The proof of the Laffer Curve pudding


There are still those who refuse to believe that the Laffer Curve can possibly exist: despite it being simply a mathematical identity, something that simply is true, by definition.

Leaving aside those ignorants, all of the interesting discussion comes in trying to determine what actually is the revenue maximising rate. We know some things with certainty: it'll be different for different taxes, we know that the rate on womens' incomes is lower than that on mens', the long term rate is lower than the short term and so on. But Scott Sumner makes an interesting claim:

I’d argue that this data is strongly supportive of the view that both the US and Europe are near to tops of the Laffer Curve for total taxation. (...) For instance, in Mankiw’s data the Germans raise $13,893/person with taxes of 40.6% of GDP.  The US raises $13,097/person, with taxes of just 28.2% of GDP.

Now the reason this is true is obvious: the US is a richer place than Germany. A lower percentage of a higher sum leads to a very similar total tax take. but recall what the Laffer Curve is trying to state: that lower taxation will lead to faster eonomic growth. This will then increase the tax take. Or alternatively, that higher taxes will lead to slower economic growth and thus a lower than would otherwise be tax take.

And what is it that we see in the data? That those countries with higher tax takes have smaller economies, those with lower tax takes have larger economies. Consistent at least with the Laffer Curve explanation: and consistent with Sumner's contention that that revenue maximising rate is a great deal lower than everyone seems to think it is.

If true (and even I would probably want to see a bit more work done on this before insisting that the US is over the revenue maximising peak) then we've now a really compelling reason to lower government back down below 30% of GDP: for the children. For what this long term Laffer Curve is really describing is how much poorer we're making our children by having so much government now. And given the constant exhortation "But won't someone think of the children!" yes, perhaps we should.

Slash the State for our childrens' sake.