The Problem With the Laffer Curve

The Laffer Curve – the idea that by lowering taxes on the rich they’ll suddenly make tons of jobs instead of hoarding wealth instead of realizing that primarily middle-class consumers drive demand, employment and GDP – has been a disaster for decades now. Commenter on Metafilter:

“The biggest problem with the Laffer Curve is that it singularly focused people’s attention on taxes as a way to raise revenue. It completely diverted people away from the concept of taxes to shape the economy.

The top tax rate in 1960 was 92%. No sane person would pay 92 cents of a dollar earned to the government. Instead of the 92% rate raising revenue, it served to channel income in the economy away from the wealthiest individuals and toward workers. It served as a way to take the harsh, ruthless edge off of capitalism.

The result was more employment – if you had to choose between taking $1 in profit but paying 92 cents to the government, or hiring a window washer for your home office, you would take clean windows over the 8 cents in your pocket. Or maybe you would hire a guy to do research and development. Or maybe you would have a groundskeeper picking up trash.

And maybe, just maybe, when the opportunity arose to close your factory and send the work to Mexico to earn another $1 million per year, you would say “but I would actually only pocket $80,000 of that money, so it is not worth it”.

Laffer caused us to forget about that. Sure, it is common sense that you can raise more revenue with a 22% tax than a 92% tax – but taxes aren’t only about raising revenue.

Full discussion

Image fromĀ Huffington Post.