Australia’s Laffer Curve

The Laffer Curve is a qualitative graph which derives from the idea that 100% tax rates return 0 revenue just as well as 0% tax rates. It is an argument which favors the unintuitive step of lowering tax rates on economic producers in order to collect more money from them, since there must be some peak revenue between 0% and 100% rates. By eliminating progressive income tax brackets and adopting a flat tax, we achieve a fair economy as well as a more lucrative economy, because earned money can be reinvested.

Well, this concept was put to the test in Australia, where the capital gains tax rate on individuals was cut by 50% in 1999. Over the next decade, Australia’s capital gains tax revenues  from individuals more than doubled (inflation-adjusted). Additionally, the capital gains tax rate on funds was cut by 30%. Capital gains tax revenue from funds likewise increased significantly over that same period, but less than the revenue from individuals. The capital gains tax rate on companies was not changed, and the capital gains tax revenue from companies grew the slowest. It’s a beautifully clear empirical trend – Australia raised greater revenues from each group roughly proportional to the extent to which they cut tax rates on each group. This means they were on the high end of the Laffer Curve, and they had to cut taxes to approach the peak.

Australia, which assesses capital gains taxes as a part of their income tax system, has progressive tax brackets very similar to the US federal income tax rates. In fact, one could argue that Australia is a relative tax haven compared to the redundant tax system in the US, where you are taxed once for capital gains and once for income (and then add in state taxes, social security, etc.). So if Australia was on the high end of the Laffer Curve, and the US has even higher taxes, doesn’t that mean the US has quite a bit  more to gain by cutting tax rates?


3 Responses to “Australia’s Laffer Curve”

  1. Australia’s Laffer Curve | Australia featured blogs Says:

    […] Author: […]

  2. Another Look at the Laffer Curve « Tristan's Journal for a Free Society Says:

    […] Making this distinction effectively explains the results of the Australian experiment I’ve described in the past. […]

  3. Dane Says:

    I’m not a student of this stuff the way your obviously are, but it might be worth bearing in mind that the period since the GST was introduced here is roughly the same as the bubble economy of the late 90s/early Noughties. Tax revenues would have gone up anyway, simply as a function of having more dollars in circulation.

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