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

2. 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

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

4. 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

5. 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

6. 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?

7. President Obama’s Challenge
Price
Level
AD1
Real
GDP

8. Dogfight over Economic Stimulus
Cost/Benefit Analysis

9. Tax Rates & Economic Growth
AD1
AS1
Inflation
Real
GDP 23

10. 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