# Where are we on the Laffer Curve? **URL:** \ **Category:** Great Debates\ **Created:** [April 24, 2010, 1:44pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199 "2010-04-24T13:44:38Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![bashere](https://avatars.discourse-cdn.com/v4/letter/b/779978/32.png) [@bashere](https://boards.straightdope.com/u/bashere)\ **Post date:** [April 25, 2010, 4:43am UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/21 "2010-04-25T04:43:23Z")
> [@Der\_Trihs](#): > > :dubious: It’s always profitable to evade taxation. Really? So I should pay my accountant $20,000 to avoid a $5,000 tax bill? That doesn’t sound profitable :dubious: ---
**Author:** ![Scruff](https://avatars.discourse-cdn.com/v4/letter/s/6f9a4e/32.png) [@Scruff](https://boards.straightdope.com/u/Scruff)\ **Post date:** [April 25, 2010, 5:31am UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/22 "2010-04-25T05:31:51Z")
> [@bashere](#): > > Really? So I should pay my accountant $20,000 to avoid a $5,000 tax bill? That doesn’t sound profitable :dubious: It is if you are the accountant! 😛 ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [April 25, 2010, 10:38am UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/23 "2010-04-25T10:38:37Z")
> [@bashere](#): > > Really? So I should pay my accountant $20,000 to avoid a $5,000 tax bill? That doesn’t sound profitable :dubious: Normally when one speaks of evasion, one is speaking of using extra-legal means. Paying an accountant to reduce your tax exposure is not typically thought of as evasion. ---
**Author:** ![ivan\_astikov](https://avatars.discourse-cdn.com/v4/letter/i/58f4c7/32.png) [@ivan\_astikov](https://boards.straightdope.com/u/ivan_astikov)\ **Post date:** [April 25, 2010, 10:46am UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/24 "2010-04-25T10:46:03Z")
My take on this, and I am admittedly far from knowledgeable in the field of economics, is that if someone is rich enough to have vast amounts of spare cash accumulating large interest rates, it is in the best interests of the state to encourage that money to go back into the economy. If that means “encouraging” them with 95% tax rates on all such profits, then so be it. What am I missing? ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [April 25, 2010, 11:23am UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/25 "2010-04-25T11:23:14Z")
> [@ivan\_astikov](#): > > My take on this, and I am admittedly far from knowledgeable in the field of economics, is that if someone is rich enough to have vast amounts of spare cash accumulating large interest rates, it is in the best interests of the state to encourage that money to go back into the economy. If that means “encouraging” them with 95% tax rates on all such profits, then so be it. > > What am I missing? You’re missing even a remote understanding of economics. Money held in accounts is going back into the economy, it will be lent out again. So your presumption under a modern economy starts from utterly false premises (it makes sense only in the context of hoarding of say physical bullion). While the “middle” of the Laffer curve is quite ambiguous, it is not ambiguous relative to a 95% tax rate. ---
**Author:** ![Chief\_Pedant](https://avatars.discourse-cdn.com/v4/letter/c/a6a055/32.png) [@Chief\_Pedant](https://boards.straightdope.com/u/Chief_Pedant)\ **Post date:** [April 25, 2010, 12:01pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/26 "2010-04-25T12:01:14Z")
> [@Der\_Trihs](#): > > Given that America is known for its low taxes, especially on the people with the most money that is highly unlikely. Known by whom? People who don’t read any actual data? Are you just making stuff up, or what? Well over half my income goes to various taxes, including about 40% to Federal and state taxes alone (not including Social Security, Medicare, sales tax…) As to the implication that the distribution of taxes is not skewed toward those with higher incomes: In 2007 in the US, the top 5% earned about 35% of income and paid about 60% of all Federal Income tax. The top 1% earned about 20% of income and paid about 40% of Federal Income tax. The bottom 47% this past year paid no Federal income tax it all. I agree add that we have no mechanism , current or proposed, to tax wealth per se, but that hardly justifies promoting the idea that our taxes are low or that we do no preferentially tax those with higher incomes. ---
**Author:** ![ivan\_astikov](https://avatars.discourse-cdn.com/v4/letter/i/58f4c7/32.png) [@ivan\_astikov](https://boards.straightdope.com/u/ivan_astikov)\ **Post date:** [April 25, 2010, 12:09pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/27 "2010-04-25T12:09:19Z")
> [@wmfellows](#): > > You’re missing even a remote understanding of economics. I mentioned that right at the beginning. And it would seem from recent economical blunders by “experts”, that I’d be in good company. > [@wmfellows](#): > > Money held in accounts is going back into the economy, it will be lent out again. So your presumption under a modern economy starts from utterly false premises (it makes sense only in the context of hoarding of say physical bullion). While the “middle” of the Laffer curve is quite ambiguous, it is not ambiguous relative to a 95% tax rate. So, do the persons providing the money for the banks to lend out get a cut of the bank’s profits, when they make a particularly good investment, or do they just get their fixed interest rates? ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [April 25, 2010, 12:14pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/28 "2010-04-25T12:14:07Z")
> [@Chief\_Pedant](#): > > Known by whom? People who don’t read any actual data? If you take a moment to review OECD analyses on income tax, the US does not come out at the top of the leagues. Indeed overall pay rate is near bottom. That is data. Der Trihs being rather hard left of course views that as a bad thing. On the other hand, my impression is Americans are particularly tetchy about any tax paid at all. > [@](#): > > Are you just making stuff up, or what? You can consult the OECD website for comparators. > [@](#): > > but that hardly justifies promoting the idea that our taxes are low or that we do no preferentially tax those with higher incomes. On the 2nd I have no opinion, but on the first, the data do say that relative to other high income nations, your taxes (income and total taxation) are in fact low, comparative to peers. ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [April 25, 2010, 12:18pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/29 "2010-04-25T12:18:15Z")
> [@ivan\_astikov](#): > > I mentioned that right at the beginning. And it would seem from recent economical blunders by “experts”, that I’d be in good company. Which experts would those be? Economists don’t run banks. Regardless, the very basic point about diminishing returns and real world examples of effects of tax rates toward 95% are not particularly controversial. > [@](#): > > So, do the persons providing the money for the banks to lend out get a cut of the bank’s profits, when they make a particularly good investment, or do they just get their fixed interest rates? Your example was of wealthy persons putting money into bank accounts and earning interest. That would be bank accounts, as such they would earn a fixed rate - that is what bank accounts are. But in any case, that is beside the point relative to your original presumption and point, that assumed that money in the bank earning interest was somehow not in circulation, back in the economy. With few exceptions (say Post Bank accounts, as in Japan) that is far from accurate. Thus your logic for such a tax rate was entirely fallacious. ---
**Author:** ![SmartAlecCat](https://avatars.discourse-cdn.com/v4/letter/s/67e7ee/32.png) [@SmartAlecCat](https://boards.straightdope.com/u/SmartAlecCat)\ **Post date:** [April 25, 2010, 12:42pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/30 "2010-04-25T12:42:26Z")
> [@Chief\_Pedant](#): > > In 2007 in the US, the top 5% earned about 35% of income and paid about 60% of all Federal Income tax. The top 1% earned about 20% of income and paid about 40% of Federal Income tax. The percentage of all income taxes they pay, while interesting, it is kind of a red herring to consider only income tax. What is their personal overall tax rate, including payroll taxes, sales taxes, etc. Is it possible that someone making $100m in long term capital gains with no other income has an overall tax rate lower than someone who makes $100k in earned income? ---
**Author:** ![Ravenman](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ravenman/32/2929_2.png) [@Ravenman](https://boards.straightdope.com/u/Ravenman)\ **Post date:** [April 25, 2010, 1:21pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/31 "2010-04-25T13:21:22Z")
> [@Chief\_Pedant](#): > > Known by whom? People who don’t read any actual data? Are you just making stuff up, or what? Well over half my income goes to various taxes, including about 40% to Federal and state taxes alone (not including Social Security, Medicare, sales tax…) How do you figure 40%? Are you just adding up your tax brackets? Because as I discussed before, adding the percentages of tax brackets gives one a simply incorrect view of your tax burden. See my previous post and the CBO study on tax burdens. For example, my income places me somewhere around the top 18, maybe 15% of earners in the country. Adding up the actual amount I pay, just a shade under 19% of my total salary goes to Federal and state income taxes. Unless someone is making a lot more money than me, has no mortgage, and takes the standard deduction, I have a hard time figuring out how people get to paying 40% of their income to income taxes. Let me make another point more on-topic to the OP: let’s say the Laffer curve as illustrated was, in fact, ground truth on tax rates, in which the government gets no income at 0% or 100% taxation, and optimal taxation were somewhere in the 50% range. Again, according to my CBO citation, the current average burden of Federal taxation across all income groups is currently 20.7%, including income, payroll, corporate, and excise taxes. ETA: and below is a citation showing that the average state tax burden is about 10% of income. That would seem to indicate that we could nearly double taxation and have much more revenue coming in to the Treasury. [http://www.taxfoundation.org/taxdata/show/335.html](http://www.taxfoundation.org/taxdata/show/335.html) ---
**Author:** ![Ravenman](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ravenman/32/2929_2.png) [@Ravenman](https://boards.straightdope.com/u/Ravenman)\ **Post date:** [April 25, 2010, 1:30pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/32 "2010-04-25T13:30:39Z")
Just to provide another citation, here’s a Forbes PDF from 2006 which shows that the total tax burden for Americans - including Federal, state and local taxes – totaled to 25% in 2004. [Link.](http://images.forbes.com/media/2006/05/Overall_Tax_Burden_Governemt_Spending.pdf) Again, it seems we could nearly double taxation if the Laffer curve as typically drawn were to be taken literally. ---
**Author:** ![bashere](https://avatars.discourse-cdn.com/v4/letter/b/779978/32.png) [@bashere](https://boards.straightdope.com/u/bashere)\ **Post date:** [April 25, 2010, 1:48pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/33 "2010-04-25T13:48:53Z")
> [@wmfellows](#): > > Normally when one speaks of evasion, one is speaking of using extra-legal means. Paying an accountant to reduce your tax exposure is not typically thought of as evasion. Fair enough, although I would point out that many of the forms of extra-legal means require the use of an accountant (all the charity-based evasions I know of do). The point remains that if the cost of evasion is greater than the cost of paying the tax, it ceases to be profitable to evade the tax, legally or extra-legally. ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [April 25, 2010, 2:02pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/34 "2010-04-25T14:02:57Z")
Few economists take the Laffer curve very seriously (minimally there is no way to ever know where one actually is on the curve, or how the curve is actually shaped or if it shifts), at least not without some serious modifications, but perhaps the best way to answer the question of the op is to go to [Laffer himself](http://www.humanevents.com/article.php?id=35341) - he thinks > [@](#): > > the economy is headed for a sharper decline next year when tax rates are expected to jump sharply, sending the economy into a new tailspin But then one suspects that Laffer would state that any taxation puts us on the wrong side of his curve. More than that is not GQ but GD I think … ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [April 25, 2010, 2:09pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/35 "2010-04-25T14:09:31Z")
> [@bashere](#): > > Fair enough, although I would point out that many of the forms of extra-legal means require the use of an accountant (all the charity-based evasions I know of do). The point remains that if the cost of evasion is greater than the cost of paying the tax, it ceases to be profitable to evade the tax, legally or extra-legally. I presume you mean use of an accountant for knowing fraud, as opposed to merely ending up on the wrong-side of a tax analysis. Evidently for complex and serious frauds, the amounts evaded - if purely relative to tax - would have to be important to justify the bother (rather than merely not paying). In any case, I believed his point was excepting the implicit and probability weighted cost of getting caught… (which for the example should likely to be near zero). > [@DSeid](#): > > Few economists take the Laffer curve very seriously (minimally there is no way to ever know where one actually is on the curve, or how the curve is actually shaped or if it shifts), at least not without some serious modifications, but perhaps the best way to answer the question of the op is to go to [Laffer himself](http://www.humanevents.com/article.php?id=35341) - he thinksBut then one suspects that Laffer would state that any taxation puts us on the wrong side of his curve. > > More than that is not GQ but GD I think … Well, the GQ resolution to the question may probably be stated that taking American taxation comparatively to historical and current examples of similar countries, there is no particularly strong reason to believe that a rise in tax rates in the US of some modest magnitude would genuinely have a Laffer Curve kind of effect. The OP may find other reasons to argue against or dislike a rise, but this argument empirically does not seem arguable. ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [April 25, 2010, 7:42pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/36 "2010-04-25T19:42:33Z")
But **wmfellows** that as an answer presupposes that the curve has some validity to begin with, which is itself, at best, a matter of debate. OTOH it may be a valid answer to the question of "Is there any empirical basis to claims like those that Laffer currently makes that allowing some of the Bush era tax cuts for the rich expire, or for that matter even raising other taxes in America, would cause a decrease in total tax revenues collected rather than an increase? " But then if one wants to go with empirical basis you can merely say that if Laffer says something it is more than likely wrong. Tax revenues did not increase during the Reagan era even as the economy rebounded. In 2006 he was cheerleading how the US economy “has never been in better shape”, pretty much right before it collapsed. In [2008](http://online.wsj.com/article/SB122506830024970697.html) he had changed his tune and was writing that the stock collapse was the start of a long term bear market, likely -6% per year for the next 16 years, and that “Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. … We are now witnessing the end of prosperity.” And prosperity’s end came not because of the failure of the Bush era supply side approach, or inadequate oversight by regulatory bodies, nope, it was because Congress and Bernanke “panicked”. Of course the stock market subsequently rallied nicely. In [mid-2009](http://online.wsj.com/article/SB124458888993599879.html) he was writing that we are due for interest rates rises and inflation unlike anything we have ever seen before. So he’s called it wrong _every time_ so far. Heck, even [Ben Stein](http://www.nytimes.com/2006/05/28/business/yourmoney/28every.html), a conservative’s conservative, saw that back in 2006. > [@](#): > > Arthur Laffer, a likable and intelligent man who, with no substantial backup at all in data that I am aware of, said that if you cut taxes on income, you would stimulate so much economic activity that you would collect as much in tax as you did when rates were higher. … > > … Supply side is fun in the same way it’s fun to rationalize spending as if it were saving, and in the same way any theory is fun when it says that the easier, softer way is better than the hard way. But it doesn’t work, or at least it hasn’t worked yet. > > “Tax and spend” was the old way, but people did not like to be taxed. The new way seems to be “don’t tax, but keep spending and things will be fine.” > > Wouldn’t it be pretty if it were true? The best you can say is that may be some degree of “taxable income elasticity” such that a rise in tax rate may be met with some avoidance of reported taxable income by the very richest (for example by legally postponing the income as reportable until some later date that may have a more favorable tax environment, or reporting it in the year ahead of anticipated changes that would increase their tax rate) resulting in less revenue production than one would expect on a one to one basis. That’s a far cry from vindicating the Laffer curve and supply side mysticism. All of which means the ops question is answered thusly - the evidence is that raising taxes will raise revenues, however sometimes by less than we might expect. ---
**Author:** ![Chronos](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chronos/32/134_2.png) [@Chronos](https://boards.straightdope.com/u/Chronos)\ **Post date:** [April 25, 2010, 8:19pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/37 "2010-04-25T20:19:15Z")
Quoth **Chief Pedant** : > [@](#): > > Known by whom? People who don’t read any actual data? Are you just making stuff up, or what? Well over half my income goes to various taxes, including about 40% to Federal and state taxes alone (not including Social Security, Medicare, sales tax…) > > As to the implication that the distribution of taxes is not skewed toward those with higher incomes: > > In 2007 in the US, the top 5% earned about 35% of income and paid about 60% of all Federal Income tax. The top 1% earned about 20% of income and paid about 40% of Federal Income tax. > > The bottom 47% this past year paid no Federal income tax it all. So, the fact that nearly half of Americans pay no federal income tax is supposed to be evidence _against_ the proposition that American taxes are low? And where are the comparisons to other countries? ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [April 25, 2010, 8:38pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/38 "2010-04-25T20:38:08Z")
> [@Chronos](#): > > And where are the comparisons to other countries? Well FWIW [here](http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.svg) is a graphic that shows America in the lower portion for mean personal taxation but up there with Japan on corporate tax rates. And [here](http://moneycentral.msn.com/content/taxes/p148855.asp) is msn money’s take on it. > [@](#): > > Believe it or not, Americans enjoy some of the lowest income tax rates in the world. … For a family with one wage-earner and two children, only Iceland and Ireland have a lower income tax burden than the U.S., according to the most recent data for 2005 … And [Forbes](http://www.forbes.com/global/2006/0522/032.html) ratings of marginal tax on the wealthiest puts America in the lower grouping as well. ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [April 25, 2010, 8:40pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/39 "2010-04-25T20:40:38Z")
> [@DSeid](#): > > But **wmfellows** that as an answer presupposes that the curve has some validity to begin with That depends on if you mean the naive curve of the abstract analysis. I understand the naive and non-empirical curve was taken very seriously in the US, but that does not mean the diminishing returns analysis is baseless. The rest of your comment is very American politics specific and I would suspect argumentative on that basis, although if you wish to highlight that it is not empirically sensible to take that curve literally, and that it should be seen as a simplistic expression of diminishing returns and tax policy elasticity… well fair enough. I don’t believe that this materially is terribly different than what I wrote, but of course I am not sensitive to the US politics in this area. ---
**Author:** ![DSeid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dseid/32/20194_2.png) [@DSeid](https://boards.straightdope.com/u/DSeid)\ **Post date:** [April 25, 2010, 8:54pm UTC](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199/40 "2010-04-25T20:54:11Z")
But **wmfellows** it does mean that there is no empirical basis for any definable curve. As a matter of abstract theory, yes, there is very likely some taxable income elasticity, and therefore some degree of diminishing returns. In the real world that depends on the presence of many other factors such as legal means to defer income or to avoid reporting it as fully (often referred to as “loopholes”) and perceptions of what future changes may bring to both the tax code and to the economy. [Previous page](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199.md?page=1) [Next page](https://boards.straightdope.com/t/where-are-we-on-the-laffer-curve/537199.md?page=3)