New nonsense from Heritage

Does anyone at the Washington Post read their Op-Eds before they go up? Like, a quick check for coherence and plausibility?  Today we have the Heritage Foundation’s chief economist (really) getting everything about the Laffer Curve wrong.

OK, let’s go over it again, time to rewhack the zombie.  The LC is a graph of government revenue against income tax rate.  Not GDP, not the sum of human happiness, not moral standing of a nation in the world, not any of those things: government revenue. The curve, like Ohio, is zero at the ends and high in the middle, duh; if the government takes all of everyone’s income, no-one will bother to earn any income and therefore not  pay any taxes; if it doesn’t take any, it doesn’t get any.  Again, duh.  Where the maximum is, and how steeply it slopes down where, are debatable with data, but a hat-shaped curve that is zero at the ends is assuredly the correct description of this relationship. Yes, Virginia, there is a Laffer Curve. No-one ever said there isn’t; how could there not be?

The LC, sketched without units on a napkin, is trotted out by people who want to make taxes lower: “see, the government could actually get more money if tax rates were lower!” (Notice that the tax rate axis always changes  from average income tax rates to top rates (what only a very few very rich people pay, and the only rates the Heritage Foundation’s funders care about) in this conversation.) To use it that way, you have to believe the high point is to the left of where we are now, not just that the curve exists, and this argument never, ever, comes with any data bearing on that. But you also have to be a liberal who wants government revenues to be higher!

Even on the Heritage payroll, Moore can’t recite the traditional Laffer refrain with a straight face, but after backsliding dangerously, he falls into complete heresy:

But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve….It’s a happy byproduct that [economic] growth will help generate higher revenue than the government’s “static” estimates always undercount.

Happy? Stephen, Stephen, revenue is what the government uses to pay its jack-booted thugs to take away your freedoms. Where is Grover Norquist, when we need him to ferret out these red Commies at Heritage, and explain to de Mint that the party line is ” less revenue for government, not more”! Why is Moore not on the street this very morning, with a tin cup and a badge of shame?

Moore’s argument wanders through a bunch of post hoc ergo propter hoc anecdotes that prove exactly nothing, and he  is happy to wrap up by reporting that middle-class incomes going up 30% from 1980 to 2005  is (i) upward mobility (ii) caused by tax cuts. Well, the middle quintile’s share of after-tax income went from 16 to 15% during that time; he lowest quintile’s from 6 to 5.  The top 1% were quite upwardly mobile, as they scarfed up pretty much the whole increase in national wealth over that period, and their share of after-tax income went from 9 to 15%.  Except at the Heritage Foundation, that’s not upward mobility, that’s the rich getting ahead while everyone else stands still or falls behind,  exactly what you would expect when you collect less taxes from the very richest people and otherwise ply them with favors like carried interest deals.

Yes, there is a Laffer Curve. No, it tells us nothing about what tax rates should be. Yes, the Washington Post Op-Ed page needs warning signs.

 

 

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

4 thoughts on “New nonsense from Heritage”

  1. That there is a Laffer curve in the trivial sense that it is possible to graph revenues against a chosen tax rate is necessarily true. That the concept has any value is not.

    First, as you suggest, there is the question of which tax rate goes on the horizontal axis. The top marginal rate? The capital gains rate? The rate paid by median workers, the marginal rate paid by low-income individauls as they begin to earn income, something else? At a minimum, the most ardent Lafferite would have to concede that more than one of these affects revenue, so throw out the napkin and start drawing lots of axes.

    Second, why the implicit assumption that the "tax rate" is what primarily matters. Many things affect the state of the economy and hence government revenue. Even sticking very narrowly to government action we have monetary and fiscal policy. And then there are any number of other matters – the weather, technological advance, demographics, education levels, and on and on. Is the shape of the curve constant for all values of these other variables?

    And finally, even in its simplest form, why must it have only one maximum point? Or, if it does, why isn't it possible that rather than being peaked, the curve has a long relatively flat segment around that maximum, so that we have no chance to locate the peak, and it's not worth the effort to try?

  2. The other thing I have always wondered about the Laffer curve is whether labor is redistributed. If you have a $300 honorarium to offer a medical school professor to give a conference presentation, and s/he says “Well, once I pay all the taxes it’s only $150, which isn’t worth it to me”, don’t you then turn to someone with lower income to engage in the labor, meaning that you are reducing inequality. Or is when high-taxed people turn down a job or investment, is it presumed to disappear?

  3. Piketty and Saez have pretty well handled the question of the inflection point, at least within the limitations imposed by the currently available data. We were pretty close to having it right in the 1970s, when the top marginal rate on ordinary income was 70 percent. Everything since 1981 has been a step in the wrong direction (gee, ya think???).

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