Around a certain sort of leftist mention of the Laffer Curve just brings a derisive snort. The sadness of that reaction being that it’s just an obvious mathematical truth. Tax rates of 0 % and 100 % bring in no revenue. Somewhere in between maximises the moolah. Note what isn’t being said, that all tax cuts always pay for themselves, nor even that lower tax rates are necessarily a good thing. Only that there’s some optimal level with regard to revenue collection.
All the arguments about the optimal level of government are over in the Wagner Curve and such others.
The Laffer Curve is also made up of two components, the income and substitution. Some people will work just to make their nut. Observational studies have shown that many taxi drivers do. So, increase their tax rates and they’ll work more. The substitution effect is, well, what’s that net wage worth to me? What’s the value of not working? When going fishing is worth more than working then people will go fishing. The curve as a whole is the interplay of these two effects.
Each tax in each society has its own such curve. A transactions tax of 0.01% can reduce revenue collection, as the EU’s study of a financial transactions tax shows us. Taxes upon income of 20% are below that Laffer Curve peak.
But where, exactly, is that peak for taxes upon income? The best study we’ve got, Saez and Diamond, says between 54% and 80% dependent upon other structures in the tax system. The Tory part of the UK Treasury says around 40 to 45% for income tax, plus national insurance, so at the bottom end of that S&D range. Many lefties want to say it’s higher so we can tax “the rich” more.
Tim Worstall, “How Lovely To Spot The Laffer Curve In The Wild – Doctors’ Pensions Edition”, Continental Telegraph, 2018-09-05.
September 25, 2018
QotD: The Laffer Curve
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