There is no Laffer Curve

First of all economics is an observational field of study. One gathers data and then tries to fit a model to it. It fails as a science because the models can't be tested, except in the simplest micro-economic situations. Tax policy is not one of these cases. Economics is not physics. It is based upon human behavior not laws of nature.

Second the "common sense" observation that tax revenue falls to zero at tax rates of zero and 100% is a meaningless observation and doesn't predict the shape of a curve which exists between them. When most people talk about the Laffer curve they mean to apply it to the income tax (or perhaps the corporate tax). That's why they talk about a disincentive to work if the rate is too high. But in most advanced countries the income tax is graduated, so the Laffer curve wouldn't be a single curve, but one for each tax bracket.

Let's assume that the highest income tax bracket really was 100%. Does this mean that everyone would stop working? Of course not. Does it mean that those reaching the top bracket would stop working? No. Does it mean that they would even stop working when further income for the year would be zero? No.

Why not? Because there are many other reasons why people (even the super rich) keep working. They need to keep their business running, they need to plan for future, they like the prestige and perks that come with the position, they find the work intellectually challenging, or they like to see the firm grow. So even the basic assumption that work would stop if the tax rate reached 100% is not based upon any observational data.

During WWII many rich industrialists became "dollar a year" men. That is they worked for nothing to aid the war effort. Apparently there are other incentives besides money. But the miserly class thinks that their goals are the same as everyone else's. Not everyone is a Walton who is worth $70 billion and constantly dreams of more.

Where is the objective data on the Laffer curve? Where are examples in the peer-reviewed, technical literature? Where are the hard numbers and predictions? Does the Federal Reserve refer to the Laffer curve when making policy? No. Even those who believe in the Laffer curve cannot say where we are on it. Are we on the left where increasing taxes would increase government revenue or are we past the peak where increasing tax rates lower revenue? They can't say, because there is no Laffer curve.

The data speaks for itself. The rich are paying less and earning more than in prior periods. They are using fake economics to "prove" that this is a good thing. There is a curve alright. It's the curve they have been throwing the public.

Moral: There is no Laffer curve.

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Copyright © 2006 Robert D Feinman
Feel free to use the ideas, but the words are mine.