July 13, 2007
Laffer curve follies
Brad DeLong points us, with entirely appropriate added snark, at Mark Thoma's destructo job on the WSJ's lead editorial today and the truly historically nonsensical graphish thingy in it. It might be a good time to recall what the Laffer Curve is about, and its use to argue for tax cuts long ago and in another universe.
The curve relates tax revenue to some sort of average or example of tax rates (for example, corporate national rates) and it's hat-shaped, with no revenue at a rate of zero (duh...) and very little or none when rates are 100% as in the old joke about the three line tax form (1. How much did you make? 2. Write it down. 3. Send it in). In between these extrema is a maximum. So far not much light shed; how could it be otherwise?
Someone drew the hat on a napkin in the Reagan Administration, as I recall, asserted that the US was to the right of the maximum, and "proved" that lower taxes would increase revenues. This event grew into "the Laffer curve proves that we should cut taxes" as a proposition advanced as always true, like "Now this!" or "Here we are!". What I never understood was why it was attractive to small-government conservatives to increase government revenues at all; how did that become a goal of policy for those guys? Why wasn't it "the Laffer curve proves we can only starve government into Norquist's bathtub by raising taxes!" [Did a whiff of intellectual dishonesty just float through the room? Perhaps I imagined it, or someone stepped in a bovine poop on the way in...]
Happily piling on the WSJ, I wish to add that the graph they published substitutes government as a fraction of GDP for revenues on the vertical axis, and they say nothing about the switch. But this is not a Laffer curve, and must increase from zero to 1 along the tax rate scale despite the ridiculous fedora they drew through, um, around and about, the data (Thoma sketches an appropriate curve for this choice of variables; probably the truth isn't a straight line but I bet it's monotonic).
Could there be a publication whose intellectual respectability and argumentative honesty would increase under Murdoch oversight? Theory and most evidence says no, but it only takes one black swan, and I think one just flew by the window...
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