn more money to make up for the loss of taxation; the third type of people's work motivation is to pursue personal achievement and self-realization, which is not directly related to income.

Fifth, the Laffer curve regards all personal income as labor income and ignores non-labor income.According to the Laffer curve theory, the higher the marginal tax rate, the lower the cost of leisure, so absenteeism increases, overtime decreases, and the time people spend on improving their skills is relatively reduced. Therefore, a high marginal tax rate hinders people's work enthusiasm and labor productivity. decline.With the gradual increase of the personal income tax rate, rational people will increase their income by increasing their working hours until they reach the working limit; then, they will increase their leisure time and reduce their working hours, and their personal income will also decrease accordingly.Therefore, light taxation on labor income and heavy taxation on non-labor income will help encourage workers' enthusiasm for work.

[links to related words]

Tax reduction, also known as tax reduction, is to reduce part of the tax payable by the taxpayer in accordance with tax laws and regulations.It is a special provision to support, encourage or take care of certain taxpayers and taxpayers to reduce their tax burden.Tax reduction is a policy measure formulated with the combination of seriousness and flexibility of taxation, and it is a generally adopted tax preference method.Because tax reduction and tax exemption are often used in combination in the tax law, people are customarily collectively referred to as tax reduction or exemption.Tax reductions are generally divided into statutory tax reductions, specific tax reductions and temporary tax reductions.

The purpose of tax reduction and exemption is to reduce the burden on producers and consumers, stimulate producers to invest, stimulate consumers to consume, and promote economic development.

(End of this chapter)