Talk:Laffer curve

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Hi all; the lead sentence in paragraph 3 of this article is not at all clear and I think it must be a typo; "To what extent these assumptions are true are beyond the scope of the underlying mathematics is unprovable,..." I'm not an economist and wouldn't presume to edit but thought I'd ask. '

Contents

[edit] Laffer curve

"The result of the tax cuts along with government spending policies of the era was large budget deficits."

No, it wasn't. The budget deficits were the result of the Congressional Democrats outspending the increased revenues by 2:1. In the 20s under Calvin Coolidge, in the 60s when Kennedy's proposed tax cuts were enacted after his assassination, and in the 80s, federal revenues increased after tax cuts. How can budget deficits be created when revenues are increased? By outspending them!

Erm, I'd like to point out the budgets Congress passed differed very little from the budgets Reagan submitted to Congress during his Administration. The Myths of Reaganomics goes into pretty good detail as to what happened in the 80s under Reagan. --Mr z 14:40, 28 November 2006 (UTC)
This is a gross oversimplification. The congressional Democrats were no more guilty of "outspending" than their Republican counterparts or, indeed, the Reagan administration itself. In particular Reagan's massive military buildup outweighed the meager spending cuts he was willing to accept. Haukurth 15:08, 25 Sep 2004 (UTC)
That's beside the point - it doesn't matter whether it was Democrats, Republicans, or little green aliens outspending the increased revenues. The point is that the increased revenues were outspent, thus increasing the budget deficit. --Dachannien 23:36, 15 July 2005 (UTC)

Consider: Because the current system taxes a larger percentage if your income is larger, and thus reaps a larger revenue, and because the people that get the lowest tax rates also need to make the least money, the net income for the amount of time spent working towards your gross income is largest if you are middle class. Being middle class requires less effort and risk than being upper class, and has more reward than being lower class. That might explain partially why people tend toward being middle class, and why the middle class is the largest class. - Augur

No, the real problem is that it's false to claim that revenues increased. Only nominal revenues increased. If the government froze its spending in nominal terms, it would clearly provide less and less each year. The truth is that real tax revenues took about 6 years to recover to their previous levels. Asacarny 09:08, 16 December 2005 (UTC)

So the "Laffer curve" is not really a curve but rather the simple statement that there's a point of maximal revenues between 0 and 1? I had expected a "real" curve with a formula ... 193.171.121.30 07:30, 21 Feb 2005 (UTC)

No there is no formula, but if you had one it could solve some problems. BrokenSegue 11:39, 20 Apr 2005 (UTC)

The weakness in the definition given here is that it states the only personal taxpayer reaction to a tax rate on the right hand side of the Laffer curve is to work less. While that is a primary reaction, the aggressive use of tax shelters (e.g. KPMG's latest apology) and the distortions high tax rates introduce into many investment decisions also need to be considered. -CA Dreamer

[edit] What is citation to Laffer's work?? And a summary of a literature search.

I came across this article, and I noticed that it didn't cite any particular paper or book by Laffer in which he proposed the idea. Having access to good databases and libraries, I thought I'd do a quick literature search and find it. Surprisingly, I can't find any recent economics paper (i.e. within the last 10 years, before which I can't get the papers electronically) that cites anything by Laffer—and this is in a search for "Laffer curve," so I'm only looking at articles with those words in the title or abstract.

It's very odd, and it makes me wonder: did Laffer himself actually publish his ideas in a peer-reviewed journal, or did he just pitch it to policy-makers? Or is it just so old that no one cites it any more? (I thought he was late 70's?)

Update: it turns out that Laffer does not claim to have originated the concept, but he seems to be responsible for promoting it to policy-makers, and the curve was indeed named after a presentation he gave directly to Dick Cheney rather than any academic publication. (I've updated the article.)

There is lots of academic research on the question of Laffer curves, by the way. (Mostly trying different economic models, including this factor or that factor, to try and analyze the effect of changes in tax rates.) Two of the most commonly cited papers from the last 11 years seem to be:

  • Paul Pecorino, "Tax rates and tax revenues in a model of growth through human capital accumulation," J. Monetary Economics 36, 527-539 (1995).
  • P. N. Ireland, "Supply-side economics and endogenous growth," J. of Monetary Economics 33, 559–572 (1994).

Pecorino cites earlier work by Fullerton (1982), Stuart (1981), Bender (1984), Malcomson (1986), and others, but no Laffer.

The basic question is summarized by Pecorino as:

Just about everyone can agree that if an increase in tax rates leads to a decrease in tax revenues, then taxes are too high. It is also generally agreed that at some level of taxation, revenues will turn down. Determining the level of taxation where revenues are maximized is more controversial.

Pecorino found optimal tax rates at around 64%, by the way (ranging from 54% to 70% depending upon the assumed parameters). Ireland, on the other hand, found the optimum at 15% (Pecorino attributes this difference to an oversimplified model on Ireland's part). One of his conclusions is:

The simulation results suggest that dynamic considerations will not overturn the conclusion that in 1980, the U.S. economy was, in some aggregate sense, on the upward-sloping portion of the Laffer curve (plotted with the presented value of tax revenue).

I'm not an economist, so I don't know quite how representative this view is, or how much it has changed. The Pecorino paper continues to be widely cited as of 2005, however, as far as I can tell.

—Steven G. Johnson 03:25, August 16, 2005 (UTC)

PS. Another interesting fact is that the term "Laffer curve" in economics and policy literature seems to have expanded far beyond its original meaning for taxation: I see usages for analyzing everything from prison sentencing to endangered-species laws. Some comment on this expanded meaning might be appropriate for the Wikipedia article.

[edit] Zero revenue at 100% tax rate?

Anyone arguing that tax rates won't be exactly zero at the 100% rate must also argue the same for the other end.

You don't think a small minority of people would make donations to the government? Or commit resources in some way for the public good? (which is an effective revenue stream for the govt)

Anyway, such discussions are missing the point of economic theory as others have correctly noted. —Preceding unsigned comment added by 68.198.48.12 (talk) 15:26, 23 February 2008 (UTC)

At the other, where there is a 100% tax rate, the government collects zero revenue because taxpayers have no incentive to work or avoid taxes and the government collects 100% of nothing.

This doesn't seem right to me. Even if there were a 100% tax rate, some people would still work for non-monetary reasons—because they enjoy what they do, or because they feel a responsibilty to work, or simply because they are bored. So, the revenue would not necessarily be zero.

(Not that I think that tax rates should be 100%! It's just that the argument for an optimal tax rate seems oversimplified here.)

—Steven G. Johnson 05:48, August 16, 2005 (UTC)

Well, you're right that it wouldn't be exactly zero, but economists like to work in near-absolute but not quite absolute numbers (since empirical data is so easy to fudge). The point is that it would be quite close to zero since nearly all rational actors would flee the tax jurisdiction, conceal economic activities, become beggars, etc. Of course, there are irrational actors, but they are usually a minority and the last time I checked, economics is still trying to decide how to model their behavior accurately. --Coolcaesar 11:48, 16 August 2005 (UTC)

Which economists, in particular, argue that revenues are approximately zero at 100% tax rates? —Steven G. Johnson 16:41, August 16, 2005 (UTC)

No firm will voluntarily "pay" someone for employment if 100% of his payment will be collected by the government. This would defy the assumption of profit maximization on the part of the firm, as it would assume part of the economic incidence of the taxation. If the employment is entirely voluntary, i.e. the employee is indifferent to whether or not he is "paid" because he will receive no money, no firm will attempt to pay him. It is not illegal to work without monetary compensation. Given that Leisure has non-trivial utility, the assumption that some people (beyond a statistically insignificant amount) would seek employment while 100% of the return on their efforts is taxed strikes me as ludicrous. Far more likely, people would either 1. enter the underground economy, or 2. produce non-taxable goods and barter these, or anything else to escape the taxation. For a supposedly economic-oriented article, this is pathetic, as it doesn't even mention the deadweight loss of taxation, nor the substitution effect that drives it. Thats wikipedia standards for you, I guess - E Plumlee 11/6/2005

Hold on there... people world easly work for nothing IF all of their needs were also satified by the governmnet. This is a major failure of the laffer curve, it presumes that no one will work for nothing, bu fails to balance that against the backdrop of what the governemtn can do for the rational actor with that money. Theoritcal revenue of taxation is the amount of income REPORTED times the tax rate. Income reported will have everything to do with satifaction with the government services provided and not the absolute rate of taxation. Cheating or gaming the system will increase as the system approached 100% taxation, but cheating can never reach 100% ( then there is no government ) and therefore tax recipts can never be 0. This type of economic activity can easly be seen in many systems including total communism as well as many religious orginizations where people are often given tasks for years without pay under the assumption that all of their living expenses would be taken care of and in return others in the community would do the same for them or their family if tragedy struck. E. Warnke 1/13/2006

In reply to the above post, If people are having all of their needs provided by the govt, then they are being compensated. They are being paid for their work. The debate on this laffer curve is based on a capitalist society, in which there is no compensation for work at 100% taxation. If a person were to chose to work and a company would agree to pay them (never happen at 100% taxation), they would recieve nothing. HERE is why it is wrong to assume that, in the long run, people would still work: If there is literally NO compensation, no food, no money, nothing for time spent working... the sheer weight of the opportunity cost of working for free (as opposed to getting food, shelter, clothing etc..) would overwhelm even the most irrational of actors in such a model. Unless the irrational actors undertook a second, blackmarket job, in which they were compensated with something or beg on the streets in their free time, they would theoretically starve to death. In the long run, such a high percentage of originally irrational actors (people doing it because they love their job) would have little choice than to stop working for free, and better utilize the majority of their waking life in aquiring goods neccessary to continue to live. IMO, zero tax revenue in a 100% taxation model (capitalist system) is as safe an estimation as 0 tax revenue in a 0% taxation model (capitalist system). Cause some people will still give money to the govt (irrationally)

whether or not taxation elasticity holds true in a communist society isn't really the point here. (although I would argue that it does) Tax recepts can never be zero, you are correct, however, they will be zero so long as all actors act rationally. Some will not. <-- this will cause the derivation in all economic models. No economic theory can be taken to be finite in its conclusions... as there will always be people who act irrationally. Cowboy357 15:03, 13 October 2006 (UTC)

I would like to point out that the costs of enforcing 100% tax must be considered, as those costs will offset revenue. A 100% tax with little or no enforcement is effectively no tax at all. A general forced imposition of 100% tax (enforced by leagues of uniformed and armed blackshirts, I imagine - the equivalent of a civil war) is tantamount to slavery - an institution noted by Adam Smith in the 1770's as uneconomical due to these enforcement costs.

Furthermore, E. Warnke said:

Hold on there... people world easly work for nothing IF all of their needs were also satified by the governmnet. This is a major failure of the laffer curve, it presumes that no one will work for nothing, bu fails to balance that against the backdrop of what the governemtn can do for the rational actor with that money.

People working for nothing does not increase revenue to the government. Furthermore, actors would work for nothing in a 100% tax regime. All but a few would choose to work for their own non-monetary gain, or in black-market enterprise, rather than effectively non-remunerative legitimate industry.

Octothorn 10:41, 3 February 2006 (UTC)

Personally I don't have a problem with the article saying that the Laffer curve only applies to market and mixed economies and is not a particularly useful description of what happens in a genuinely socialist economy. While it's very possible to get worked up about what would actually happen at 100% tax rates, it's not an important criticism of the Laffer Curve itself. The Land 14:09, 3 February 2006 (UTC)

This is where I have to say you're wrong. It's a very important criticism of the Laffer curve, because the entire justification for such a curve relies on those two endpoints both being zero. If you can argue that the endpoint at 100% taxation is somewhere above zero (as it must be for any truly socialist economy to exist), then it makes any estimated shape of the curve much more difficult to define. Half of the explanation for the modern Laffer curve relies on the assumption that socialist economies cannot exist. As a very general explanation that at some point, tax revenue will fall if taxes are too high, the Laffer curve works, but it's much harder to apply it to actual problems. This is why far more policy-makers believe in the Laffer curve than economists. —Preceding unsigned comment added by 210.1.26.55 (talk) 04:38, 5 September 2007 (UTC) Edit: The Above is mine. (Harlequin115 04:48, 5 September 2007 (UTC))

A few quick points:

1) Does the Laffer Curve refer only to income/corporate tax, or also to sales (goods) taxes and capital gains taxes?
2) It seems to me that the theory works when referring to a specific industry within an economy (e.g. Reagan's experience in acting) but struggles when applied to the economy as a whole. I.e. if all tax rates were set to 100% noone would trade or buy or sell anything - money would become useless and the government would have to feed and house the population in return for labour. The government would still exact 'revenues' but these would be 'paid-in-kind'. So it seems to me that the theory is just not applicable at the higher end of the spectrum as such extreme tax rates would undermine the national currency.
3) The curve seems to be no more than a graphical extrapolation/(mis)representation of Ibn Khaldun's 14th century summary "[When taxes are raised significantly,] businessmen are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation". It is fascinating to learn that the Arabs were so advanced in economics even before the Renaissance - I wonder how many people realise that the Arabs were the most sophisticated nation in the world prior to their 800-year subjugation by the Turks. --84.12.21.104 01:31, 3 May 2006 (UTC)

this discussion is pointless becouse You are too much affected by the point where there are 100% taxes... it's 100% theoretical and 0% practical... point is that sometimes it's better for government to lower the taxes in order to get higher revenue and sometimes it's better to make taxes higher it is just a hint for politicians who may think that only rising taxes yields higher revenues which seems pretty logical without khaldun-laffer curve Jerzy czaja-szwajcer 12:17, 26 May 2006 (UTC)

the example of a socialist state pulling in revenues while the tax rate is 100% can always be made because everyone who works, works for the state, and the state does not tax itself. no one gets any profit. the only wealth is power, and all power and therefore all wealth is centralized -- with one person or one small group at the top. you clearly can't argue that such "revenue" is going to work. as to the example in question, the USSR had revenues from oil exportation, and indeed they still could. they are energy independent. except, they collapsed internally, with no money left even to hire people to beat the citizens into submission. sure, they had revenue, but how much? bread and vodka for khrushchev on tuesdays? chait makes absolutely no assertion that socialist states are actually viable, and laffer himself refuted the entire chait article which is referenced to provide this so-called criticism, so i wouldn't call that particularly notable. 128.128.98.46 (talk) 16:02, 20 May 2008 (UTC)

[edit] Intro

Cut from intro:

although initially suggested by many before him (see below), is a concept often used to justify tax cuts and is intended to show

Originality of the idea is not at issue. The last sentence of the intro has Laffer giving credit to someone else. Saynig "not an original idea" is the punch that softens up the reader for the knockout blow to follow: that it's "only used to justify tax cuts".

Better to say that the Democratic Party opposes tax cuts, and that's why they oppose the Laffer curve. Or if not Democrats, then some other group, but we need to name the critics instead of making the criticism ourselves.

Who says that every tax rate is set on the left side of the curve. (Not - surely - leftists! ;-)

Is there anyone who say that the idea itself is valid but was misused in certain circumstances? Or do critics all say that the idea is invalid in all circumstances? --Uncle Ed 21:11, 12 June 2006 (UTC)

Economists usually accept the core idea of the Laffer curve--that at some point of taxation, marginal revenues of an increase in taxation will be negative--but the Laffer curve is far too imprecise and inaccurate to be used to determine tax policy. In all honesty, supply-side economics in general are far more useful to politicians than to actual economists. (Harlequin115 04:47, 5 September 2007 (UTC))

[edit] Cleanup

--- Removed this section: " The Laffer Curve assumes that the Government will collect no tax at a 100% tax rate because, rationally, no person will choose to carry out work if they receive none of the economic return from that work. However some economists question whether this assumption is correct.[1] For example, in classically structured Communist societies, there was an effective 100% tax rate and, whilst these societies may have been highly inefficient, people did continue to work to some extent. "

Laffer Curve says that government will not collect income tax revenue. In these Communist societies with "effective 100% tax", they aren't actually getting any income so there's no income tax. Alternatively, you could argue that people in these societies were 'paid' in other less quantifiable ways. This results in less than 100% tax and which is why they worked.

So, saying that there is an "effective 100% tax" in such examples is a fallacy. ---

Examples of the Laffer Curve being correct are mixed in with "criticism". Does this mean critics are unhappy because the idea is correct?

We need to say why the critics are unhappy. Are they saying that certain tax rates should be higher? That is - while accepting the premise of marginal rates and Taxable income elasticity - they claim that a rate (like federal income tax) is "on the left side of the curve"? This would put them in opposition to others - who accept the same premises! - but who claim that the rate in question is "on the right side of the curve".

Let's detach "tax increase advocacy" and "tax cut advocacy" from the general idea illustrated by the Laffer Curve.

Are people saying they disagree with the concept of an optimum rate? Or do they accept this but disagree over where the optimum is?

Secondly, are there people who want to increase tax rates for reasons other than increasing revenue? Such as "sticking it to the rich"? Or as part of an wealth redistribution scheme, as in some variants of socialism? --Uncle Ed 20:43, 13 June 2006 (UTC)

[edit] Renaming "Laffer Curve" article to "Taxable income elasticity"

The article appears to have been renamed. Was there any discussion of this change of name? It seems a bit too radical to me. For starters the term "taxable income" implies that the laffer curve applies to income taxes only. It is certainly general enough to apply to things such as VAT and GST also. Pretty much any tax based on transactions will have an impact on terms of trade. I don't agree with the name change. In common usage the concept is still refered to as the "Laffer Curve". Terjepetersen 02:12, 13 July 2006 (UTC)
I concur with you on this one. Wikipedia naming policy is to conform to the common usage in a field. Unless someone can produce a citation showing that at least some economists do commonly refer to "taxable income elasticity," I suggest that the article should be moved back to "Laffer Curve." --Coolcaesar 20:28, 13 July 2006 (UTC)
I have undone the move. It was a silly idea and there was no consensus for it. I am moving all the relevant discussion that was here to Talk:Laffer curve. Some of the page history will end up at [[Talk:Taxable income elasticity; sorry, bit of a bad move job by me. The Land 16:58, 15 July 2006 (UTC)

Eco folks keep reading - in 1985 I sent the explantion below of the Laffer Curve to Irving Kristol at The Public Interest and he sent back a kind note "very cogently done"). B-52 performance manuals [T.O. 1B-52D/G/H-1-1 or -11-1] had/have numerous charts that mirror the Laffer Curve as shown on the web page at the upper right. "Effect of off-speed or off-altitude on range" is exactly a Laffer Curve. For any given weight and configuration, there is ONE speed-altitude schedule that will produce the maxiumum possible range. Flying higher, lower, faster, or slower than the schedule will result in a range decrease. The chart is denominated in "% of max range" where the vertical line at the top center (as with the Laffer Curve figure on the web page) is 100% of the possible range. The range available falls off in both directions from there; 99%, 98%, etc. If you take the "fuel flow per hour" charts and divide the fuel burn rate by true airpseed, you get a "nautical miles per pound of fuel" curve that is again a Laffer Curve. If you want the maximum MINUTES per pound of fuel you fly one schedule. If you want the maximum MILES per pound of fuel, you fly a different schedule . . . and endurance (minutes) is ALWAYS a lower speed than range (miles). In a jet, this Laffer-type Curve behavior results from the summation of two inversely proportional values. Induced drag (lift, downwash, and tip vortices) decreases with an increase in speed. Parasitic drag (just pushing the air out the way and the increases in the jet's frontal area) increases with speed. Other things exhibit the same chracteristic and for the same reason; for example, parachutes. The lowest possible opening shock on the crew dog occurs around 13,000 feet. Two variables are inversely proportional. The thinner the air, the faster you fall through it, so the shock component from the velocity change is large - you have more speed to give up. However, the thinner the air, the longer it takes for the canopy to inflate, so the speed change occurs over a longer time, lowering the load. The opposite occurs in thick air. You fall through it more slowly but the 'chute opens much faster. Somewhere between sea level and 50,000 feet there is a "magic" altitude with the lowest possible opening shock. You want a long opening time from a low speed and that's about 13,000 feet. [Note: "Best corner" (the max rate of turn possible) is another jet problem with only one solution but it does not arise because of inverse proportions. Where the lift curve crosses the structural strength line is a different thing entirely.]

As I appreciate Laffer's insight, the theory was that, at some point, the incentive to have more money would be overcome by a decreasing marginal return, especially in the upper brackets.

Observe further that there are an infinite number of "wrong" tax rate pairs on the Laffer Curve that will nonetheless produce the identical tax revenue. You can get, say, 78% of the maximum possible taxes paid in by being, say, 17% too low or by being, say, 12% too high (or vice versa). Jets also act that same way, in that any given fuel flow/thrust setting will hold either of two speeds. One will be on the back half of the curve (below best endurance) and the other will be above it (faster than best endurance) on the front half of the curve. That's why the same throttle setting can hold either of two speeds.

To me, the rub for Laffer's critics is the assumption that we are always on the left half (no pun intended) of the curve, the "region of reverse command" in which it takes more power/thrust/gas to fly more slowly; the area less than best endurance . . . and not on the right (no pun) half, the "region of normal command" in which any increase in thrust results in an increase in speed. If we were indeed above the max revenue rate in 1981, then lowering tax rates was the correct move (provided, of course, that increasing revenue was the goal). On the other hand, if we were left/below the max money rate in 1981, then we should have raised rates even further.

Wiring a jet like a pinball machine and taking careful measurements of "miles per gallon" is of course far, far simpler than setting a tax rate. Jets are noticeably easier to control and predict than either taxpayers or voters.

So, if Kemp-Roth was a bad idea, to what higher rate should taxes have been raised? If the current rate cuts sought by Pres. Bush are a bad idea, to what new, higher rate should the IRS be told to set its sights?

LSU Law 05 06:32, 27 July 2006 (UTC)

[edit] Dollars and Sense - worthy of our reference?

The Dollars and Sense piece referenced by our (increasingly wonderful and iteratively more brilliant) article on the Laffer Curve includes some questionable, if not outright incorrect, statements that make me wonder if it is worthy of our mention.

It represents a marked POV with statements like "...Bush officials have not explicitly cited Laffer's arguments in defense of their tax packages. Probably, they wish to avoid ridicule." and "Some of the Republican faithful continue to argue that tax cuts will unleash enough growth to pay for themselves, but most are embarrassed to raise the now discredited Laffer curve."

The phrase "the now discredited Laffer curve" seems exceptionally ill-chosen, since the Laffer curve is widely ackowledged - it says so right there in our (increasingly wonderful and iteratively more brilliant) article! The main points of contention are the usefulness of the curve to decision regarding tax policy, our current position on the curve (left-side/right-side), and the overall impact of supply-side tax relief.

But my largest grievance with the Dollars and Sense column is against the author's characterization of the economy's performance following the tax cuts. The author relates that "economic growth was tepid through much of Reagan's presidency" and that "Die-hard supply-siders insist that the Reagan tax cuts worked as planned—the payoff just didn't arrive until the mid-1990s!

I'm not sure how the author is measuring the U.S. economy or where her statistics are sourced from. I took a look at the Bureau of Economic Analysis Historical Gross Domestic Product Estimates and Historical Prices of the S&P 500 Index, and they paint a different picture:

History of US Economy under Reagan and Clinton (in 2000 Dollars)
Period Starting GDP Ending GDP  %Change Starting S&P Ending S&P  %Change
1980-1988 $5161B $6742B 31% 114.16 277.03 143%
1992-2000 $7336B $9817B 38% 408.78 1380.2 237%

Am I overlooking meaningful statistics that would support the author's descriptions? Are there any staunch defenders of this article as a scholarly and unbiased reference that is worthy of inclusion in our (increasingly wonderful and iteratively more brilliant) article? dpotter 02:27, 20 October 2006 (UTC)

While I'm not familiar with the article you referenced, some meaningful statistics could be a look at changes in real GDP per capita, as opposed to simply total GDP, as real GDP per capita would ignore changes in GDP due to population shifts and inflation. In that case, real GDP per capita increased from $23061 to $26725 (in 2000 dollars) from 1980 through 1987, an increase of $3664. By contrast, from 1992 to 2000, real GDP per capita increased from $28601 to $34785 (again, in $(2000)), an increase of $6184. This is a fairly significant difference. The source for GDP figures was "Louis D. Johnston and Samuel H. Williamson, "The Annual Real and Nominal GDP for the United States, 1790 - Present." Economic History Services, October 2005, URL : http://www.eh.net/hmit/gdp/" -(Harlequin115 06:52, 5 September 2007 (UTC))

[edit] Khaldun-Laffer curve

I removed the following from the lead paragraph: (or Khaldun-Laffer curve)...developed by Ibn Khaldun and popularized and promoted by economist Arthur Laffer.

The phrase "Khaldun-Laffer Curve" is a neologism, and an inaccurate one at that. Google returns 27 hits for the term (versus 228,000 for Laffer curve), and most of those are copies of the same 2-3 articles. Furthermore, Khaldun developed the theory of the relationship between taxation and economic prosperity (in The Muqqadimah), but he did not represent it graphically or with a description of a curve.
Khaldun deserves the credit he receives in our fine article, but lets not champion a neologism on his behalf.
  • Laffer, Arthur; Jan P. Seymour (1979-01-01). The Economics of the Tax Revolt: A Reader. Harcourt Brace Jovanovich. ISBN 0155189204. 
  • Atiyeh, George Nicholas; Qusṭanṭīn Zurayq, Ibrahim M. Oweiss (1988-07-01). Arab Civilization. SUNY Press, 120. ISBN 0887066984. 
dpotter 07:29, 29 October 2006 (UTC)

[edit] Cleanup II

Boy is this poorly written. First, lose the scare quotes on "optimum" in the first paragraph. If necessary replace with a word that is less scary. Second, I think the historical section needs to go back to the Kennedy tax cuts and their impact on the economy. Most important though the prose needs to be cleaned up, the sentences need to be clearer, and the paragraphs need to actually have a point instead of an introduction and a bunch of random thoughts.

This reminds me of every economics text I have ever read. No wonder those guys are so dismal.

[edit] The curve doesn't exist

While the proponents of the Laffer curve make claims about its applicability they never show the curve for the US economy. The actual statement by Laffer is really good, if it's good, at and only at the 0% and 100% tax rates. It is demonstrably true that the government does get $0 in revenue for all cases where the tax rate is 0%. Beyond that all discussions are hypothetical. Advocates of the Laffer curve don't use the Laffer curve, they use the concept of the Laffer curve, as they bend and mold it to fit their agenda. Mostly they declare that a reduction in the top income tax rate from something to something lower will cause an increase in revenue. Mostly they wait, however long it takes, for there to be an increase in revenue from whatever cause and then claim the observed increase is the one they predicted.

The anecdote about the curve being sketched on a napkin sounds familiar, but in the versions I recall of the anecdote Laffer sketched the curve in response to a question. The question to which he was responding is not revealed. Keynesian theory has it that reducing taxes on those who spend (that is, the middle income bracket) will stimulate the economy, even if it does cost the government some revenue. The people gathered at that lunch were more likely people who wanted a rationale for reducing taxes not on those who spend but on those who invest - or hoard. The tax rates are higher for that group and the desire very probably was to come up with a cover story for a reduction not for the spending bracket but for the top bracket. It's not entirely unlikely that the question was "How can we justify cutting tax rates at the high end rather than in the middle?"

There was a discussion in a Scientific American column in which it was shown that the shape of the curve is unknown. If the shape is unknown then it can't be said if it is smooth, can't be said if it has only one maximum. Absent an actual curve for the US economy statements about the applicability of the Laffer curve to US tax rates are groundless, other than at the 0% and 100% level. Even at the 100% level the assumption in the Laffer argument is that the individual earning enough to be taxed that high has the freedom to stop the flow of income.

Thankfully, we don't hear much about it any more.

Minasbeede 03:32, 5 June 2007 (UTC)

Hi, talk pages aren't for general discussion of topics. Please stick to facts and discussing how to improve the article. Thanks - Taxman Talk 13:52, 5 June 2007 (UTC)

The curve doesn't exist. No actual curve is ever shown. The article is about a phantom. I'd gladly see my comments pared down to that essential fact.

Thanks for your comment.

Minasbeede 14:01, 5 June 2007 (UTC)

Surely some curve must exist just by pure definition. Any given tax rate should result in some expected tax income.

If you're saying that it is impossible to predict any part of the curve at all then we shouldn't have any taxes because you're saying that we cannot predict tax income from the tax rate.

Surely to God, you must believe that raising the tax rate from 2%-5% will increase tax revenues. If so, then we can predict part of the curve! It's not completely unknown. Only part of the curve is as unpredictable as you make it about to be.

If you're saying most of the curve is unknown, then we should never raise taxes into the unknown range because that would just be a gamble.

Keep in mind the curve is EXPECTATION. If you're saying a range is unknown you're saying that you CAN'T EXPECT tax revenues to change one way or another by changing the rate. The Laffer curve is predicting EXPECTED revenues to increase when we raise taxes up to the maximum and predicting that we EXPECT them to decrease after.

Tax revenues are affected by many other uncontrollable random variables (e.g. if we got nuked tomorrow, 2008 would have pretty poor tax revenues nor matter what rate we choose). By effecting any sort of government policy, or making any decision for that matter, we can only change the EXPECTED value of our dependent variable.

Arguing that random events affect the curve is sort of a distraction unless you're saying that the curve is so dominated by them that the expected change in tax revenue is insignificant. And if you say that, we might as well keep the rate at the lowest possible part of this mysterious chaotic range of the curve.

Also, investing is not as bad as you make it out to be. The freedom to 'hoard' so freely is what has allowed the US economy to develop into what it is over the past 100 years and what has allowed third world countries to develop so quickly. Try not to be so negative.

[edit] Wall Street Journal article

See here  :) Count Iblis 22:01, 13 July 2007 (UTC)

[edit] Re: "back into" a continuous curve

You can "back into" a continuous curve by assuming the tax rate will be legislated with no more than a given number of decimal points. The resulting discrete function could then be interpolated with line segments, with the same result as the assumption of continuity.

You miss the point.

Go ahead, do what you propose and show us the result. --Minasbeede 17:41, 4 August 2007 (UTC)

[edit] The First Diagram

The diagram showing the curve would be more meaningful to most readers if the x scale were in percent, not 0-1.Landroo 17:51, 1 September 2007 (UTC)

Maybe we should consider using the image that is in the Polski article. The image is on commons. Morphh (talk) 21:34, 04 February 2008 (UTC)

[edit] POV in this article

BrendelSignature has made several changes to the article - filled with spelling and typographical mistakes - inserting selective POV that has no place in a neutral wikipedia article. Cited as a source is a Jonathan Chait article that contains such epithets and polemical ad hominem as "wingnuttery", "crackpots", "deranged" - hardly a serious scholarly source for criticism of the Laffer curve. Chait is not an economist either. Overall, a very unprofessional and clumsy attempt to skew the article and its opening lede with unhelpful and selective POV insertions. Nobel Prize is written as Nobel 'price' for example; and the Laffer curve is typed as the 'Laffter' curve. Wikipedia is not a political battleground for poorly sourced political hackery and epithets. 220.255.27.213 11:01, 16 October 2007 (UTC)

In earlier edits, BrendelSignature writes: "this curve is a joke", followed by wholesale insertion of selective and poorly sourced POV. Is this proper behaviour for what appears to be a Wikipedia administrator? Perhaps I'll have to ask another administrator to look into this. 220.255.27.213 11:05, 16 October 2007 (UTC)

Chait does cite reputable references in his work (though he unfortunately tries to "spice things up" by using strong language) and the New Republic is still one of the most reputable news sources in this country. Fact is nonetheless that the vast majority of economists do agree that this curve is faulty. The assertion that 100% tax = 0 revenue is indeed "a joke" (I am allowed to ridicoule the subject of an article in the edit summary when the article is strongly POV). We must not mislead our readers into thinking that the Laffer Curve is a widely accepted concept when it is not.
The only piece of truth most economists find within the Laffer curve is that at times taxes can dampen economic grwoth; thus, when tax rates are at high levels (much higher than the U.S. currently) a tax cut may indeed provide an economic stimulus. Yet, the idea that 100% tax = 0 revenue is obviously false as is the idea that there is only one peak.
For now, we can agree on having just Tobin in as someone who actually represents the community of American economists and provides a balance in the intro - just quoting Mises, who is hardly reprensative of most contemporary economists, is unacceptable. I think for the time being, we have established a sufficient balance. Signaturebrendel 20:44, 16 October 2007 (UTC)
Thanks. That is a good compromise for now. (I agree that if there is a study that shows that "most economists" think the Laffer curve is bunk, it should be included. I just don't think Chait is a good source for it.) 220.255.27.213 08:01, 17 October 2007 (UTC)
I think we could do with a clearer explanation why supplysiders believe (or believed) that a simple cut in taxes would increase revenues; IOW, why did they believe we are on the "right side" of the curve? And for the simpleminded such as me, perhaps someone could explain this: tax rates are marginal, so it seems to me that there should be "Laffer curves", not just one curve. The maths of this would seem to apply if there was just one rate. Does it measure average rates or something? It seems to me that if you earned 300K at 75% and 200K at 100%, you would not stop working just because you lost all of the 200K at the top tax rate (although there would obviously be economic effects from it) and the government could still gain revenue from the 100% rate for this reason. Grace Note 01:10, 19 October 2007 (UTC)
Absolutely agree with your first point - it would be helpful to have this kind of explanation, but I think you will struggle to find it. As used by those who argue for tax cuts, the Laffer Curve has generally been a rhetorical rather than an academic tool. On your second point, the curve refers to the simple case where there is just the one marginal tax rate. LeContexte 10:09, 19 October 2007 (UTC)
I think there must be explanations of this kind somewhere, but I read a lot of wingnutty stuff online and I've never found one, so maybe you're right. The second point would seem to torpedo their theory right there. I guess I'll have to search for someone who says that. Grace Note 07:13, 22 October 2007 (UTC)

[edit] Lead

The lead is too long. Please reduce the size per WP:LEAD. Morphh (talk) 21:07, 04 February 2008 (UTC)

[edit] Article structure

Be careful of article structure. Consider reading Wikipedia:NPOV#Article_structure. There is too much built under a header of criticism. Break this up into relevant sections by topic point listing the both sides of the argument. Morphh (talk) 21:27, 04 February 2008 (UTC)

[edit] The Neo-Laffer curve

The new graphic is better, but the Neo-Laffer curve seems like a bit of a distraction. The fundamental point Neo-Laffer makes is that we can predict little about revenue from the tax rate because real-world data has too much noise. However, the concept is used in practice to asymmetrically bash only the right half of the curve. If the logic was applied symmetrically, one would have to conclude that RAISING taxes would also have an UNPREDICTABLE effect on revenue. This should at least be pointed out in the article. - Scott

This section seems too long (271 words, compared to 55 words for "Keynesian critique"). The figure is obviously a joke (the curve isn't even a function). A curve derived from U.S. economic data in the form of a function would be more appropriate. Jethro Dull (talk) 20:41, 7 March 2008 (UTC)

Indeed the Keynesian critique deserves way more than 55 words and certainly more than the neo-laffter curve. That's a vio of the due-emphasis guidelines. At the moment I don't have the time, but thanks for pointing it out. Signaturebrendel 09:30, 8 March 2008 (UTC)
Gardner is stated in the article to have based his curve on actual "U.S. economic data", but there is not even a citation supporting the existence of a neo-Laffer curve. (So two citations are needed — one for the curve and one for the graph.) I have replaced the graph with one based on actual data, but as I have tried to plot the curve as that of a single-valued function of the tax rate, the effect might not be as striking. Do you think adding a loop-de-loop or two would imPOVerish the image quality? ~ Jafet (spam) 17:14, 15 April 2008 (UTC)

[edit] WikiProject, Category Economics?

Should this article be part of WikiProject Economics? Category? —Preceding unsigned comment added by Cretog8 (talk • contribs) 00:26, 22 May 2008 (UTC)