IS LAFFER THE BEST MEDICINE?

If you want to see Republican supply-siders squirm, ask them this simple question about the Laffer curve: at what marginal tax rate does the “backward bend” (higher tax rates produce less revenue) begin? Even Laffer himself has not ventured an answer. Nor has anyone else.

Examine the depictions of the Laffer curve drawn by Laffer and you find the graph shows only two tax-rate numbers 0% and 100% at which the government collects no revenues — at 0% because their is no tax levied and 100% because there is no incentive to produce.

In between, Laffer draws the curve symmetrically with the backward bend into the “Prohibitive range” occurring neatly in the middle, suggesting 50% is the magical rate of taxation above which tax revenues decline because of the disincentive to work and invest. And yet, nowhere on the vertical axis does 50% or any other number than 0 and 100 appear. Instead Laffer dodges this critical issue, saying “Figure 1 is a graphic illustration of the concept of the Laffer Curve — not the exact levels of taxation corresponding to specific levels of revenues.” How convenient. Like Einstein saying “e=mc?”.

You would think an academic would jump at the chance to provide policymakers with empirically verified, useful guidelines for setting tax rates to optimize revenues and maximize economic activity. But no. Laffer would rather wax on about the intuitively obvious notion that confiscatory taxes discourage economic activity without identifying the tax rate at which this phenomenon kicks in. This leaves him free to harness a concept everyone can agree on — the notion of confiscatory taxes discouraging economic activity — and misapply it indiscriminately, as Republicans do, at all times: no matter the current level of taxation, supply-side dogma claims that raising taxes discourages economic activity, increases unemployment and decreases government revenue, and lowering taxes does just the opposite. In short, the backward bend in the Laffer curve occurs at all levels of taxation, according to die-hard supply siders freed from the constraints of evidence. Ergo the pathological aversion to raising tax rates and doctrinaire endorsement of tax cuts during every election season. Laffer then attempts to prove the validity of this thesis by citing instances in which tax cuts have been followed by economic surges.

This academically unsound approach is fraught with problems. There is the unaddressed potential fallacy of post hoc ergo propter hoc, in which false causality is derived from sequential chronology — the crowing rooster taking credit for the sunrise. Then there are inconvenient counterfactuals: a) high top tax rates in the ‘50s and ‘60s (70%-90%) for example, coexisted with strong economic growth and rising revenues and b) following Clinton’s 1993 tax-rate increases, economic and revenue growth outstripped that of Reagan’s and G. W. Bush’s low-tax regimes, to the point of producing budget surpluses 4 out of Clinton’s 8 budget years. This is the result promised, but never delivered by either Reagan or Bush II.

The demonstrable consequences of Laffer’s flawed theorizing, eagerly embraced by Republicans, are recurring mega-deficits burdening our children, growing inequality of wealth eventually producing the financial and economic meltdowns seen in 2008, and the inability (because of previously-incurred national debt) to rescue the economy with adequate government emergency spending.

Bottom line: Laffer is an amiable charlatan. His seductive, yet misleading little curve has seriously undermined the economic and political wellbeing of this country and continued adherence to this flawed thesis could well engender generational and class warfare that could prove fatal to the survival of the republic.

Since your supply-side friend will be unable to answer the original question, then pose another: Why does smart cookie like you continue to subscribe to this intellectually bankrupt exercise producing demonstrably counter-productive consequences?