Laffer Curve Overview: The Laffer curve is a tool used to represent the changes in tax revenue as tax rates fluctuate by illustrating the marginal tax effect on income.
The argument of the Laffer curve is that high income taxes distort labor markets and lead to a sub optimal level of labor hours which consequently decreases tax revenue. If taxes are lowered then real disposable income will increase, and, in theory, people will raise their incomes which will increase tax revenue.
To understand the Laffer curve it helps to be familiar with the “individual supply for labor curve” from which Laffer drew several key assumptions. This second curve is based off the idea that there are two conflicting forces that determine how much people work. The substitution effect is the likelihood that a worker would give up free time for more work. This positive effect is most powerful when the reward of working outweighs the opportunity cost. There is also a negative income effect which argues that higher incomes allow individuals to put in less time for the same money. Thus, at higher levels of income, the income effect outweighs the substitution effect, creating a backward bending supply curve.
Given the trends of labor, the Laffer curve suggests an optimal tax rate. Tax revenue would clearly be zero at tax rates of 0 and 100 percent, but in the middle there must be an optimal tax rate that produces maximum revenue. The weakness of the Laffer model is that, while it can analyze the tax scenario, it does not provide the users with tools to make a judgment on their own situations. It is up to governments to figure out whether they are to the right or left of the optimal tax rates and then adjust their rates accordingly. Successful changes of tax rates throughout history have hinted that the Laffer curve is most likely correct. Most recently, Russia increased tax revenue Russia increased tax revenue by cutting tax rates from 30% to and 13% flat tax.
Jesse Stuckwisch
Long-Run Phillips Curve
-Inflation can e measured by taking a look at both the Long and short run phillips curves. Inflation is an increase in the general level of prices, or, alternatively, it is a decrease in the value of money. To say that prices have gone up means that a given number of dollars buys less, or that the value of money has gone down. An economy without money, using only barter, could have no inflation. The opposite of inflation is deflation, a decrease in the general level of prices or a rise in the value of money. For example, if prices are declining, holding inventories is expensive, and sellers will try to minimize inventories. The price at which people borrow and lend funds will also depend heavily on what they expect to happen to prices.
Inflation is measured by: • Consumer Price Index (CPI) - A measure of price changes in consumer goods and. • Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services.
Assumptions:
The assumptions of inflation are since the desire is to fix inflation rates in the short run, it is believed that the rates chnage quickly. Inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost shifts.
-The injections form both a monetary and fiscal perpective will get short run results
Conor
Short Run Phillips Curve
-Attempts to illustrate the relationship between Unemployment and Inflation.
-Originally drawn using data collected by Phillips, and then had formulas put to it
-Inflation expectations cause shifts in the curve
-Has recently fallen out of favor because it assumes that people wont be able to predict the effect a monetary or fiscal injection will have
Michael:
-Kuznets Ratio:
-Ratio that measures the gap between the richest and poorest segments of a society.
-Calculated by taking proportion of income of the highest earning 20%, dividing it by proportion going to lowest earning 20%
-Higher Kuznets Ratio means more distance between the rich and the poor, which typically indicates less even distribution
-Kuznets Curve:
-A curve that attempts to correlate income distribution with economic growth
-Kuznets suggests that initial stages of growth will bring a worsening distribution of income, which is to say that the rich will receive more than the poor in the first stages.
-As stages of growth progress, the income distribution becomes more even.
-The graph plots the Gini Coefficient against GDP/capita
-The Kuznets Curve has been debated extensively over the days; studies show mixed results.
-Self-proclaimed by Kuznets as "5% empirical, 95% speculation"
George Natural Rate of UnemploymentLong_run_aggregate_supply_diagram.png businesscycle_1.jpg -In an economy there is a certain level of unemployment that will be dominant in the long run, despite short term fluctuations to the current unemployment rate.-This rate will be the point at which the economy is performing at its potential GDP-Currently strive for 5% -Keynes believes it is very close to 0% Conditions or assumptions: -Cyclical Unemployment = 0 -Seasonal Unemployment > 0-Frictional Unemployment > 0 -Structural Unemployment > 0- In the long run, NRU=LRAS-While AS determines the NRU, Keynesian aggregate demand factors cause fluctuations in current unemployment-Demand management policies, including monetary policy cannot be used to affect the NRU-Supply side economics, policies that actually shift the long run aggregate supply curve are the only way to change NRUOther Assumptions:-There will be no discouraged workers Today: -How will the feds policy of injecting 600 billion into the American economy affect the Natural Rate of unemployment? Why?
-Non Accelerating Inflation Rate of Unemployment: Level of employment below which inflation rises.
Laffer Curve
Overview: The Laffer curve is a tool used to represent the changes in tax revenue as tax rates fluctuate by illustrating the marginal tax effect on income.
The argument of the Laffer curve is that high income taxes distort labor markets and lead to a sub optimal level of labor hours which consequently decreases tax revenue. If taxes are lowered then real disposable income will increase, and, in theory, people will raise their incomes which will increase tax revenue.
To understand the Laffer curve it helps to be familiar with the “individual supply for labor curve” from which Laffer drew several key assumptions. This second curve is based off the idea that there are two conflicting forces that determine how much people work. The substitution effect is the likelihood that a worker would give up free time for more work. This positive effect is most powerful when the reward of working outweighs the opportunity cost. There is also a negative income effect which argues that higher incomes allow individuals to put in less time for the same money. Thus, at higher levels of income, the income effect outweighs the substitution effect, creating a backward bending supply curve.
Given the trends of labor, the Laffer curve suggests an optimal tax rate. Tax revenue would clearly be zero at tax rates of 0 and 100 percent, but in the middle there must be an optimal tax rate that produces maximum revenue. The weakness of the Laffer model is that, while it can analyze the tax scenario, it does not provide the users with tools to make a judgment on their own situations. It is up to governments to figure out whether they are to the right or left of the optimal tax rates and then adjust their rates accordingly. Successful changes of tax rates throughout history have hinted that the Laffer curve is most likely correct. Most recently, Russia increased tax revenue Russia increased tax revenue by cutting tax rates from 30% to and 13% flat tax.
Jesse Stuckwisch
Long-Run Phillips Curve
-Inflation can e measured by taking a look at both the Long and short run phillips curves. Inflation is an increase in the general level of prices, or, alternatively, it is a decrease in the value of money. To say that prices have gone up means that a given number of dollars buys less, or that the value of money has gone down. An economy without money, using only barter, could have no inflation. The opposite of inflation is deflation, a decrease in the general level of prices or a rise in the value of money. For example, if prices are declining, holding inventories is expensive, and sellers will try to minimize inventories. The price at which people borrow and lend funds will also depend heavily on what they expect to happen to prices.
Inflation is measured by:
• Consumer Price Index (CPI) - A measure of price changes in consumer goods and.
• Producer Price Indexes (PPI) - A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services.
Assumptions:
The assumptions of inflation are since the desire is to fix inflation rates in the short run, it is believed that the rates chnage quickly. Inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost shifts.
-The injections form both a monetary and fiscal perpective will get short run results
Conor
Short Run Phillips Curve
-Attempts to illustrate the relationship between Unemployment and Inflation.
-Originally drawn using data collected by Phillips, and then had formulas put to it
-Inflation expectations cause shifts in the curve
-Has recently fallen out of favor because it assumes that people wont be able to predict the effect a monetary or fiscal injection will have
Michael:
-Kuznets Ratio:
-Ratio that measures the gap between the richest and poorest segments of a society.
-Calculated by taking proportion of income of the highest earning 20%, dividing it by proportion going to lowest earning 20%
-Higher Kuznets Ratio means more distance between the rich and the poor, which typically indicates less even distribution
-Kuznets Curve:
-A curve that attempts to correlate income distribution with economic growth
-Kuznets suggests that initial stages of growth will bring a worsening distribution of income, which is to say that the rich will receive more than the poor in the first stages.
-As stages of growth progress, the income distribution becomes more even.
-The graph plots the Gini Coefficient against GDP/capita
-The Kuznets Curve has been debated extensively over the days; studies show mixed results.
-Self-proclaimed by Kuznets as "5% empirical, 95% speculation"
George Natural Rate of UnemploymentLong_run_aggregate_supply_diagram.png businesscycle_1.jpg -In an economy there is a certain level of unemployment that will be dominant in the long run, despite short term fluctuations to the current unemployment rate. -This rate will be the point at which the economy is performing at its potential GDP -Currently strive for 5% -Keynes believes it is very close to 0% Conditions or assumptions: -Cyclical Unemployment = 0 -Seasonal Unemployment > 0 -Frictional Unemployment > 0 -Structural Unemployment > 0 - In the long run, NRU=LRAS -While AS determines the NRU, Keynesian aggregate demand factors cause fluctuations in current unemployment -Demand management policies, including monetary policy cannot be used to affect the NRU -Supply side economics, policies that actually shift the long run aggregate supply curve are the only way to change NRU Other Assumptions: -There will be no discouraged workers Today: -How will the feds policy of injecting 600 billion into the American economy affect the Natural Rate of unemployment? Why?
-Non Accelerating Inflation Rate of Unemployment: Level of employment below which inflation rises.