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Posted by on Oct 25, 2011 in Politics | 6 comments

The Laffer Curve and Last Laughs

There’s nothing more contentious — or the topic of sound bites — than federal tax policy. Although Jude Wanniski, a writer for the Wall Street Journal, coined the term in 1974, the Laffer Curve made its way into the political lexicon with President Reagan’s championship of supply-side economics and the Kemp-Roth Tax Cut of 1981.

And now it’s back, because Authur Laffer called GOP Presidential Candidate Herman Cain’s 9-9-9 tax plan “wonderful.” Laffer was Reagan’s economic adviser.

In the original Cain proposal, the current tax system would be replaced with a 9 percent tax on income, a 9 percent business tax and a 9 percent national sales tax. The Tax Policy Center showed the 84 percent of Americans would pay more taxes under this plan, according to the SunshineStateNews.

For those who don’t remember Reagan, the Laffer Curve claims to model tax elasticity. In vernacular, the argument is that there is a tax rate that will yield the most tax revenue. Raising the tax rate beyond this point would reduce tax revenue.

Mike Kimel at TheAngryBear asks the reader: “have you ever seen [the Laffer Curve] estimated?” No, right?

Kimel writes that “someone should let non-quant people into the joke [b]ecause the only people really discussing it are those who are driven by ideology…” According to his calculations (emphasis added):

The low point in tax collections happens to be about 32%. In other words… if the top marginal tax rate is below 32%, cutting it further will raise tax revenues. On the other hand, if the top marginal tax rate is above 32%, to boost revenues you have to raise tax rates…

[I]t turns out that the optimal tax rate for growth is easy to calculate. The data cooperates very nicely. There is a relationship, an easy to estimate curve which I’ve modestly called the “Kimel curve.” And the high point in the Kimel curve is somewhere around 65%. Now, the Laffer curve analysis shows us that getting to the level of taxation that produces the fastest economic growth rates would also increase our tax collections… not a bad thing at all in an era of rapidly rising national debts.

Which brings us to the biggest Laffer curve joke of them all: ain’t no way the folks who like to talk about the Laffer curve would support that.

Although I am an economist and once-upon-a-time dealt with complex equations, it’s been decades, so I pass this along in the category of “interesting and rigorous” analysis. The comments are very worthwhile.

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