What produces high GDP & low Unemployment? Income Tax Rate Theory What produces high GDP & low Unemployment?

Tax Rates & Economic Growth Higher GDP leads to more tax revenue What is the optimal income tax rate? Raises enough revenue & promotes economic growth AD1 Inflation Real GDP AS1 GDP ↑ Tax Revenue ↑ GDP 23

What level of tax rates creates the most Economic Growth? GDP GDP GDP

What if Tax Rates are too high? Higher GDP generally leads to more tax revenue However, extremely high taxes will likely lower tax revenue & GDP When are taxes too high? GDP GDP ↓ Tax Rates increase too much Tax Revenue ↓ 23

The Laffer Curve Illustrates the amount of revenue Government collects as tax rates ↑ Potential Impact: An ↑ tax rate can lead to tax revenues ↓ GDP GDP GDP

A Critical Question What tax cuts have GREATEST affect on GDP? What are the true goals of tax cuts? 1) Stimulate Economy? 2) Redistribute Income?

President Obama’s Challenge Price Level AD1 Real GDP

Dogfight over Economic Stimulus Cost/Benefit Analysis

Tax Rates & Economic Growth AD1 AS1 Inflation Real GDP 23

President Bush’s Fiscal Policy Analysis Dow Jones 9,000 → 13,600 Unemployment 6.3% → 4.7% GDP recession → 2-4% Growth Inflation moderate Debt 7 Trillion → 9 Trillion Interest Rates 6.0% → 1.0% → 5.25% → 4.5% AS1 Price Level AD1 Real GDP