Wednesday, August 11, 2010

Laffer Curve, Piled On...

Dylan Mathews surveyed a bunch of economists to find out where the peak of the laffer curve is.

Trouble is, there is no "the peak". The peak will depend on what the past rates are and other cultural factors, and in general will be different at all times and places. If a marginal tax rate moves from 70% to 50%, people will behave quite differently than if it the rate had just moved from 30% to 50%. And Greg Mankiw also made a good point, that the short-term and long-term effects can be different. Of course, what he doesn't realize is that this can go in both directions... I.e., if we declare all income over $20 million to be taxed at 99%, I think we'd all agree that Exxon Mobil will stop paying it's CEO more than that, and Phil Mickelson would do fewer sponsorships. Hence, we'd be on the wrong side of the laffer curve. But Exxon Mobil will still have a full-time CEO, and if Phil Mickelson does fewer sponsorships, then Lee Westwood or Jim Furyk will do more. Exxon will probably share more of its profits with its shareholders or other employees. In short, nothing less necessarily gets produced, yet revenues in the short run are increased. In the long run, however, this reduction in inequality would likely increase the growth rate...

I'm not saying to tax all income over $20 million at 99%, but currently we tax it at just 35%. The point is that it's very possible to be on the wrong side of the laffer curve but on the right side of maximizing economic growth.


  1. I would also note that I don't think that we've ever seen a definitive Laffer peak, though we have seen people engaging in more extreme tax avoidance/evasion at higher levels of marginal tax rates.

    (I am not an economist though)

  2. Well, we've actually seen laffer-esque "kinks" at the individual level for Danish women, many of whom "stopped working" when the 60% tax rate hits around US $40K/year... Evidence that Denmark should at least make the rise to 60% a bit more gradual... Danish men just kind of make as much money as they can regardless of the tax rate...