The Laffer Curve is Wrong

[Toro]

But we all know that...

No, I'm not referring to supply-siders arguing lower tax rates will bring in more revenue, I'm talking about the very foundations of the curve. Yes, I admit this is pedantry, but it may come in handy next time someone at a cocktail party starts explaining what the Laffer curve is all about (if you go to this sort of cocktail parties that is). Here's a recent description at Tim Worstall's blog:

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.

A 100% tax rate on everything was tried before, of course: they called it communism. Whereas not advisable, government revenues sure weren't zero. And even if you rule out authoritarian methods, it is very likely that even at such high levels of taxation some market activity would take place simply to support non-market, non-taxable activities. And of course, I would expect considerable social pressure on individuals to work (if you don't work alongside me, we all die), plus a lot of activity from people who actually enjoy doing their job.

http://bluematter.blogspot.com/2007/11/laffer-curve-is-all-wrong.html