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In this video, Something to Consider uses the Laffer Curve to help us challenge our assumptions about tax policy, and arm us to challenge our elected representatives when they propose policy. Get curious!

What assumptions do you and your friends have about how changing tax rates in your country will affect revenues and the economy? How can you challenge them?

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46 Comments

  • Chris McAdam, April 4, 2015 @ 9:52 pm Reply

    Where we are on the laffer curve is difficult to tell, and yes, the different tax brackets are in different places.

    The policy issues, though, are much more a problem of whose ox is being gored than it is on effective policy. Lower classes, as a rule, favor taxing "the rich", meaning, people making more than they do. Democrats calling for "raising taxes" aren’t generally calling for raising taxes on everyone…. just the higher brackets.

    Republicans, by contrast, don’t generally call for cutting all services…. they look to cut services they generally don’t use. Welfare, disability, and other safety net areas. Not so much defense spending or law enforcement, which protects their assets.

    Both sides have one problem : they want someone else to take up the slack. So it isn’t finding the right rate that’s the true issue, it’s getting everyone to assume responsibility for paying for the benefits that government provides, not trying to stick someone else with the check.

    • Something to Consider, April 7, 2015 @ 4:39 am Reply

      I decided to go fact-check the "Republicans don’t use welfare" bit and you’re generally right; Dems outnumber Republicans about 2:1 on food stamp usage (22% to 10%): http://www.pewresearch.org/fact-tank/2013/07/12/the-politics-and-demographics-of-food-stamp-recipients/

      I’ll say, though, that both issues (what you’re pointing out and what I am) are important/different. There’s doubtless a split in partisan priorities, but I think it’s definitely worth asking congresspeople that are proposing lowering or raising taxes (which is usually on higher tax brackets, totally) whether they have a good sense of what they think the impact will be before they do it, either way.

      • Chris McAdam, April 7, 2015 @ 2:56 pm Reply

        I will absolutely grant we likely do not tax at the optimal rate. Finding that optimal rate may be nearly impossible, because constantly changing factors impact what rate, or structure of rates, yields the biggest revenue.

  • Amos Meeks, April 7, 2015 @ 2:30 am Reply

    As an engineer I look at this and see a simple problem of finding a local maximum. If R = revenue and T = tax rate, then why can’t we make small changes to T in either direction, see how R changes, get a value for dR/dT, and then follow the slope upwards until we find a local maximum? Or at least we can find some approximation of this.

    • Something to Consider, April 7, 2015 @ 4:44 am Reply

      I do know some folks have done serious research on this and I’ll be putting it in the book (I don’t yet have a good sense of their methodology).

      As a not-math guy, I find your simple approach both tempting and also possibly elusive–given how many huge factors go into gov’t revenue (most of which affect economic performance at a given time), will we be able to measure small effects through all the noise? I have no idea.

      Interestingly, I did a quick search and found a tangential-but-neat article on cigarette taxes: http://www.forbes.com/sites/timworstall/2013/01/20/in-which-we-spot-the-laffer-curve-in-the-wild/

    • Chris McAdam, April 7, 2015 @ 3:01 pm Reply

      We don’t know the shape of the curve. The neo-laffer curve was proposed by Martin Gardner decades ago, in part to point out there may be multiple rates that yield the same revenue, and in part to point out that the laffer curve is an oversimplification (Which Laffer himself admitted readily)

      This is (I believe) one of the ones he drew for his initial article :
      https://ygiraud.files.wordpress.com/2014/01/giraudrspfigure3.jpg

      It’s clearly not a useful curve, and likely isn’t correct, but it makes the point that it’s not as easy to optimize tax revenue as one would hope.

  • alex kats, April 23, 2015 @ 5:38 pm Reply

    This is a good introduction to an economics tool and why it is important. But I think misses an opportunity to pull more directly on data.

    Also, while you clearly make a great effort to benon-partisan, I think some of your assumptions actually betray bias. For example, the "everyone wants to cut the deficit" doesn’t really address the larger debate, or that it isn’t and never really has been a problem in the US. It is a good example though of people who will swap around different arguments, while maintaining the same conclusions. Which I think would make a super interesting post topic.

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