Slighty unfortunate that Hari makes exactly the same mistake about The Laffer Curve that Jonathan Chait does.
Trying to explain this idea to an eager Cheney, "Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it," writes the liberal New Republic journalist Jonathan Chait. "The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And if the government sets a tax rate of 100 per cent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two, Laffer\’s curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government."
No, there\’s a reason it\’s called the Laffer Curve rather than the Laffer Arc. The point is that there is a level of taxation (and we must be very careful to point out that this will vary for different taxes too) which maximises revenue collection. Go to the right of that point and raising the rate will reduce collections. If you\’re already to the left then reducing the rate will indeed reduce collections.
The point is that if you\’re to the right then reducing the rate will increase collections….and vice versa, if you\’re to the left then increasing the rate will.
We also need to be careful to distinguish between the short and long term. Let\’s have a completely made up example, shall we? OK, we have a taxation system which, via its deadweight costs (which is what we\’re really talking about with the Laffer Curve, the lifting of them, and there isn\’t a single economist alive who would try to insist that taxes don\’t have deadweight costs) leads to a growth rate of 2% pa. We fiddle around with such taxes until we\’ve engineered a growth rate of 4% (well, I did say this was completely made up, didn\’t I?). In the process, we\’ve reduced tax collections by some amount. And we find that we\’ve reduced collections in year two, and three, and four….does that mean we\’ve reduced collections for all time then?
Clearly, no, because the difference between a growth rate of 2% and 4% compound quickly (for one meaning of "quickly") starts to get noticed. For example, a 2% growth rate means the economy doubles in size in 35 years or so. A 4% one means it doubles in 17.5 years or so.
So if we had a 4% growth rate, and taxation levels of only 75% of those in the 2% growth rate scenario, you would see that at some point in the future total tax collections in the higher growth scenario would in fact be higher than in the high tax scenario.
OK. So The Laffer Curve is not buncombe then. The statement that always lowering taxation rates will always increase revenue is indeed buncumbe though: as is the statement that they never will.
The question is, where are we on the curve and further, what timescale are we talking about?
I\’ll also add my usual whine here about the phrase "supply side". It has come to mean, in the annals of American liberalism, exactly this about marginal taxation rates. But that\’s not the way it started out, not the way I continue to understand/use it. It\’s about reform of the supply side. Privatising BT, breaking up AT&T, these are also supply side reforms. Education vouchers would be supply side reform, GP fundholding was a supply side reform. It\’s about what it says on the tin: reforming the supply side of the economy.
From 1947 to 1973, the US economy grew by 4 per cent a year – while the richest Americans paid a 91 per cent top rate of tax.
Err, Johann? A little research perhaps before you write about things where you have no knowledge base?
President John F. Kennedy proposed a series of tax rate reductions in 1963 that resulted in legislation the following year that dropped the top rate from 91 percent in 1963 to 70 percent by 1965. The Kennedy tax cuts helped to trigger the longest economic expansion in the history of the United States. Between 1961 and 1968, the inflation-adjusted economy expanded by more than 42 percent. On a yearly basis, economic growth averaged more than 5 percent.
That\’s just sloppy.