Laffer Avoids His Own Curve

August 2, 2013 at 3:42 pm

I find this amusing.

When the economic curve Arthur Laffer is famous for no longer supports his arguments, Laffer ignores his work and talks about something else.

Arthur Laffer

How he dances around his own earlier work below.

What is the Laffer Curve?

The Laffer curve is a diagram that was used originally to justify tax cuts.

Here’s the theory. At 0% income tax rate, the government collects no money. Obvious, right? 0% of anything is 0. At 100% income tax, the government will also collect no money because there would be no earnings. Who would work if you kept none of what you earned?

Laffer’s theory postulates that there is a point between 0% and 100% of income tax rate where the maximum amount of revenue is generated.

You’ll hear conservatives invoke some variation of this when they say “If you tax people 100%, you won’t get any revenue because no one will work.”

What they never mention, however, is the other side of the equation. If the income tax rate is zero, government collects no money.

If the point of the curve is to find the tax rate that generates maximum revenue, then you’re looking at a number between 0 and 100%.

Notice in the diagram how at both ends of the curve, revenue is zero. Where the maximum exists is a subject of much debate. But what is clear is that it’s not at 0% or 100%.

laffer curve

Why does Laffer want a 0% rate then?

In this interview with PBS’ Paul Solman, Arthur Laffer argues for a 0% state income tax rate.

How can he argue for a 0% income tax rate when his own curve states that this won’t generate any revenue?

It’s right there in his curve: 0% income tax = 0% revenue.

Laffer is simply allowed to say: “The zero-income-tax-rate states have far faster growth in tax revenues than did the states with highest income tax rate over this period.”

How, Arthur?

How can state revenue grow faster if there’s no income tax? Where is the state getting any money if the income tax rate is zero?

Now it’s true that state revenues could come from other sources like sales taxes or property taxes.

Laffer never says, however. He simply asserts it as a fact even though it would go against his own theory. For all we know, it’s magic.

For me to believe Laffer, I’d need to see proof that states have somehow realized additional revenues above and beyond what an income tax would generate from other taxes due to increases in growth.

What I do know is that, in terms of maximizing revenue from income tax, according to Laffer’s own curve, it’s impossible for the rate to be 0%.

A 0% income tax rate returns zero dollars. This is quite likely why Laffer avoids any mention of his own curve in what looks like a snake oil sales pitch for zero percent state income tax rates.

Cross posted at: Daily Kos.