Getting High with the Laffer Curve

Townhall.com ^ | June 2, 2013 | Daniel J. Mitchell

[Kaslin]

Two of my favorite things in life are the Laffer Curve and the Georgia Bulldogs.

So you know I’m going to approve when an economics professor from the University of Georgia writes a column about the power of the Laffer Curve.

And since I’m a libertarian and the specific issue is about curtailing the foolish Drug War, it goes without saying that this is something that belongs on this blog. Especially when we get to celebrate some evidence that statists are acknowledging that tax rates matter!

Here are some excerpts from Jeffrey Dorfman’s column at Real Clear Markets.

Now that the state will let people legally purchase marijuana for recreational use (medicinal use was already legal), the state wants to collect tax revenue from the new industry. What is fascinating about this is that many people who have probably long argued against the concept of the Laffer Curve are suddenly embracing it. …the politicians in Colorado are openly discussing the fact that if they set the tax rate too high on marijuana, people will buy it on the illegal market and avoid the taxes. If the tax rate is set too low, potential tax revenue that is to be designated for school construction would be left on the table. They are searching for just the right tax rate that will bring in the most new tax revenue. In other words, they have accepted the Laffer Curve. The exact same arguments apply to income taxes. If too high a tax rate is levied, people will search for ways around it (loopholes, less work effort, and outright tax fraud). Taxes too low will not produce sufficient tax revenue to fund government. The ideal income tax rate is in the middle somewhere.

I have to interrupt at this point. Professor Dorfman isn’t saying that the goal is to maximize revenue, but I’m worried some people may jump to the wrong conclusion.

The ideal point on the Laffer Curve is very low, sufficient to raise the modest amount of revenue needed to finance the legitimate – and very limited – functions of government.

Let’s continue with another excerpt.

There is an old saying that politics makes strange bedfellows. This is a classic such case. Now that liberals have found a business they like, businesses should be protected from excessive taxes. Suddenly people do respond to taxes by changing their behavior. Finally, we have agreement that incentives matter and taxing something means there will be less of the item that got taxed. Getting liberals to agree with these usually conservative beliefs more broadly is by no means certain. After all, liberals have long held that high cigarette and gas taxes encourage people to change their behavior, convincing people to smoke less and drive more fuel-efficient cars. Yet these same liberals have refused to believe that high income taxes encourage people to earn less (taxable) income. Conservatives, whether in favor of legalizing marijuana or not, should applaud the liberals who now agree with them that tax rates matter to businesses and people and that the Laffer Curve is a reality.

So does this mean that leftists are waking up to reality?

The answer is yes and no. There are some advocates of class warfare who want higher tax rates even if the government doesn’t collect any additional revenue. If you think I’m exaggerating and such people don’t exist, watch this video – especially beginning about the 4:30 mark.

But there are other leftists who are more reasonable, even among those working for traditionally statist international bureaucracies.

• Such as this study from the OECD acknowledging that lower tax rates can lead to more taxable income.
• Or this study by the IMF, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.
• Or this European Central Bank study showing substantial Laffer-Curve effects.
• Or the United Nations admitting that the Laffer Curve limits the feasible amount of taxes that can be imposed.

Unfortunately, the ideological left still controls the Joint Committee on Taxation, the congressional bureaucracy that refuses to acknowledge that changes in tax policy can impact economic performance.

Maybe they’ll be less dogmatic if we send them to Colorado for some “field research”?

[FatherofFive]

So you know I’m going to approve when an economics professor from the University of Georgia writes a column about the power of the Laffer Curve.

I was fortunate that my first economics professor in college was a capitalist. One text book was Milton Friedman's, "Capitalism and Freedom" and he almost mocked Keynes.

Go Gators!

[SECURE AMERICA]

What drug war?
Our society is over run by drugs. The cost of the damage they do can not be measured...

[Rusty0604]

I tried to explain this concept to libs about cigarettes; that if the tax is too high, people will buy from a black market. That’s what happened in NYC.
Smoking pot has the same health effects as tobacco but libs don’t get that either. I give up.

[MosesKnows]

Getting High with the Laffer Curve

The absolutely finest aspect of the Laffer Curve, the beauty of it if you will, is that Liberals and Conservatives, Democrats and Republicans, and Socialist agree on the two main datum points of the curve.

The Laffer Curve is a graph of tax rates on the horizontal X-axis and revenue received on the vertical Y-axis. The two points that all agree on are that revenue resulting from a 0% tax rate and revenue resulting from a 100% tax rate is ZERO dollars. So you see they have no choice but to agree.

The Laffer Curve promotes discussion regarding what tax rate will yield the highest amount of revenue to the treasury. The curve clearly illustrates that increasing tax rates from 0% will increase revenue flow. The curve also clearly illustrates that as tax rates continue to increase the revenue yield will began to decrease.

The discussion is then about how high the tax rate can become before the result is decreasing revenue as the curve returns to zero.

This is important because there is a segment of Americans who are more concerned about increasing tax rates as punishment for success than controlling tax rates to create increased revenue flow.

[representativerepublic]

Professor Denslow?

[r-q-tek86]

“Capitalism and Freedom”

That’s a good one. If you are still interested in such things, Thomas Sowell (a student of Friedman) has a number of books that are even better.

As for Laffer, I got to meet him last year. He was speaking to the organization where my wife works. Most people in the room didnt know who he was.

And finally, Gig’em Aggies

[DannyTN]

Friedman’s emphasis on free trade no matter what has seriously hurt this country. Free trade with countries that don’t buy our products in return has wrecked our industries and is the root cause of our current 23% unemployment (shadowstats.com) and it has helped make an economic powerhouse out of communist country (china).

It’s destroyed key US industries. We now depend on China for military parts. We even use their satellites for military communications. Heck China even just bought our largest pork producer. But notice they aren’t buying our goods, they are buying our manufacturing capability.

We seriously need to protect our industries and put Americans back to work.

[FatherofFive]

Protectionism never works.

[DannyTN]

"Protectionism never works."

Of course it does. It worked great for our country until 1960 when we lowered our tariffs.

Here read the excerpt "The dilberately forgotten history of trade" from the book "Why Free trade doesn't work. What should replace it and why."

Thomas Jefferson for years thought that American should remain an agricultural economy and just trade with Europe for manufactured goods. Then the "unthinkable happenned" and Europe cut us off. That's when Jefferson realized that a strong industrial base was necessary to maintain a free state.