We’re On The Left Side Of The Laffer Curve…
…but on the right side of the supply-side argument growth curve.
I’ve posted about this several times, but I think the Laffer Curve is presented in such a way that it becomes highly misunderstood. Today that was made perfectly clear by Ezra Klein, who asked economists, political leftists and political rightists what tax rates would maximize revenue on the Laffer Curve.
The “neutral” economists all pointed to tax raters higher than we have today. Unsurprisingly, the political leftists agreed. Surprisingly, though, a number of the political rightists suggested a tax rate higher than we have today, but brought up an argument completely unrelated to the Laffer Curve in their response.
Here is one response that nails my criticism of “Laffer Curve Analysis” to a T:
Stephen Moore, senior economic writer and editorial board member, Wall Street Journal:
“The revenue maximizing rate is probably around 40 or 50 percent. But the growth maximizing rate, even given the current deficits, is probaby about 20 percent. So the goal is to get the rate down to 20 to 25 percent. For cap gains the revenue maximizing rate is between 15 and 20 percent.”
Interesting. The problem is the second sentence, describing maximizing the growth rate, has nothing to do with the Laffer Curve. The Laffer Curve ONLY describes the revenue-raising rate. It has nothing to do with long-term economic growth. In fact, any presentation of the Laffer Curve plots as related to economic growth are entirely the wrong shape, as economic growth doesn’t fall to zero at 0% taxation!
I think the below is a lot more representative:
Now, we can quibble over specifics (i.e. growth probably falls below 0% at high tax levels). But I think the shape is more representative of what you would expect from economic growth plotted vs. tax rates.
Economic growth and short-term revenue maximization are a trade-off, and that trade-off is NEVER represented in the Laffer Curve. Many suggest that revenue maximization is a lot closer to European tax levels than our own, but I’d state that the anemic economic growth seen in Europe suggests that they’re sacrificing economic growth for today’s tax receipts. America doesn’t really follow this, which is why our economic growth (and over time, now, our per capita GDP) are much higher than Europe.
But I think it’s clear that we’re below the maximizing revenue rate, but that we have a VERY GOOD REASON for remaining below that rate — we want to make a better world for our children and grandchildren through the possibilities that high GDP growth will open up to them.