Skip to main content

Where Are We On The Laffer Curve?

  • Author:
  • Updated:

The economist Murray Rothbard believed that the Laffer curve was one of the great myths of the Reaganite right, distorting Republican economic policy and distracting Republicans from the goal of reducing the size and scope of government. It was an economic idea that could be explained on a cocktail napkin, so it appealed massively to politicians and propagandists. And it contained an important kernel of truth. But there have always been serious problems with the way it was used by supply siders.
"It is true that if tax rates are 99%, and they are cut to 95%, tax revenue will go up," Rothbard wrote in Making Economic Sense. "But there is no reason to assume such simple connections at any other time…People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut."
He could list off a half dozen problems with the claims of supply siders about the Laffer curve. But the most devastating was this one: they had no metric for showing where we were on the curve at any given time. And yet this never stopped them from always claiming we were on the diminishing tax-revenue side of the curve, regardless of what the marginal tax rates were at the time.
And apparently the great myth of the Laffer curve remains central to conservative orthodoxy. The long-legged and razor smart Megan McArdle of Asymetrical Information reports that she recently had a book review spiked by a conservative magazine because she had written that the Laffer curve didn't apply to American levels of taxation. "The Laffer curve and the supply siders pushing it seem to be the teacher's unions of the right," McArdle writes.
Now we're not sure that she's right when she claims that the Laffer curve doesn't apply to current levels of taxation. But we're not sure she's wrong, either. As we've said, there's never been a plausible metric for figuring this out except in the most extreme cases, which renders the Laffer curve useless as a predictive model.
More importantly, there are probably many Laffer curves operating in our economy at any point because there are many kinds of taxation. Income taxes. Corporate taxes. Capital gains taxes. Excise taxes. Sales taxes. Because these are set at different levels and hit at different points in our economy, we may well be on the left side of the curve for some taxes and the right on others.
In any case, it's distressing to see the closing of the conservative mind to economic debate. No wonder those Republican presidential hopefuls were so terrible in the Michigan debate.
I take it all back [Asymetrical Information]