Skip to comments.We are on The Laffer Curve
Posted on 09/16/2009 1:27:09 PM PDT by Admiral_Zeon
The Laffer Curve is a simple idea: a government cant raise taxes forever and expect to increase revenue along the way. Eventually youre taking so much in taxes that people dont have any reason to earn income. The argument is simple (and correct): if you have zero tax rate you get zero tax revenue. If you raise taxes just a bit, nobody will be discouraged from working, and you will collect some amount of revenue; therefore, the curve of revenue versus tax rate starts at zero and initially rises. But if the tax rate is 100%, nobody has any reason to work, and your total revenues will be back at zero. By the wonders of math, there must therefore be a maximum of the curve somewhere in between 0% and 100% tax rate.
An important question is, where are we on the curve? The notion of the Laffer curve has been used to justify all sorts of tax cuts, under the assumption/claim that we are to the right of the maximum, so that cutting taxes will actually increase revenues. Serious economists generally dont believe this holds true in the U.S. right now, but the lure of the idea is undeniable: lose weight by eating more ice cream!
Via Marginal Revolution, heres a study by Mathias Trabandt and Harald Uhlig that tries to get it right. Obviously they have models that make various assumptions, and I have no idea how realistic those assumptions are. They study the U.S. and several European countries, and find that Denmark and Sweden are just a bit on the wrong side of the curve for the specific case of capital income taxation. For the most part, however, tax rates lie to the left of the maximum. In the U.S., especially, we are significantly on the left.
(Excerpt) Read more at blogs.discovermagazine.com ...
Every time tax rates are cut revenue increases. What more proof do you need that we are to the right of the maximum.
It would be hard to find a more inappropriate analogy.
Well I guarantee that if my taxes go up any more I’m definitely gonna “shrug”. Sounds like they are trying to argue that taxes can go up a little more without hurting revenues. I find that hard to believe.
Increased taxation provides a nice incentive to do the kind of work that pays in under-the-table ‘cashy money.’
This is a future model. What is needed is a historical graph. One that shows the real tax rate (Fed plus state) against total revenues (Fed, + State income + State sales) for the past 50 years.
You can avoid all this by using the Charlie Rangel “Instant Tax Cut” software package. Guaranteed to cut your taxes!
This assumes that we want the govt to get the most money it can. Only a population of willing slaves thinks that increasing govt revenue is a good thing.
Maximum revenue to the Treasury is repeatedly and reliably analyzed by economists to be at 22% of GDP.
The U.S. tax take is >35% of GDP. State and Local included.
Therefore, the Treasury could RAISE RECEIPTS by lowering taxes, since more people would work more, more than offsetting losses due to rate reductions.
Smart liberals know this. It is proved.
However, smart liberals also know that ENVY wins elections. So they convince their green-with-envy constituents that they will raise taxes on those evil rich neighbors, and the stupid proles vote for the libs.
Only through the purposeful manipulation of the human instinct to envy in violation of G-d’s Commandment do the liberals achieve votes and office.
Rose Friedman said of the Laffer Curve, approximately,
“Who said we want revenue to the Treasury to be maximized? We should want taxes much lower than that!”
There are so many false premises behind the author’s argument that it’s not worth listing them all. However, the most important one is the idea that maximizing the government’s tax take is any sort of ideal or overriding goal. The goal is to adequately fund proper and legitimate government functions. Taking any more than that is not just counterproductive, it’s evil.
Business has already shrugged.
However, in the longer term investors are less likely to invest in the United States. Consumers will learn to live with less deciding that they would rather have a 500 sq. ft. apartment and only work 40 hours a week to pay for it instead of the 80 hours they needed on their old houses after taxes. They will also learn to work off the books and might even abandon the US for a lower tax job. Thus the long term Laffer Curve has a peak at a much lower tax rate than the short term tax rate.
If the government takes most of the harvest, it might make more sense to eat the seed corn and let the land lay fallow next year.
It is well below that, to allow real investment to grow the economy over time.
The article is still stuck in first partial land. That is better than the delusion that the government can just take everything, but it is still bad economics and bad policy.
I feel under siege. Every time I go to the mail box it’s another letter from the IRS - late penalty, interest penalty, penalty penalty - against my small business and against my personal taxes. Yesterday the letter was from the State of New York ... a reminder to register to pay a retroactive commuter tax! It seems NYC isn’t satisfied I pay $26 a day in tolls to get into the city from the burbs, now they want a commuter tax from my business!
Property taxes, school taxes, dog license, fishing license, sales taxes ............ Don’t get me started.
“Shut up and do science”
>Well I guarantee that if my taxes go up any more Im definitely gonna shrug.
Same here. And it’s not even the money - it’s that I don’t want my hard work supporting these Congressional clowns and the leeches that vote for them.
An essential point about the Laffer Curve: there are TWO points that yield the exact same level of tax revenue. One is at the high rate the other at the low rate. People who foolishly think that boosting rates can boost taxes have more faith in the compliance/compulsion culture of Washington than they do in the natural yearning of everyone to keep as much of their own income as possible.
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