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Friday, July 13, 2007

Yet Again, Tax Cuts Do Not Pay for Themselves

The Wall Street Journal says Kevin Hassett has discovered the Laffer curve, but I think these data might say something else. Here's the picture from the editorial where they are making their usual plea for more tax cuts:

Laff1

The blue line is supposed to be the Laffer curve, but this is far from compelling. Since it looks like all that's been done here is to draw a line through an outlier, Norway (an outlier that in other contexts we are told to ignore because it is an outlier, e.g. see below), and since this is clearly not the best fitting line to these data, here's another possibility:

Laff2

I haven't actually run the regression, but it looks clear to me that revenues rise with tax rates, and the fit also looks better than in the first graph. Toss out Norway, and the fit looks even better (and to quote The Economist blog on this point, "Throwing out Norway...").

I know how much supply-siders want to find a Laffer curve, they've become frustrated going this long without success. But if they really think one exists they'll need to keep looking because they haven't found it yet. [Update: Max has estimates.][Update: Response(s) to a post at The Economist's blog,  Free Exchange.]

    Posted by on Friday, July 13, 2007 at 12:06 AM in Budget Deficit, Economics, Taxes | Permalink  TrackBack (9)  Comments (104)

          

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