Quote:
Originally posted by taxwonk
Econometrics isn't really my field, so I'm approaching the edge of my ability to discuss the issue. However, I am certain that the Laffer Curve purports to demonstrate the elasticity of taxable income earning. To put it in the terms it is most commonly expressed: the greater the tax rate, the less tax will be generated because the increase in taxes acts as a disincentive to work harder to earn more income.
I think that's a load of hogwash other than at the extremes. If you take issue with my examples, then you can substitute others. Examples include Oprah Winfrey, Jack Nicholson, Jay-Z. The point remains the same. They all do have other reasons to keep earning; the tax rate is not a determinative factor.
|
You're right on the first paragraph, at least on the "far" side of the curve. But if the tax rate were, say, 90%, on marginal income over $1m, would Oprah keep working? Not so sure. 99%? Probably not (of course, they'd find ways of getting non-taxable income instead "Oprah--today on location in Hawaii; tomorrow on location in Tahiti".) At some tax rate, people will see so little of the income that they would prefer to get their utility from non-taxable sources--i.e., leisure.
Aggregated across the economy, the effect will be more pronounced. The question is what is that tax rate at which in increased tax from a higher rate is more than offset by lower income to be taxed in the first place. The princple is no different than what is the profit maximizing price for a monopolist.
The reason Reagan had so much belief in the Laffer curve was, apparently, his experience in Hollywood. When he was an actor, the tax rate was something like 95%. Actors would earn enough from one film to hit that bracket. So they would do one film a year. At least, that's the anecdote I recall from Stockman's book.
