The Laffer Curve (economics)

[asta]

Ignore the politics (and the source, if you can't stand them) --

 

This little article is a great, concise explanation, with real world examples, of the Laffer curve - a fundamental concept in basic economics courses that many students have difficulty comprehending.

 

Bonus - it is actually written by Laffer, himself.

 

 

asta

[flyingiguana]

The only data given in this article is incomplete. It says that the top 1% paid a lot more in taxes -- implying that they are paying more taxes on the exact same amount of income. But no data is given on what their income was.

 

As I've read other places that the incomes of the top 1% have been shooting up, it wouldn't really be a surprise if the amount of taxes these people pay has also gone up. The amount they are paying may not be going up as a percentage of their income, but only up in number of dollars. In fact, the percentage of their income that they pay in taxes might even have been going down, but one couldn't tell from the numbers given here.

 

I'm always a little suspicious of using simple theoretical models to say what's going on in an economy. The reality is SO much more complicated that the models are probably somewhat useless. Hypothesis testing using real data is a better approach, but the data here are so incomplete that these numbers also don't tell a thing. The truth is, these numbers, if given in more complete form, might support the exact opposite of what this article is proposing.

[Vida Winter]

Thomas Sowell has a good article on this topic today.

[flyingiguana]

Wikipedia actually has a lot more information on this.

http://en.wikipedia.org/wiki/Laffer_curve

 

The following quote is interesting, and provides some possible references ("possible" because wikipedia is notorious for referencing things that aren't reliable). However, it's likely one would get better info from wikipedia than the originally cited article (which, as I pointed out, has a fatal flaw in its reasoning.)

 

"Economist Paul Pecorino argued in 1995 that the peak of the Laffer curve occurred at tax rates around 65%.[19] A 1996 study by Y. Hsing of the United States economy between 1959 and 1991 placed the revenue-maximizing tax rate (the point at which another marginal tax rate increase would decrease tax revenue) between 32.67% and 35.21%.[20] A 1981 empirical study published in the Journal of Political Economy found that the point of maximum tax revenue in Sweden in the 1970s would have been 70%.[21] A recent paper by Trabandt and Uhlig of the NBER found that the US and most European economies are on the left of the Laffer curve (in other words, that raising taxes would raise further revenue).[22] The New Palgrave Dictionary of Economics reports that for academic studies, the mid-range for the revenue maximizing rate is around 70%.[23]"

[flyingiguana]

I think I may have found the Sowell article:

http://heathenrepublican.blogspot.com/2011/07/taxes-laffer-curve-and-cognitive.html

 

However, this also suffers from the author not being completely clear on what the Laffer curve actually is (it's only a simplistic, theoretical construct that is difficult to apply to real life without any data). Also, even if the Laffer curve is a true representation of the situation, this author seems to have no idea where on the curve the US currently sits. If it's to the left of the maximum, then raising taxes will increase govt revenues. And it does seem, from available evidence, that the US is sitting pretty far to the left of that hump.

 

But both the Sowell and Loyola descriptions of the Laffer curve refer only to the boundary conditions, which is not where any govt sits. The stuff in the middle of the curve is the interesting bit, and that's the part they can't describe. As they can't describe it, basing policy recommendations on it is just silly.