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Authur Laffer on the Laffer Curve

Simon Gibbs

[One of] a few of the advances that powered this extraordinary century

Time

I remember once passing a stall manned by socialists and surrounded by a small huddle of voters. I had a few seconds, but only a few seconds, to express my distaste before getting back to paid work. I listened for a few moments and then I intervened and suggested that the voters present should look up one simple concept on Wikipedia: the Laffer Curve.

I was quite cocky I suppose, and the socialists told me so, fair enough.

The curve is a practical impediment to anyone whose ideas require higher taxes, but it also poses an interesting moral problem. The maxim “from each according to his ability to each according to his need” is equivalent to 100% taxation and the Laffer curve informs us that nobody will produce anything at that rate. I often wonder if socialists think through their ideas* to the end and think about what occurs at 100% rates. If no-one wants to work, how do you force them. Ayn Rand – who lived under Russian socialism – gave a clue in the form of Dagny Taggart’s part III epiphany that the population would be forced, by fear of starvation into producing just enough that when the looters take their share, they are not left with nothing. The result would inevitably be dire poverty and violent thuggish dictatorship. I am told, by another Russian, that tax rates were more like 95% so I guess the Russian’s never found out what this is really like, but the Laffer Curve seems to predict it. At that stall I was hoping, perhaps vainly, that an average voter might see that.

So, it is with a little excitement that I can tell readers that Arthur Laffer will be speaking about Britain and its relation to the Laffer Curve at an IEA event on the 27th June. Full details over at the IEA.

* more on this later!

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One response to “Authur Laffer on the Laffer Curve”

  1. Paul Marks Avatar
    Paul Marks

    Art Laffer told the truth – high tax rates do produce LESS tax revenue not MORE tax revenue. This has been shown many times in history, for example (do not worry – I am not going back to the Roman Empire) when the Leopold (later Holy Roman Emperor) became Grand Duke of Tuscany one of the things he did was to cut very high tax rates – revenue went up.

    But it was very difficult to for Laffer (and others) to convince people of the case (it still is – try explaining it to a New York or Californian ruling politician) Jack Kennedy understood the case for lower tax rates, but (of all people) Barry Goldwater did not. Goldwater certainly wanted lower tax rates – but he thought he had to cut government spending in order to reduce high tax rates without producing a deficit (at the level American tax rates were at the time, this was just not so.

    Laffer is not right about everything (for example his knowlege of money and banking is that of a mainstream economist – and that is not praise), but about his “big thing” (tax rates) he is right.

    However……

    The very success of Laffer’s ideas (not just when Jack Kennedy cut the top rates, but when Ronald Reagan and “Bush 43” cut high tax rates – tax revenue from “the rich” went UP) did indeed (as Barry Goldwater feared all those years ago) take Republican ideas of the ball of cutting GOVERNMENT SPENDING.

    If all one had to do was cut taxes and revenue went up – why cut government spending?

    This misses the point about the Laffer CURVE – at a certain level of taxation cuts in tax rates do NOT produce more revenue.

    For example, if instead of attacking George Walker Bush for “tax cuts for the rich” (which produced more revenue) the left had attacked him on “tax cuts for the middle class” or “taking the poor out of taxation” they would have had a point. Of course, as the basic point of the left is class hatred, attacking taking pooer people out of taxation (thanks to Reagan as well as Bush about half of Americans pay no Federal income tax at all – no Laffer curve is going to stop that not being a gain for the Treasury) is not the point the left wish to make.

    In the end cutting tax rates is not a magic bullet that can allow the Welfare State to carry on growing, One has to deal with GOVERNMENT SPENDING.

    Indeed, to be fair, an honest look at the Laffer Curve itself shows that. It is just that certain people (George Bush….) only looked at that bit of the curve they wanted to see.

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