Go Find Me the Peak of the Laffer Curve

Mon, 02 Aug 2010 15:16:26 +0000

My New Year's Plea from 2007 has been getting some attention in the recent discussions over whether cutting tax rates will raise revenue.  In this post, I'd like to follow up on the last line of that plea, which I have not seen recently quoted:

If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.

Restated, if these tax cuts raised revenue, then why not keep cutting them until the point at which revenues actually begin to fall?  I presume the reason is that none of the proponents of this line of argument have any idea what the revenue-maximizing tax rate is.  They only like to assert that we must have been past it because tax revenues eventually went up at some point after the tax rates were cut (ignoring the obvious counterfactual that it was economic growth unrelated to the tax cuts that pushed revenues higher and that they would have been even higher at the higher tax rates). 

So the next question is simply, "What do the experts on your staff tell you that the top marginal tax rate should be in order to maximize tax revenues, leaving everything else about the tax code the same?"  Journalists should relentlessly ask it of the Republican leadership in Congress who continue to make fallacious claims, and the Democratic leadership in Congress ought to ask it politely in a letter to CBO Director Doug Elmendorf. 

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In both cases, we'll get some interesting responses. The Republican leadership will have to admit that they have no idea or give some ridiculous answer. CBO will also have to take a serious look at how it allows for potential supply side responses to changes in tax rates and take a stand on the issue.