Prompted by:
The Laffer Curve Wreaks Havoc in the United Kingdom
in which was written:

I’m more mystified by the behavior of economists. Let’s look at a couple of examples. Justin Wolfers and Mark Thoma recently cited some survey data to claim that the Laffer Curve was universally rejected by the profession.

But as James Pethokoukis of the American Enterprise Institute explained, the survey actually showed just the opposite, with economists by a margin of nearly 5-1 agreeing that lower tax rates could boost GDP (and therefore taxable income).

Those economists did say that a reduction in tax rates, based on current levels, would not cause taxable income to jump by a large enough amount to fully offset the revenue-losing impact of the lower tax rate. But the Laffer Curve says that only happens in extreme circumstances, so there’s zero contradiction.

So why did Wolfers and Thoma create a straw man in an attempt to discredit the Laffer Curve?

OK. First Let’s review what the Laffer Curve is:

I have a couple of quibbles with that video, but nothing important and it’s short and clear.

Now probable reasons for economists disdain:

1. Lowers demand for “erudite economic opinion” involving tax policy
2. Adoption of a “Flat” or better* still a”Fair Tax” would make optimizing the balance between growth and revenue so simple that the institutionalized obfuscation of who pays what by 80,000 pages of political favours in the laughingly referred Tax Code would be tossed out, robbing the politcrats of much of their power to reward or punish selected groups for political advantage (also #1 again).
3. No one can state they “know” where the optimum rate is except by simplification of the code and experimentation with the rate to observe where market forces place it. That takes us back to #1. Theory is much more fun (and lucrative) than experimenting with “messy” market forces and simply observing results to influence rate changes.

* The “Fair tax”, because it is collected at point of sale is more responsive, thus we wouldn’t have to wait very long for the market forces to show us where we were on the curve and whether we could safely raise tax percentages or should lower them. It would also build in a guage of whether we are encouraging or stifling growth by our tax rate. A Twofor!


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