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.
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No it because high taxes start crowding out investment and hurt the economy. The less money people have the less money they have to invest and consume. The higher the corporate tax rate, the less money companies have to employ people or invest. High tax rates all over the world have been dropped because they hurt the economy.
There is no question that the lower the tax rates the better it is for the economy. However, you can't go too low because then you bleed the government and prevent it from providing for the infrastructure that is necessary for growth. With no government you get no growth.
However, above that level the issue is the more you tax now the more you lose in the future. The laffer curve states that when taxes reach a certain level they hurt growth so much that over the next few years revenue growth will dimish and a certain point they will actually cause overall revenues to diminsh.
At a certain point in the curve, over a five year period tax increase will actually lead to less revenue because of the loss in growth and a tax decrease will lead to more revenue because the growth will outweigh the cuts.
Just a small increase in the GNP dramatically increases tax revenue. So if a tax decrease brings in even a little rise in the GNP there is no question that such tax decrease can compenstae for the lost revenue through growth.
The Supply Siders argue that the Reagan tax cuts provided the growth that led to balancing the budget in the Clinton administration. In other words we grew our way out of the deficit.
So to maximise government revenue you need to find the point where if you raise taxes you get diminshing marginal returns and at that point you stop. That is the theory anyway.
There is no question the theory is sound, the issue is where is the maximum point on the curve. Conservatives think we are above it, and liberals generally think we are below it.
