President Obama is considering whether to push early next year for an overhaul of the income tax code to lower rates and raise revenues in what would be his first major effort to begin addressing the long-term growth of the national debt.What President Obama is considering is very much like the supply-side economics (given the nickname "Reaganomics") that former President Ronald Wilson Reagan utilized in the 1980s in order to give the United States one of its greatest non-war time periods of economic growth and prosperity. Supply-side economics is based on the concept that by making it easier for producers to supply goods and services, more goods and services will be supplied at more competitive prices. To make it easier for goods and services to be supplied, tax rates are lowered and the government eliminates unnecessary regulation. Government revenue from taxes will increase in the long-run, as a stronger economy will result in there being more money to tax. Essentially, volume makes up for lower tax rates. Would you rather have 30% of $2,000 or 25% of $2,600? The smart answer is 25% of $2,600, which is $650. Taking the other option, while a higher percentage, gives you less money (only $600.)
Extreme Value Theorm and the Laffer Curve (shown at left). The Extreme Value Theorm states that for any closed function on an interval from point A to point B, there must exist a minimum and maximum value. The Laffer Curve uses the basic mathematical principle that any real number multiplied by zero will equal zero and the idea that if the government took 100% of income there would be no incentive for anyone to earn money since the government would simply take it all. The Laffer Curve shows government revenue from a 0% tax rate (point A) to a 100% tax rate (point B). Applying the Extreme Value Theorm to the Laffer Curve, it can be concluded the minimum value is zero, and that there must exist a maximum value. t* is the tax rate at which government revenue is maximized. In order to reach maximum government revenue, tax rates must be decreased if they are to the right side of t*, which is where today's tax rates are.
Under President Reagan, the median family income in the United States rose by $4,000 from 1980 to 1988, government tax revenues increased more than 50 percent, and the number of jobs in the country rose, as did the GDP. The economic policies that some, including former President George H.W. Bush, labeled as "voodoo economics" actually worked. "Reaganomics" was a success, and if President Obama moves forward in 2011 with an embrace of supply-side economics, it will only strengthen our economy and bring greater prosperity to the American people. In fact, if President Obama embraces supply-side economics, in 30 years people may look back and credit "Obamanomics" for getting the United States out of one of it's worst recessions.