Read the following articles:
http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future
https://www.nationalreview.com/2019/11/greenwich-connecticut-taxes-wealth-friendly-places-prosper/
Using your knowledge of after tax engineering economic analysis on a company’s investment decisions and
the information in the article, relate how taxes can affect investment decisions. The Laffer curve basically
relates how a 5% increase in a tax rate does not necessarily increase the taxing agency’s revenue 5%, it may
even decrease the total revenue due to the interaction of arithmetic (5% increase) and economic factors (a
higher effective price will decrease economic activity). A simplistic explanation is that the tax increase may be 5
% of economic activity, but that tax increase reduces that economic activity due to a higher effective price of
goods and services, so the 5% increase taxes a lower base revenue. And that lower base revenue is caused
by the higher tax rate.
Write a two page paper on your analysis of the article and any outside research you do on the possible effects
tax rates have on private investment versus government revenue. You may restrict your analysis to Federal
taxes only. Keep in mind, this is economic theory only and, as such, can not be definitely proved or disproved.
There are other opinions on the matter and you are encouraged to explore alternate views. One area that
might prove useful in an analysis of the Laffer Curve could be the tax increases recently put in place by the
states of Connecticut and Maryland. Have the increased tax rates of those states decreased economic activity
in those states? Congress recently reduced the Corporate tax rate from 35% to 21%, and used the logic of the
Laffer Curve as an argument for doing so. Is there evidence to back up this legislation?
Sample Solution
