The Laffer Curve Strikes Again: (Shortened Title)

Townhall.com ^ | October 4, 2012 | Daniel J. Mitchell

[Kaslin]

I’ve shared evidence from around the world (England, Italy, the United States, and France) and from various states (Illinois, Oregon, Florida,Maryland, and New York) to argue that it is foolish to ignore the Laffer Curve.

Not that it makes any difference. I’m slowly coming the conclusion that my friends on the left will never learn – in large part because they’re more interested in punishing success with class warfare tax policy than they are in collecting extra revenue for government.

But surely there are some statists who are motivated by emotions other than spite, so I refuse to give up. Let’s look at some evidence from Spain to further confirm that high tax rates aren’t necessarily the way to maximize tax revenue (this also is a story showing that tax competition between nations is a good way of disciplining governments that are too greedy, but that’s another issue).

Here are some details from a CNBC report.

Spain’s corporate tax take has tumbled by almost two thirds from pre-crisis levels as small businesses fail and a growing number of big corporations seek profits abroad to compensate for the prolonged downturn at home. …Spain has a headline corporate tax rate of 30 percent, broadly in line with other large European economies. Switzerland, however, has a headline rate of 8.5 percent, and lawyers say deductions can be made to reduce this further. “A fundamental right of EU law is the freedom of establishment. All companies and taxpayers look after their tax affairs, and if they can pay a lower rate somewhere else, it’s better for their business and natural that they would do so,” a global tax lawyer based in Spain said. …Rajoy did eliminate some corporate tax breaks in 2012, a policy he will continue in 2013, and has also brought forward some tax payments, though that could be storing up problems.

Much of the decline in corporate tax revenue can be attributed to Spain’s dismal economy, of course, which has been exacerbated by a bunch of tax hikes imposed by a supposedly right-of-center government.

The one tax rate that hasn’t been increased, though, is the top rate of corporate tax. So how can this be a story about the Laffer Curve?

Well, sometimes standing still is a recipe for defeat. And sometimes moving in the right direction isn’t enough when everybody else is going in the right direction at a faster rate.

Here’s a chart showing changes in the average EU corporate tax rate compared to Spain’s corporate tax rate.

Spain’s corporate tax rate has dropped by five percentage points. That’s progress, but other nations have moved more rapidly in the right direction. Back in 1995, the Spanish corporate rate was slightly lower than the EU average. Now it’s noticeably higher.

And as the excerpt above notes, there are nations such as Switzerland that have far lower tax rates and much better fiscal policy.

To be sure, Spain’s main challenge is the need to dramatically reduce the burden of government spending. That will help long-run growth because more resources will be allocated by private markets.

But Spain also should seek an immediate boost to growth by reducing tax rates on productive behavior. A lower corporate tax rate should be part of the answer.

It also would be a good idea for the United States.

[Kaslin]

The entire title is: The Laffer Curve Strikes Again: Revenues Falling in Spite of (or Perhaps Because of) Spain’s Punitive Corporate Tax Rate

[ctdonath2]

Same idea, different angle:

Federal revenue NEVER exceeds 20% of GDP.

[MrB]

To a leftist, Keynesianism IS economics.
And a leftist has the unique blindspot of never being able to admit being wrong.

[Daveinyork]

Liberals actually believe in the Laffer curve, but they just don’t know it, or won’t admit it. The proof is that they haven’t yet proposed a 100% tax, for themselves. :)

[nascarnation]

The proof is that they haven’t yet proposed a 100% tax, for themselves.

A good way to know the media is biased:

They NEVER ask these ranting rich libs if their tax preparer makes sure to figure their taxes WITHOUT the "Bush" tax cuts.

[Uncle Miltie]

I’ve explained the Laffer Curve to my most liberal friends, and asked them what they thought was a “Fair” and “Tax Revenue Maximizing” total tax rate for the country.

The more liberal they are, the lower a rate they suggest.

My most liberal friends think 10% total for Federal, State and Local is about right for the total tax take.

Considering it’s somewhere around 40% today, they’re shocked. They had no idea.

So, then I suggest that in the interests of providing more revenue to the Treasury for their Good Government programs, we should lower Tax Rates, their heads explode.

They cannot reconcile Lower Tax Rates = Higher Revenue to the Treasury. Ever.

[Daveinyork]

Liberals always want a lower tax for themselves and a higher tax for everyone else.

[nascarnation]

Liberal senator Howard Metzenbaum moved from Ohio to Florida just to avoid the death tax.

[conservatism_IS_compassion]

5

The Laffer Curve is a simple assertion of the law of diminishing returns, and an argument that notwithstanding that a 10% tax rate might be good, a 20% tax rate might not be twice as good - or even better than a 10% tax rate at all.

The frustration I have in listening to Laffer Curve discussions is that nobody ever uses an appropriate analogy to illustrate it. My favorite analogy is to the “speed” selection of a bicycle. We all have experience on a ten-speed bike, and we all know that while the lowest “speed” selection is usually very easy to pedal it doesn’t get you where you’re going very fast. You can select a higher “speed,” and the bicycle goes faster but the pedals get harder to crank. At some point you select a “speed” that is so high that you cannot sustain the same pedal RPM - and since your power input to the pedals is the product of the RPM and the torque resistance to pedaling, when the pedal RPM drops proportionately more than the “speed” setting increases, the real speed of the bicycle actually drops. In the same way as the tax revenue drops if you raise the tax rate so high that the economy sags.