Does the Laffer Curve Have Humps?
Remember the Laffer Curve? It was all the rage during the Reagan years. The idea is that if the tax rate is zero, the government won’t collect any revenue. And if the tax rate is 100%, the government will collect very little. (Probably not zero. We can presume they’re not just flushing tax dollars down the toilet. Can’t we? I know they do their best to make it look that way, but they have to be spending it on something.) In between is a maximum.
The thinking was that we were on the high side of the maximum, and that decreasing taxes would increase revenue by giving people more money to invest. It may have worked in the short run, but almost certainly we are not on the high side.
The Laffer Curve sounds rigorous and precise, but it’s actually trivial. We know precisely three points on the Laffer Curve: zero, 100%, and where we are now. There is no known way to determine its precise shape, and we don’t know if the shape changes from one day to the next. It almost certainly does. A tax cut stops stimulating once people get used to it, and a tax hike eventually loses its effectiveness.
And in particular, who said there has to be only one maximum? Lots of mathematical curves have multiple humps and valleys. Why not the Laffer Curve?
I bring this up because the Right loves to harp on the damage that a tax hike will do to the economy. And yes, a tax hike will cause some people to sit on their money rather than investing or hiring. But what if there’s another peak out there? What if the tax hike is structured to give high rollers the choice of getting off their butts and working their tails off or taking a soaking? You can either watch your holdings evaporate, or you can scramble like blazes to keep your nose above water. You can (shudder) work.