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A Conservative Misinterpretation Of The Laffer Curve

Posted By John Hawkins On November 15, 2010 @ 3:00 pm In NewsReal Blog | No Comments

If you’re reading a blog like Right Wing News, you’ve probably heard of the Laffer Curve. If you haven’t, here’s the self-explanatory graph:

Long story short, what Arthur Laffer is trying to get across is that contrary to what some people believe, tax increases DON’T ALWAYS increase revenue to the government and tax decreases DON’T ALWAYS decrease revenue.

This is because people’s behavior changes. As tax rates go higher, people are incentivized to work less, cheat on their taxes, and find ways to protect their income from the tax man. Once the tax rate gets up to 100%, the question becomes: Why work at all since every dime will be handed over to the government?

So, what Laffer is saying is that there is some optimal point, where the government can maximize its revenue, and raising taxes beyond that point will be counterproductive.

Makes sense, right?

Okay, now here’s where I’ve noticed some conservatives misinterpreting this theory lately: They’ve come to believe that tax cuts will inevitably produce more revenue and tax increases will inevitably decrease revenue.

This certainly can happen and it often has happened. But, and pay close attention to this, either a tax increase OR a tax cut may increase revenue to the treasury. Moreover, it’s entirely possible that even though the revenue going to the government may increase after a tax cut, it may have increased EVEN MORE had taxes been raised.

If you don’t understand how this can be, then you don’t quite get the Laffer Curve.

Here’s what you have to understand: The Laffer Curve measures MAXIMUM revenue. If you cut taxes, it may stimulate economic activity, increase the income earned by the population, and lead to more money coming into the treasury. On the other hand, raising taxes may slow economic activity, but the increased amount of tax revenue paid per person may more than make up for it.

Here’s a SUPER SIMPLISTIC example to show you what I’m talking about.

Continue reading at Right Wing News.



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