Where are we on the Laffer Curve?

For the U.S., that is.

Some people say we must raise taxes in order for the federal government to increase revenue. But will raising taxes automatically increase revenue? Based on where we are on the Laffer Curve, isn’t there a real possibility that higher taxes could actually *decrease *revenue to the government?

I guess it all depends on “where we are” on the Laffer Curve. So where are we?

We are in Cloud cuckoo land, on the Laffer curve.

Even assuming the curve was correct (and I doubt very many people believe in it any more), it’s impossible to tell.

In the short run, yes. There’s no real doubt of that.

Given your national prevailing tax rates, it seems rather

From the wiki page is appears there is no unambiguous answer to that relative to the USA. Or perhaps anywhere.

Still compared to other OECD countries, you seem to have lower rates, it would appear that you have quite enough margin for raising taxes over a period to pay down debt, and there would also taking comparative examples, be little reason to fear ‘reduced revenue.’ Perhaps over more than a decade… but in any case, debt reduction has to come from increased revenues. Same thing the Greeks are learning right now.

ETA: I realise the US has a federalised tax system and the states have great leeway in taxing, so making US to say more centralised taxation system comparisons can be very difficult.

I don’t believe the curve in abstract form is considered incorrect, it merely states an obvious point, diminishing returns - and diminishing returns from BOTH taxation and tax cutting. Economically it make perfect sense that there might be a rate (or perhaps more sophisticatedly, a band of rates) which maximizes rate of return on taxation.

It appears from the reading that what is controversial are assertions re specific levels of taxation, assertions that seem in politics to be more about politics than empirical conclusions.

Given that America is known for its low taxes, especially on the people with the most money that is highly unlikely.

No one knows; no one even knows what the shape of the curve is, much less where we are on it.

I think we are at the point of declining returns (it is more profitable to evade taxation now). That is why we see guys like George Soros setting up operations in tax havens (like certain west indies islands) to avoid federal taxes.
I see the "underground’ economy growing by leaps and bounds-my mechanic offered to do some work on my car for me: the price (cash, no receipt) was $60.00-if I paid via credit card, it would be $100.00.

Somewhere in the middle.


:dubious: It’s always profitable to evade taxation.

While doubtless it is impossible to address Americans’ chronic sensation of being over-taxed, you appear to have substantially lower tax rate than any of the other wealthy, industrial countries.

Well, someone like Soros does it because he can, and he operates mostly off-shore regardless. They do end up paying your taxes, however, when the money is repatriated to the investors (unless the investors are non-American, but then that’s a reason not to be on-shore in any OECD country).

So, I shall have to opine that this anecdote illustrates nothing in particular about the concept one way or the other.

Have your tax rates actually changed of late (and in particular the tax rates that would effect a mechanic who is presumably in a low tax bracket)? And do you have an actual data benchmark. As I am afraid I have a very hard time taking such assertions seriously.

Let me explain it to you (so that you can understand it). If my mechanic operates legitimately, he has to pay:
-the MA state sales tax (6.75%) on what he charges me (I of course would pay that)
-the Federal income Tax (his bracket is probably 20%)
-the State Income Tax (5.3%)
-the SS (FICA) tax on his earnings
-the the various environmental fees (disposal of used oil, antifreeze)
By working off the books, he saves himself about 40% on the transaction.
This appears (to me) to illustrate that the soct of evasion is now less than the cost of compliance.
As for Soros, his (American) clients can avoid capital gains taxes by maintaining accounts in places like Lichtenstein, Monaco, Switzerland, etc.)

And you have also a complex deductions regime, so what he actually pays is… different.

Regardless, 40% puts you in the average area of OECD country headline taxation rates, including countries with apparently low levels of evasion. Thus empirically we can’t merely assert that level is on the declining end of a Laffer Curve type analysis. I suppose culturally it might be, but equally it might not.

One rather suspects your mechanic will evade at any and all levels of taxation (as he is so small that the likelihood of being caught and punished is doubtless trivial), and ergo is not an argument under a Laffer curve type analysis for any particular level. This person will always make more money in dodging taxes (although one supposes in dodging his retirement contributions he’s cheating himself in reality, but I am not familiar enough with that system). There will always be economic actors who will dodge taxes regardless of their level (while doubtless always engaging in rationalisations along the way).

You also did not answer my question about change in tax rates. I do believe on this type of person I read the tax rate went down, correct?

If they are private clients (and if Soros accepts private clients, versus institutionals), perhaps, but the recent Swiss bank to-do highlights that this is not as easy as it sounds. Very wealthy ratepayers are generally what inland revenue authorities love to track down, the payoffs are generally quite large.

Yep, it just happened too. Not 90 years ago when the highest tax rates were 90%, or 5o years ago when they were over 50%, but now that we have reduced taxes they are too high. Do you even think about the words before you type them?

Is is astonishing how Fox News and the tea party movement have convinced people that Obama raised their taxes, when in reality he actually lowered them. While it’s true that starting in 2 years, taxes will be raised on the richest 2% of america, to date federal taxes haven’t gone up a dime for even one single person; and in fact, have actually gone down for most americans over the past year. But for some reason, most people seem to not understand that.

Really, I don’t understand how any honest person still believes the Laffer Curve is a useful concept. Sure, it’s true that if taxes are 100% then no one will work and the government would be better off cutting taxes. But outside of that exact case, it’s a much harder to claim the Laffer Curve says anything useful.
Ask yourself – you already have a job working 40,50,60 or however many hours a week. Now suppose your taxes were cut 10%. Would you then go out and get a second job? Would you start working more hours at work than you already do? No? Honestly, the vast majority of people would not.
What about the other way around? Suppose someone raised your taxes 10%. Would you quit your job then? No? Well, since the alternative to working is to starve, then most people wouldn’t do that either.

So if raising and lowering the tax rate +/- 10% really won’t affect most people’s decision to work or not, then doesn’t that count as some pretty serious evidence against the Laffer Curve?

Look, the Laffer curve has some use as an illustrative model, but not as a predictive one.

But to ralph124c’s point, his mechanic isn’t paying 40% taxes. For one thing, his state income tax is deductible from his federal taxes, and what’s more, that 20% (notional) tax bracket does not apply to all income. According to the CBO, not even the richest one percent of Americans have an effective Federal income tax rate of 20%. (see page 4) Odds are pretty good that the amount of his paycheck that he’s actually paying in Federal income taxes is somewhere around 6-12% – which is a more accurate measure of taxation than just throwing around tax bracket numbers.

What’s the equation for the Laffer Curve, anyway?

It’s not an equation, per se. It’s just a parabola with two positive roots at 0 and 100, a 0 y-intercept, and a maximum somewhere between 0 and 100. It’s not a mathematical formula, just a picture you can point at and say “if you’re here, and raise taxes, you’ll lose revenue.”

If you wanted to approximate it, one way would be to look at the places where the revenue (which I’ll call f(x)) is 0 (x = 0, x = 100), and multiply it out: f(x) = (x - 100)*(-x - 0) = -x[sup]2[/sup] - 100x, which gives you the correct roots; a maximum at x = 50 (f’(x) = -2x - 100 = 0); and the correct concavity (f’’(x) = -2x < 0 for strictly positive x). Still, that’s reasoning out from the properties we want to the function, not starting with the formula and finding useful properties of it.

And in editing I failed to correct a functional mistake I made, which is that the function should be -x[sup]2[/sup] + 100x. That leads to the correct maximum at x = 50 (-2x + 100 = 0) and leaves the concavity untouched.

I think the point of the Laffer curve is to show that tax revenue will not necessarily increase as tax rates increase. It’s just a way of saying “don’t count your eggs before they hatch.”

So, the Laffer Curve is a meaningful concept without knowing where we are on it (or even knowing how to determine where we are on it).