Monday, March 16, 2009

Who Laughs at the Laffer Curve?

You've found me: the one and only person in America who believes in the Laffer curve.

Ever since Reagan championed the idea that the government can earn more from lower taxes, liberals have shunned the concept.

Oddly, conservatives have, too, though they love part of the idea. You can read some near-religious praise for part of the Laffer curve at, a site whose crazy fervor used to tickle me until they kicked me off for suggesting there's a role for good government.

One poster says, 'its logic continues to elude the class-warfare lobby' and another insists, 'Laffer curve should be pasted on the ceiling above every child's bed.'

But they don't really want a Laffer curve. They want a Laffer bulge, a curve with no left side.

Look closely at that left side: at that point, government receipts fall with further tax cuts. That fits both our historical data and plain logic. If you cut taxes to 0%, we'll clearly have no government revenue.

So where are we on the curve?

For us to expect more revenue by cutting taxes to 10%, from 40%, we'd have to expect that people would work four times as many hours. That's simply not possible, and the tax change does not imply any leap in productivity to fill the gap.

Could people work twice as many hours to compensate for a cut to 20%? Since the average employed American works between 46 and 50 hours per week, doubling their time would be exceptionally hard. Remember, that's an average. Yes, some people already work 100 hours a week, but they can't double their time to 200.

Then here's where we are on the Laffer curve: we're close to the optimum level for receipts. We can't cut the top tax rate to 20% and expect people to double their work week, nor should we hike it to 60% while hoping it doesn't reduce hours. Neither is reasonable.

We can argue over whether we should shift 5% one way or another, but we're no longer at the punitive 80% top tax rate that existed when Reagan took office. The level now is close to where it needs to be.

So let's put away the Laffer bulge and call a spade a spade: lowering taxes now is liking taking medicine for last year's cold.

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