Unbiased Analysis of Today's Healthcare Issues

Neo-Laffer Curve

Written By: Jason Shafrin - Sep• 25•07

The Laffer curve is a compelling economic concept.  It claims that government revenue as a function of tax rates is shaped as an inverted-U.  This means that, at first, raising the tax rate from zero will increase tax rates.  However, there is some tax rate which maximizes government revenue (but not necessarily social welfare).  When tax rates are increased beyond this point, however, tax revenues decrease because as income taxes rise, the disincentive to work becomes sufficiently great that the higher per hour amount of tax receipts will be more than offset by the workers incentive to work less hours.

The theory is theoretically sound and elegant, but do economists actually know what the tax rate which maximizes government revenue will be?

The mathematician Martin Gardner claims not.  His satirical construct called the neo-Laffer curve (see image).  According to Wikipedia, “The neo-Laffer curve matches the original curve near the two extremes of 0% and 100%, but rapidly collapses into an incomprehensible snarl of chaos at the middle. Gardner based his curve on actual US economic data collected in a fifty year period by statistician Persi Diaconis.”

Gardner makes the sound point that the Laffer curves is very appropriate for theoretical analysis and as a pedagogical tool, but it does not sufficiently reflect reality in order for politicians to make tax policy based on the construct.

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2 Comments

  1. […] The Laffer curve is a compelling economic concept. It claims that government revenue as a function of tax rates is shaped as an inverted-U. This means that, at first, raising the tax rate from zero will increase tax rates. However, there is some tax rate which maximizes government revenue (but not necessarily social welfare). When […] Read more… […]

  2. […] anyone who tells you that cost and quality are closely linked. The fact of the matter is that sometimes you pay very little for a design and it rocks and sometimes you pay a whole giant load of cash for a design and it rocks not at all.  It’s very difficult to determine quality of work before you’ve received the work.  Because it’s so difficult, giant design firms would love for you to think that there is a tight correlation; their giant bill is not only justified, it’s integral to good work.  There may be a loose correlation.  But below are two of the data points I used to carefully plot my “quality of design” chart.  I should also note that the scribble chart is a direct rip-off of Martin Gardner’s Neo-Laffer curve. […]