The Laffer curve was created during the time of Reagan's presidency by Arthur Laffer. Reagan was a huge supporter of the Laffer curve, because he had experienced very high tax rates during World War II, as an actor. The Laffer curve suggests that there is an optimal tax rate in terms of optimizing total tax revenue. Naturally, tax revenue is zero at a tax rate of zero and would be zero at a tax rate of 100%, because one would basically have to pay the government to work, and not receive any income. Tax revenue will be collected in between these two extreme values and the general shape of the curve is hardly up for debate.
This graph than shows that if income tax rate is above the equilibrium than total tax revenue will increase if the tax rate is lower. When the tax rate it is below the equilibrium tax revenue will increase if taxes are increased. The points on this graph are all arbitrary, and no one is absolutely sure where the equilibrium tax rate is. This is highly up for debate and leads to the next point:
This is model creates the divide between the two major political parties in the U.S. government. Conservatives generally advocate lower tax rates while Democrats generally advocate higher tax rates. There has been much debate over what tax rate percent will yield the maximum revenue level. Majority opinion, however, seems to agree that the democrat's policy of higher tax rates yield higher revenue that tax breaks.
- As shown in the graph, maximum revenue is obtained when the tax rate is at 50%. The constant decrease and increase in the tax rate by the Conservative and Democrate groups are attempts to reach maximum revenue.