Yes, There is a Laffer Curve. No, It Tells Us Nothing About What Tax Rates Should Be

Does anyone at the Washington Post read their Op-Eds before they go up? Like, a quick check for coherence and plausibility?  Today we have the Heritage Foundation’s chief economist (really) getting everything about the Laffer Curve wrong.

OK, let’s go over it again, time to rewhack the zombie.  The LC is a graph of government revenue against income tax rate.  Not GDP, not the sum of human happiness, not moral standing of a nation in the world, not any of those things: government revenue. The curve, like Ohio, is zero at the ends and high in the middle, duh; if the government takes all of everyone’s income, no-one will bother to earn any income and therefore not  pay any taxes; if it doesn’t take any, it doesn’t get any.  Again, duh.  Where the maximum is, and how steeply it slopes down where, are debatable with data, but a hat-shaped curve that is zero at the ends is assuredly the correct description of this relationship. Yes, Virginia, there is a Laffer Curve. No-one ever said there isn’t; how could there not be?

The LC, sketched without units on a napkin, is trotted out by people who want to make taxes lower: “see, the government could actually get more money if tax rates were lower!” (Notice that the tax rate axis always changes  from average income tax rates to top rates (what only a very few very rich people pay, and the only rates the Heritage Foundation’s funders care about) in this conversation.) To use it that way, you have to believe the high point is to the left of where we are now, not just that the curve exists, and this argument never, ever, comes with any data bearing on that. But you also have to be a liberal who wants government revenues to be higher!

Even on the Heritage payroll, Moore can’t recite the traditional Laffer refrain with a straight face, but after backsliding dangerously, he falls into complete heresy:

But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve….It’s a happy byproduct that [economic] growth will help generate higher revenue than the government’s “static” estimates always undercount.

Happy? Stephen, Stephen, revenue is what the government uses to pay its jack-booted thugs to take away your freedoms. Where is Grover Norquist, when we need him to ferret out these red Commies at Heritage, and explain to de Mint that the party line is ” less revenue for government, not more”! Why is Moore not on the street this very morning, with a tin cup and a badge of shame?

Moore’s argument wanders through a bunch of post hoc ergo propter hoc anecdotes that prove exactly nothing, and he  is happy to wrap up by reporting that middle-class incomes going up 30% from 1980 to 2005  is (i) upward mobility (ii) caused by tax cuts. Well, the middle quintile’s share of after-tax income went from 16 to 15% during that time; he lowest quintile’s from 6 to 5.  The top 1% were quite upwardly mobile, as they scarfed up pretty much the whole increase in national wealth over that period, and their share of after-tax income went from 9 to 15%.  Except at the Heritage Foundation, that’s not upward mobility, that’s the rich getting ahead while everyone else stands still or falls behind,  exactly what you would expect when you collect less taxes from the very richest people and otherwise ply them with favors like carried interest deals.

Yes, there is a Laffer Curve. No, it tells us nothing about what tax rates should be. Yes, the Washington Post Op-Ed page needs warning signs.

[Cross-posted at The Reality-Based Community]

Michael O’Hare

Michael O'Hare is a Professor of Public Policy at the University of California, Berkeley.