Can We Stop The Idiocy About The Laffer Curve Please?

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That working out where the peak of the Laffer Curve is is difficult is entirely true. That it’s going to be different for each tax in each different legal and societal set up is also true. But that doesn’t excuse drivel like this:

The ends of the curve are basic enough – at a tax rate of 0, the government will raise $0 in revenue, and at a tax rate of 100, the government will still raise $0 in revenue because people won’t work without take-home pay. At the extremes, the Laffer curve is correct, but that doesn’t tell us anything about the points in the middle. Laffer’s idea, however, was that a “tipping point” existed on the continuum in between, where people’s incentives to work and invest decreased because tax rates were too onerous.

If the end points are true – something admitted – then it’s a matter of simple, pure, and true logic that there are one or more revenue maximising points inbetween. For it’s simple enough for us to observe that there are tax rates which do raise revenue. And if we have tax rates which raise no revenue and tax rates which raise some then there are those one or more rates which raise the most.

So, please, can we stop the drivel?

Sure, Art Laffer himself is incorrect when stating that all tax cuts always pay for themselves through increased economic growth. But that doesn’t invalidate the logic of the curve, only the use to which it is put.

At which point something actually interesting about that Laffer Curve. As far as we can tell – it’s difficult, you know? – the revenue maximising rate for taxes upon income is around the 54% level. That’s what Diamond and Saez tell us in their paper for a tax system which has allowances at least. And that 54% is around what top-earners currently pay in the UK and many US states – note again it’s taxes upon income, so include NI, SS, Medicare and all that, plus any state taxes.

And there’s a lot of people really very pissed at the idea that we can’t pay for lots more lovely government by taxing the rich more than we already do.

Oh, and that revenue maximising capital gains taxes seem to be in the 20 to 30% range, VATs peak somewhere in the 15 to 25% area, sales taxes perhaps 10 or 12%, possibly even the gross tax burden upon the whole society at somewhere like 30 to 40% of GDP. Maybe lower for that last one, could be in the 15 to 20% range judging by Singapore, Hong Kong etc.

That is, people aren’t really arguing about the existence or logic of the Laffer Curve they just hate the empirical answer.

Aw, shame, eh?

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Thomas L. Knapp
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“Sure, Art Laffer himself is incorrect when stating that all tax cuts always pay for themselves through increased economic growth.”

Does he actually say that?

timworstall
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timworstall

He’s been known to in newspaper pieces and rhetoric, yes. Not formally in a paper though.

Thomas L. Knapp
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OK. I guess I can see why he’d be that way. The people who like him and his Curve generally favor cutting taxes, so he’s got a naturally sunnier disposition toward them. In my experience, every politician who pulls out the Laffer Curve in a positive way insists — evidence or no evidence — that we’re on the “right” side of the curve (or of a bump in the curve) such that cutting taxes will increase revenue. Also in my experience, every politician who pulls out the Laffer Curve in a negative way does so mockingly, either as if it’s… Read more »

Jonathan Harston
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Jonathan Harston

And there’s always the bizarre argument that, ok, there’s a peak in the Laffer curve, so that’s where we aim for. Yey Hey! Let’s maximise our income then wonder what to splash it all out on! No, you should start from: what do we want to do, and *then* ask: how do we raise the money.