Where Does the Laffer Curve Bend?
Imagine a government that moves its top income tax rate higher and higher every year. At some point, that imaginary government would raise taxes so high that it
Jul 31, 202020.7K Shares481.9K Views
Imagine a government that moves its top income tax rate higher and higher every year. At some point, that imaginary government would raise taxes so high that it would dissuade its citizens from bothering to make more money at all: Taxing income at, say, 80 percent might actually bring in less government revenue than taxing income at 79 percent.
The economist who first theorized that high taxes reduce government revenue at some level is Arthur Laffer, and the point at which higher taxes mean less government revenue is where the so-called Laffer curve“bends.” The theory of the curve underpins some Republicans’ arguments about taxes: Higher taxes discourage people from striving to earn more, so tax cuts pay for themselves, Sen. Mitch McConnell (R-Ky.) argues. (Notably, this is wrongat the United States’ level of taxation, meaning the United States is on the left-hand side of the Laffer curve.)
Nobody really knows where the Laffer curve bends — but Dylan Matthews thought to ask a number of tax policy experts, economists and politicians. It is a great post and worth reading in full. But here are some particularly good responses.
“„****Bruce Bartlett, columnist, Forbes.com; former adviser to Reagan and Bush I:
“„“I would hate to venture a specific number…. I would, however, say that I think the top rate could be quite a bit higher than it is without significantly impairing incentives or leading to excessive amounts of tax avoidance. I think 50 percent is an important threshold and I would be very reluctant to go higher even if it raised net revenue…. Anthony Atkinson, probably the leading public finance economist in England, estimates (PDF) that the top rate could go as high as 63% to 83% before it became counterproductive in terms of revenue…The European Central Bank…finds that only two European countries are on the wrong side of the Laffer Curve. All other countries could raise substantial additional revenue by raising tax rates.”
“„“Since our rates are much lower than those it Europe, it suggests that we have a very long way to go before the top rate became counterproductive.”
“„Greg Mankiw, Robert M. Beren professor of economics, Harvard University; former chairman, Council of Economic Advisors:
“„“My guess is that that the short-run answer and the long-run answer are quite different. For example, if you raised the top rate from 35 to, say, 60 percent, you might raise revenue in the short run. Over time, however, you would get lower economic growth, so the additional revenues would fall off and eventually decline below what they would have been at the lower rate…. I will pass on offering a specific number, as it would require more time and thought than I can offer just now, but I will opine that I think the long-run answer is actually more important for policy purposes than the short-run answer.”
“„Edward Lazear, Jack Steele Parker Professor of Human Resources Management and Economics, Stanford University; former chariman, Council of Economic Advisors:
“„“Sorry, no.”
“„**Senate Minority Leader Mitch McConnell (R-KY):**His office declined to answer.
Paula M. Graham
Reviewer
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