The Laffer Curve & Its Reverse

patently

True, but it should not be forgotten that the purpose of taxation is not to raise the highest amount possible, but to raise what the Government requires in order to do what it needs to do.

Laffer showed us the location of the limit to this, not the optimal point.

ndm

Describing the squiggle Laffer drew on a napkin as a curve is a disservice to mathematics. We don't actually know what any part of the squiggle looks like let alone its peaks and troughs.

Those who use the Laffer squiggle to argue about tax policy are at best disingenuous and at worst lying.

Chris

If you add income taxes from national, state, and local sources, you get up to 55% at the top margin in New York City. If the Republican Party doesn't push back against such things, then what exactly is the point of the Republican Party?

Edmund Jerk

Tax cuts are not just an economic issue they are a liberty issue: how much does the government have the right to spend your money on your behalf, for the greater good? What happens when the government uses your money to splurge on something you disapprove of that, in the case of ID cards say, actually curtails your individual freedom?

If the public had a say in tax rates and what governments spent taxes on - we would have lower taxes and government would be forced to be live within its means.

Most analysts look at tax rates from the governments point of view (i.e. how much revenues it can get to spend) rather than from the tax-payers. It would be nice if this changed.

Beefeater

Danny's point is childishly silly. If there is a "curve" at all, it is telling us something about two variables working in a certain way against each other. It is all about optimization points. The shape of the curve carries the information, not the zero point (when the variables are not in play), nor the initial straight slope.
There is no "reverse" Laffer argument.
The Laffer curve itself is a demonstration that the relationship between increases in tax versus revenue is not simple, but that there is point where tax increases will not increase government's pot.

Sir Graphus

You make a simple but brilliant point, Mr Patently, that hasn’t been made for so long, it’s almost revolutionary, borderline seditious.

ndm

If you add income taxes from national, state, and local sources, you get up to 55% at the top margin in New York City

I think this is a case of the State getting back some of the trillion dollars it donated and lent to their employers to stop them going under.

DavidDP

Someone should also tell Fraser Nelson.

DavidDP

"Describing the squiggle Laffer drew on a napkin as a curve is a disservice to mathematics."

It's not, you know. As the article says, the principle expressed by the curve is sound. Like most curves in economics, the precise shape depends on a lot of factors.

The problem is that a lot of proponents of the curve only get the half of the principle they agree with. They don't accept that the curve makes the case for an optimum taxation point, not a case for a reduction in taxation. It may be that it makes the case for a tax raise.

ndm

As the article says, the principle expressed by the curve is sound. Like most curves in economics, the precise shape depends on a lot of factors.

I almost had to laugh here. Squiggle is the mathematical term-of-art for most "curves in economics." Suggesting that the "precise shape depends on a lot of factors" is a cop-out for the fact that its precise shape is not known. Specifically, its maxima are unknown and are not usable in any policy debate about the appropriate rate of taxation. Given that, the only reason to introduce the Laffer squiggle in such a debate is to disinform.

Snowman

ndm @ 7.29:

you reckon then that if a country were to be facing a major catastrophe e.g. an imminent invasion by a foreign force, the curve would still be identical to that of a country in peace?

porkbelly

ndm reflects the attitude of those who believe that all money is the property of the State which graciously permits its subjects to use some of it. Occasionally. With conditions.

Vern

A bit off topic Alex, but your much admired Andrew Sullivan was insinuating his birther lunacy about Trig Palin on the Joy Behar show last night. Thought you might want to post on it. Then again, maybe not.

Snowman

The Laffer’s curve is really a pictorial expression of a common sense idea rather than a principle. You have 100% tax - nobody bothers to work. You have 0% tax - the government has no revenue. You can plot your squiggles in between.

What it doesn’t say is that the optimum of any of the series of squiggles in between alters in an any given circumstances. Edmund Jerk makes the point well. If people perceive that that paid for from the common funds (taxation) doesn’t benefit them more than they would have benefitted by spending the tax money themselves, they lose the incentive to create more wealth.

Lower taxation can only be had with lower level of publicly provided services. The money retained by the taxpayers is instead spent by those who created the wealth in the first place. There’s no question that we, individual consumers are, by and large, better in spending the money than a bunch bureaucrats, however well meaning they may be. The American system of local taxation, and local spend seems better than the massive decoupling between the raising of tax revenues, an act that effects each of us directly, and their centrally approved re-investment, in which we have increasingly less say.

(ndm: am fully aware of a falling share of locally raised taxes in the total spend)

ndm

Lower taxation can only be had with lower level of publicly provided services

Would that it were more as Julia Child put it. We only need to look back at the Bush Administration's 2001 tax cuts which were funded through debt not a lower level of publicly provided services.

Dirty Euro

The USA cut taxes and has ended up poorer than France and the UK. The taxes have gone down and people are poorer.

Christopher Chantrill

"Someone should probably mention this to the Republican party."

Not.

You are missing the point. The late dear old Irving Kristol one wrote that Republicans should always hand the country to the Democrats flat broke.

When it comes to taxes, Republicans should cut, cut, and cut again. As Verdi said to his librettist Piave.

Then, Kristol suggested, the Democrats would be forced to raise taxes into a hurricane of taxpayer rage. Rather like right now.

In the US the Republican Party is slowing coming to realize that they should not help the Democrats milk the private sector for monies with which to bribe their supporters. Ever.

Because we won't get to reform the welfare state until it hits the buffers.

Snowman

Christopher Chantrill: exactly

daniel.waweru

Thomas Frank is good value on Cantrill's point:

Even the theory's proponents don't really believe it. David Stockman, the libertarian budget director of the first Reagan administration, did the maths in 1980 and realised it would not rescue the government; it would wreck the government. This is the point where most people would walk away. Instead, Stockman decided it had medicinal value. He realised that with their government brought to the brink of fiscal collapse, the liberals would either have to acquiesce in the reconfiguration of the state or else see the country destroyed. Stockman was candid about this: the left would "have to dismantle [the government's] bloated, wasteful, and unjust spending enterprises - or risk national ruin".

And it's a mad world when Naomi Klein's claims are vindicated by their targets. Out of the mouths of conservatives...

Yam Yam

Dirty Euro - the reason that the United States is growing poorer is that whilst Bush cut taxes he did not control public spending. Instead, he ramped up defence spending to pay for his War On Terror.

Unfortunately - like Britain - the United States is living way beyond its means. It cannot forever pay for the burdens of empire whilst living high on the hog of cheap imports, all on the back of a steeply accumulating national deficit.