The Laffer Curve

Who knew that Arthur Laffer’s description of how tax revenue changes with rate applies to golf, exams, public speaking, and music recitals?  It does and it’s obvious once you see it.

Arthur Laffer was an adviser to Ronald Reagan on tax policy.  He pointed out that tax revenue depends on two things.

  1. The rate charged (the thing media people understand) and,
  2. The base to which it applies (usually ignored)

Rate x Base = Revenue.  Pretty obvious really.

Since revenue depends on two things raising the rate, by itself, will not necessarily get more money for the government.  At least not beyond the short run.

The government can manage the rate, but the taxpayers manage the base. If the new rate is offensive, the taxpayers will amend their affairs so less base is exposed to the new rate.

Laffer’s observation is that there are always two tax rates that will raise the same amount of revenue.  For example 0% applied to a large base raises nothing.  Similarly 100% applied to a base that has disappeared raises nothing.  As rates travel from 0% to 100% there are intermediate rate pairs that generate the same revenue.  A and A* in the graph below.

Don’t fall in love with rates.  They alone will not raise revenue once people adjust.

If you are interested in the economic ideas for the Laffer Curve, you can find a reasonable discussion about this here.  Don’t Knock the Laffer Curve

But, how does that affect me when I need to make a 6 foot putt or write a chemistry exam?

Change the image so that the axis tax revenue$ becomes your mark on the exam or the probability of making the putt or setting a new best in the 200m dash.  Performance improves moving left to right.  On the Y-axis, up and down, change the tax rate% to be your level of excitement about the task at hand.

Again there are always two levels of excitement that will get the same result.  If I am 0% excited, (sleeping, unconscious, coma) then the achievement will be quite low.  If I am 100% excited, (catatonic with fear) again I will achieve nothing.  As with taxes, there are two levels of excitement that will result in the same mark.

In this context, excitement is made up of several things.  Stress, alertness, vigilance, hope, fear.   The optimum is in the middle somewhere.  Excited enough but not too much.  Paying attention but not so stressed that I am “tight.”  Athletes refer to it as getting up for a game.

Athletes have very strong ability to manage their emotions and their involvement.  Usually they need to move up to their optimal level.  In the zone, where things just flow.  Less experienced people tend to get over excited and need to learn to move their level down.

Take a deep breath, focus on your skills rather than your failings, relax your body, allow your brain to focus on the things you know.  Repeat until ready.

This entry was posted in Education, Personal Finance, What The Martian Saw and tagged , , , . Bookmark the permalink.

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