Art Laffer explains the Laffer Curve — Transcript

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1. 0:00[Music]
2. 0:11so you asked me what is the laugher curb
3. 0:13now in all honesty the laugher curb is
4. 0:15you may see as my profile but no it's
5. 0:18not the the laugher curve is the
6. 0:20relationship between tax rates and total
7. 0:23tax revenues and by the way I did not
8. 0:25name it the laugher curve and it's been
9. 0:28around for centuries and centuries in
10. 0:30fact the first reference to it I already
11. 0:32know is in the madema in 1381 ibben
12. 0:36calun described it this way at the
13. 0:39beginning of dynasties tax rates are low
14. 0:41and revenues are high at the end of
15. 0:43dynasties tax rates are high and
16. 0:45revenues are low that's the sort of
17. 0:48logic behind it but let me if I can say
18. 0:50how much would you work if you were
19. 0:53taxed at 100% so that every time you go
20. 0:56to the office uh instead of getting a
21. 0:58check you get a bill
22. 1:00obviously you wouldn't work at all and
23. 1:02there'd be no work but also the tax
24. 1:04revenues would be zero now that's this
25. 1:06point right here on the laer curve at
26. 1:09100% tax rates no one will find there's
27. 1:11any incentive whatsoever to work they
28. 1:14won't work and tax revenues will be zero
29. 1:17as well now as you start lowering tax
30. 1:19rates to 99 to 98 to 97 somewhere along
31. 1:23the line all of a sudden you're going to
32. 1:25find it worthwhile to start working and
33. 1:27you're going to see revenues starting to
34. 1:28rise the other point of the laugher
35. 1:31curve that's fixed is at zero tax rates
36. 1:34at zero tax rates if there are no taxes
37. 1:36of course the government's not going to
38. 1:38collect any revenues we're going to have
39. 1:40a lot of output employment production
40. 1:41but there'll be no revenues and that's
41. 1:43this point down here and again at this
42. 1:45point if they start raising tax rates as
43. 1:48they start raising tax rates what you're
44. 1:50going to find is the revenues are going
45. 1:52to increase but they're increase at
46. 1:54slower and slower rates and these two
47. 1:56curves will come at a point the maximum
48. 1:58point out here now the key thing about
49. 2:01the laugher curve that makes it fairly
50. 2:03interesting for politicians is do
51. 2:05remember it's a pedagogic device not an
52. 2:08explicit measure of any one country but
53. 2:10what it does show you is that there are
54. 2:12two tax rates that give the same amount
55. 2:15of Revenue there's a high tax rate and a
56. 2:18low tax rate No Country should ever want
57. 2:21to be in that high tax rate range I mean
58. 2:24why would you ever want a tax at this
59. 2:26point where if you lowered tax rates you
60. 2:29collected more money money and you have
61. 2:31more output employment and production so
62. 2:33this is the laer curve which really
63. 2:35brings together the debate about taxes
64. 2:38there are two effects taxes have on
65. 2:40revenues number one which we call the
66. 2:43arithmetic effect if you raise tax rates
67. 2:46you do collect more Revenue per dollar
68. 2:49of tax base that's the arithmetic effect
69. 2:52but there's also the economic effect
70. 2:54which if you re red increase tax rates
71. 2:57you reduce the attractiveness of doing
72. 2:59the activity
73. 3:00and you will shrink the tax base these
74. 3:03two effects the arithmetic effect and
75. 3:05the economic effect always work in the
76. 3:08opposite direction in this range the
77. 3:10arithmetic effect wins and you get more
78. 3:13revenues by raising tax rates in this
79. 3:15range the economic effect wins which by
80. 3:19raising tax rates you actually get less
81. 3:21revenues because you do more and more
82. 3:23damage to the tax base and that ladies
83. 3:26and gentlemen is the laugher curve thank
84. 3:29you
85. 3:30[Music]