I have seen numerous people sneer at the Laffer Curve. I have never heard one of them attempt to demonstrate why it is not true.
Of course, one can claim that we are presently on the left side of the curve. If so, cutting rates will indeed result in a decrease in revenue.
I’ve also never seen any logical explanation of how to determine where we are on the curve.
As a CPA, I have pondered this question often. I believe that somewhere around 6-8% is the point where most people do not change their behavior, meaning most will pay the tax rather than worry about ways to avoid it. interestingly this is the amount of most sales tax or commissions on large purchases etc.
After that, for larger transactions I would see my clients wanting to take tax avoidance steps to about 15% and avoid taxes on any transactions beyond 15%.
At about 30% or more, most clients would be willing to consider deferring a transaction or giving up control in order to avoid or delay a tax.
In excess of 50%, most clients become very risk adverse and will avoid investing in profit making activities if they have sufficient income to meet their needs.
At 60-70%, most clients would rather give the money to their employees, charity or in bad investments rather than pay the tax.
The problem is, it's not a static curve.
See, let's say that in theory, present revenues could be maximized with a 30% Tax. Well, that's true enough for today; but what if a 25% Tax would result in higher GDP growth over time (ceteris paribus, it would), thus resulting in a larger GDP and a larger total haul of tax revenues over ten years time? But then you could make the same argument for a 20% tax -- even greater GDP growth than with a 25% Tax, thus resulting in an even larger haul of tax revenues over ten years time?
Since one can theoretically forecast higher GDP future growth for each percentage point of lower taxation, there's virtually no limit to just "how low you can go" with long-term forecasts of higher revenues from lower tax rates -- at least until you get down to such a low level of tax rates that the basic functions of Government break down, creating disorder in the economy.
Since there's no way (IMHO) to "scientifically" forecast just exactly what Tax Rate would be the "optimal" revenue-generating Laffer Tax over ten years, or twenty years, or a hundred years -- I say we throw pragmatic econometric forecasting out the window, and just go back to the Bible.
Specifically, 1 Samuel 8:17 -- ANY Government Taxation over and above the 10% which God requires for His Tithe, is Biblically defined as Tyranny. (Which government should be cut back down to size; or in extreme circumstances, "it is the Right of the People to alter or to abolish it".)
Look, it even makes a handy tagline:
"Taxation over Ten is Tyranny!"
You’d have to actually analyze it. And it is different in each case but all economics can be summed up with the term equilibrium point. There is an equilibrium point in everything and in a free market without controls the idea is that equlibrium is always reached for maximum efficiency.
Of course this doesn’t change the fact that we’ve had irresponsible financial management in this country for years. Bush pursued the LBJ strategy of cutting rates, fighting a war, and not really cutting domestic spending. It’s why were are in the situation we’re in now.
I hate taxes but I also grew up as the son of parents who grew up during WWII. Back then they had rationing. Back then they had all sorts of economic controls. The same was true for WWI and the Late Unpleasantness.
The idea that we could fight a war and not ask anything of the American people of it was retarded. It’s one comment my father has always made on Bush and Johnson. Neither of them ever asked the American people to sacrifice for the war “apart from the draft.” No one asked for anyone to be involved. That was a problem.
A war is a war and if you are going to fight a long term war then your economy has to be geared towards fighting a long term war. It was in WWI. It was in WWII. It wasn’t in Vietnam. It wasn’t for Iraq. It’s why WWI and WWII presaged periods of prosperity and its why Vietnam and Iraq both helped set the state for economic problems.
It’s also why the American people turned against both wars. Because nothing was ever asked of them it freed them up to view both wars as “not a national imperative” and rather as wastes of money and all else.
And that’s the thing, as long as we are going to be engaged in these long term military operations we will have to configure our economy to meet the obligations or else we’ll soon go broke just as every other country that led it’s defense spending go out of whack with its economy. Its what did in Rome. It’s what did in the Soviet Union. Don’t think it can’t do is us.