Pop Quiz

What is the name of this economic theory that wingnuts love so much. They use it to support tax cuts. The graph shows tax rats from 0% to a 100%. Tax revenue can be small or vast. The graph is meant to judge the elasticity of taxation. Conservatives used this graph to argue that if taxes are down then people work less. They in turn will have more free time to spend money.

Okay kiddies, name this economics theory.

Note: clicking the photo won't help and Ropers can't play. I know you guys will figure this out. I want to see if the readers will.

We have a winner. Vrej correctly answered that it is the Laffer Curve. He corrects an error I made in the post.

You explained it wrong. Conservatives (really, proponents of supply-side economics, they don't have to be conservative) argue that the lower taxes are, the MORE people will work, since they get to keep more of their own money. However, reducing taxes all the way means no money for the government. Likewise, at 100% taxation, no one has any reason to work, since all the profit would go to the government, and so revenue is also zero. The idea is that somewhere in between 0% and 100% taxation is the perfect balance between encouraging work (really, not work but profit-generating activity, which could be investments, rents, etc.) with low taxes and raising revenue for the state with "high" taxes. The equilibrium point (which your picture suggests is at 50%, but according to supply side economists would be much closer to 0%) thus maximizes revenue for the state - any higher and profit is discouraged, and lower and the extra profit isn't benefiting the state.

I responded with my misgivens about the theory.

Vreg, you are correct. I stated it wrong. Which makes Laffer's theory more troubling. The more people are taxed the more they will have to work. Ofcourse, if taxes are at 100% it would be counterproductive to work.

Laffer did not invent the theory. He was credited with it after having dinner with two Gerald Ford aides named Dick Cheney and Donald Rumsfeld.