FEE – At a 1974 dinner meeting that included Dick Cheney and Donald Rumsfeld, Arthur Laffer presented his case against President Ford’s tax increase by famously sketching a graph on a napkin to prove his point. This graph came to be known as the “Laffer Curve.”
The Laffer Curve shows the direct correlation between tax rates and tax revenue. The graph suggests that there is a certain tax rate the government should impose. To better understand the graph, you have to understand where placing the tax rate at either end of the X-axis would mean. If the government imposed a tax rate of 0 percent, the government would not collect any revenue. If the government imposed a tax rate of 100 percent, individuals would no longer work and businesses would no longer produce goods as there would be no incentive to do so. While there are varying schools of thought from economists on where the tax rate should be placed, economic principles show that lowering the tax rate gives more of an incentive to produce and can grow the economy.
We are finally seeing the Laffer Curve applied in real policy, as well as the predicted results. The new tax plan has significantly lowered taxes and helped stimulate growth for the economy.
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