Conservative Publisher Axes Conservative Author Who Dares Question the Laffer Curve

[Toro]

The small-tent Republicans are now eating their young if they don't subscribe to the rigid theology that all tax cuts are good, no matter what.

I take it all back

16 Oct 2007 07:43 pm

A conservative publication, which I will not name, just spiked a book review because I said that the Laffer Curve didn't apply at American levels of taxation, even while otherwise expressing my vast displeasure with the (liberal) economic notions of the book I was reviewing. This isn't me looking for an alternative explanation for the spiking of a bad review: the literary editor accepted it, edited it, and then three hours later told me it couldn't be published because it violated their editorial line on taxation.

I suppose I ought to have known, but I didn't. Go ahead liberals, pile on: you told me so. The Laffer Curve and the supply siders pushing it seem to be the teacher's unions of the right.

http://meganmcardle.theatlantic.com/archives/2007/10/i_take_it_all_back.php

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.

http://www.dealbreaker.com/2007/10/where_are_we_on_the_laffer_cur.php#more

"The closing of the conservative mind."

Ain't that the truth.

Rothbard on the Laffer curve

Myth 9: An income tax cut helps everyone; not only the taxpayer but also the government will benefit, since tax revenues will rise when the rate is cut.

This is the so-called "Laffer curve," set forth by California economist Arthur Laffer. It was advanced as a means of allowing politicians to square the circle; to come out for tax cuts, keeping spending at the current level, and balance the budget all at the same time. In that way, the public would enjoy its tax cut, be happy at the balanced budget, and still receive the same level of subsidies from the government.

It is true that if tax rates are 99%, and they are cut to 95%, tax revenue will go up. But there is no reason to assume such simple connections at any other time. In fact, this relationship works much better for a local excise tax than for a national income tax. A few years ago, the government of the District of Columbia decided to procure some revenue by sharply raising the District's gasoline tax. But, then, drivers could simply nip over the border to Virginia or Maryland and fill up at a much cheaper price. D.C. gasoline tax revenues fell, and much to the chagrin and confusion of D.C. bureaucrats, they had to repeal the tax.

But this is not likely to happen with the income tax. 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.

There are some other problems with the Laffer curve. The amount of time it is supposed to take for the Laffer effect to work is never specified. But still more important: Laffer assumes that what all of us want is to maximize tax revenue to the government. If--a big if--we are really at the upper half of the Laffer Curve, we should then all want to set tax rates at that "optimum" point. But why? Why should it be the objective of every one of us to maximize government revenue? To push to the maximum, in short, the share of private product that gets siphoned off to the activities of government? I should think we would be more interested in minimizing government revenue by pushing tax rates far, far below whatever the Laffer Optimum might happen to be.

http://www.mises.org/econsense/ch2.asp

 

[midcan5]

Clinton's tax increase should have once and for all destroyed the silliness known as the laffer curve, that it didn't shows this is more about belief than economics.

 

[BaronVonBigmeat]

Pre-emptive strawman strike: Murray Rothbard (my avatar ) makes most supply-siders look like Marxists, he was an anarcho-capitalist who sees the institution of government as being wholly unnecessary. Not that I necessarily agree with that, I just thought I'd point it out before someone says "LIBERAL!".

But yeah, even supply-side guru Jude Waninski was very forthright about admitting that no one's totally sure where the peak of the Laffer curve is. He thought it was 15%~20% IIRC. And certainly, in the long run at least, a rich nation with low taxes will have more revenue than a poor nation with high taxes. The trouble is, when they lower income taxes but raise the inflation tax--can we even say that taxes have been cut, or merely shifted around?

 

[Gunny]

Clinton's tax increase should have once and for all destroyed the silliness known as the laffer curve, that it didn't shows this is more about belief than economics.

Oh ... you mean the Clinton tax increase that almost had me filing for bankruptcy? It took living to a monk to get over that.

 

[Paulie]

Oh ... you mean the Clinton tax increase that almost had me filing for bankruptcy? It took living to a monk to get over that.

Funny...I almost filed for bankruptcy after the Bush tax cut...hmmm

 

[JeffWartman]

The main question for "supply siders" is why they care so much about maximizing tax revenue when they say they care about limited government.

If you really care about limited government, maximizing tax revenue shouldn't be on your radar.