There are really two Laffer curves. There’s the real one, which actually is a curve, and there is a version of it frequently used by conservatives living in the imaginary world which so many current conservatives inhabit. Pretty much nobody likes to pay taxes and most of us would love to see taxes lower, but those in the reality based world also generally realize that currently our taxes are fairly low by historic standards. We also realize that, as much as we’d rather not pay them, taxes are a necessary evil. Many other conservatives don’t get beyond the point of wishing we don’t have to pay taxes and developing a set of principles of Voodoo Economics.
To conservatives who are divorced for reality, there is a simple solution to the problem of not wanting to pay taxes while simultaneously wanting to fund necessary government services. They claim that the Laffer Curve proves that we can cut taxes and the government will bring in more revenue.
This is certainly true under some circumstances. At some point high taxes will reduce motivation to create wealth, resulting in less money being earned to be taxed. High taxes can also increase the likelihood that money will be spent in various ways to shelter money for taxes. There have actually been times in which lowering taxes will bring in more revenue. The Laffer Curve shows that this is the case with high levels of taxation, but not all levels.
We are not currently in a situation where we can lower taxes and bring in more tax revenue. Bruce Bartlett, a former Reaganite who sees many of the problems in the current conservative movement, refers to this paper from The National Bureau of Economic Research. From their abstract:
We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring ”constant Frisch elasticity” (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation.
As Bartlett points out, this is not an argument that we should raise taxes, but “only an argument against a common right-wing argument against raising taxes; i.e., that no net additional revenue would be collected if tax rates are raised because of a Laffer curve effect.”
One of the problems with the mind set of many on the right is that they would see the issue as purely one of raising taxes, have a knee-jerk opposition, and then cite the Laffer Curve even though it does not support their case. The real issue is not a yes or no question as to whether we should raise taxes but whether we are receiving value for our money. In other words, I wouldn’t want to pay higher taxes for the war in Iraq (not that fighting it on credit was a good idea) but higher taxes to really do universal health care right would be worth considering.
