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Wednesday, June 27, 2012

Laughing at People Who Say Tax Cuts from Present Levels Will/Might Increase Revenue

There are two responses to the post below this one on the Laffer curve:

Miles Kimball explains why tax cuts are unlikely to increase revenue. This is worth reading.

Dave Henderson: Where are we on the Laffer Curve. Henderson says:

Cutting marginal tax rates will somewhat increase taxable income. But the odds are very high that it wouldn't increase nearly enough to increase tax revenue.

That is, he is asserting we are to the left side of the peak, but he leaves himself wiggle room even though there's little reason to do so based upon the evidence ("odds are very high"). He then says:

the question is not whether the Laffer Curve is right. The question is where we are on the Laffer Curve.

But he's already answered this question, we're to the left of the peak, or at least "the odds are very high" that we are. I'd be curious to hear what he thinks those odds are, and if they are non-trivial what evidence it is based on. So to me the real question is trying to figure out what point he is trying to make. We're to the left of the peak, almost surely, but the real question is whether we're to the left or right of the peak? Huh? Saying it could be true that tax cuts will increase revenue -- leaving wiggle room -- when all the evidence points in the other direction just gives the politicians and others who say tax cuts from present rates will increase revenue something to hang on to in their ideological battle against taxes. Why give them this opening when the evidence says the opening isn't there?

Along the way he tries to take a swipe at me based on play on words in the title -- but his assertion that I deny the existence of a revenue curve, or that it has a peak, is silly. I don't think we are anywhere near the peak (based partly, but only partly, on recent research showing it's near a 70% rate), but where have I ever said no such peak exists? As I said in comments, what I am laughing at is people -- politicians in the GOP in particular -- who still say that if we cut taxes it will increase revenue (and I am disappointed with economists who abet that by saying it could be true, or that the real question is what side of the peak we're on even though, as Henderson admits, that's all but a settled question: "Not one economist surveyed agrees with this claim [that tax cuts will increase revenue within five years]. I don't either." He doesn't agree, but it just might be true? Hmm.).

Update: Bryan Caplan also responds: Did the IGM Reject Laffer Optimism or Old-School Keynesianism?

    Posted by on Wednesday, June 27, 2012 at 08:19 AM in Budget Deficit, Economics, Taxes | Permalink  Comments (35)



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