THEFIXBOOKSTORE.COM

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The Laffer Curve - Fallacy or Solid Economics?

The Laffer Curve owes its existence to Professor Arthur Laffer, a Stanford economist who worked in the Reagan Administration and became one of the key proponents of supply-side economic theories by explaining how taxation can really be optimized for the benefit of garnering fiscal appropriations with the least amount of damage resulting to the private-sector economy being levied.  Professor Laffer has often explained the Laffer Curve in terms of two interacting effects of taxation: one being an "arithmetic effect" and the other being an "economic effect".  This equates to a calculation side (the arithmetic side where the theoretical tax rate is multiplied by the revenue tax base) of the theory being interpreted in terms of how it could theoretically impact decisions in the private-sector economy.  At the extremes (i.e.: 100% tax rate and 0% tax rate) no revenue is raised at all, but there are decidedly different outcomes.  The zero percent (0.00%) tax rate allows maximum economic output and sustained economic growth as there are no limiting conditions or impacts upon the private-sector economy that would lead to the creation of recessionary business cycle conditions precedent, while the 100% tax rate results in all participants exiting the economy in favor of other activities as there is no incentive for the activities (because all the economic gains are confiscated).  As a result of his appreciation of these facts Professor Laffer posited there is a "sweetspot" where economic activity can be maximized in terms of a practical tax rate.  This is the Laffer Curve and it is generally expressed (visually) in the form of a parabolic graph.

But a bigger question remains outstanding that Professor Laffer never addressed and avoids to this day that is answered by Clint Lovell in the creation of Lovellian Economics.  That question is:

"Why use taxation to pay for government at all?"

For some this sounds like sophistry, but for the serious economist who is looking for policy solutions to the current deficit spending dangers facing the global economy, the entire premise of taxation-based government financing is called into question.  After all, if taxation were a workable economic solution for our economy and systems of governance, would there be all these deficits?  Would not taxation be able to pay for all government programs?  The answer is obvious: taxation is obsolete and the reality is that we have to have a sober discussion regarding what can be done to replace it with a system that will pay for all our costs of government.  Lovellian Economics is focused on the investment-income method and that fundamentally changes the entirety of how the economy is organized and would be expected to operate and this is the part of the argument that was never considered.  Now is the time.

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