The Laffer curve doesn’t matter

There’s a shocking statement.  Haven’t I recently claimed to be a deficit hawk?  Don’t I care about maximizing — or at least increasing — revenue to offset recent debt growth and reduce long-term confidence worries?  And for that matter, haven’t I also argued that taxation is theft?  Whence this sudden disregard for a putatively useful conceptual tool?


(If you just want a shot of insight, go read Brad’s post and enjoy.  If you want to see what it looks like when a differential-geometry nerd pretends to be an econ wonk, read on!)

See, the Laffer curveL(r) — is a function of revenue with respect to a tax rate r.  It’s a static model, and if you’re starting to think that it’s a bit simplistic on its own you’re absolutely right.  It would be more interesting to consider tax revenue with respect to time and wealth — L(r,t,w) — but no-one wants to plot isosurfaces of a function of three variables in an intro Econ textbook.  Hell, only graphics nerds like me want to plot isosurfaces full stop.

Even my notional time- and wealth-varying Laffer function isn’t all that useful.  I mean, we can build a vector field from L(r,t,w)‘s gradients, plot pathlines, and figure out how (say) changing tax rates impact wealth over time — assuming we ever manage to construct a decent model of L(r,t,w) in the first place — but it’s far more interesting to study the impact of tax rates on dw/dt directly, no?

Economic growth and short-term revenue maximization are a trade-off, and that trade-off is NEVER represented in the Laffer Curve. Many suggest that revenue maximization is a lot closer to European tax levels than our own, but I’d state that the anemic economic growth seen in Europe suggests that they’re sacrificing economic growth for today’s tax receipts. America doesn’t really follow this, which is why our economic growth (and over time, now, our per capita GDP) are much higher than Europe.

But I think it’s clear that we’re below the maximizing revenue rate, but that we have a VERY GOOD REASON for remaining below that rate — we want to make a better world for our children and grandchildren through the possibilities that high GDP growth will open up to them.

I also suspect that integrating L(r,t,w) over t at the (present) peak of the Laffer curve — that is, summing the revenue obtained from “maximal” income taxation — is nowhere close to a global maximum.

Now, this might start to sound a lot like Stephen Harper’s cavalier claim that “we’ll just grow our way out of debt” with low taxes and, um, the Alberta oilsands, but that’s not where I’m heading with it at all.  My point is, rather, that we can vary tax rates to achieve two different goals — maximizing growth and maximizing immediate revenue.  The tax rate that maximizes growth is likely to be far lower than the rate that maximizes revenue.

But neither growth nor revenue is a useful variable to optimize!

Okay, if the only parameter that controlled growth was the tax rate r, we might be able to find the growth-optimizing tax rate and stick to it.  Alas, other variables — like fear for the future — also affect growth rates, and this is where my deficit-hawkishness comes back into the argument.  Second-order effects from higher tax rates — paying down the debt, say* — could reduce fears of long-term catastrophe and increase growth.  Of course, that depends on thuh gummint actually paying down the debt rather than showering its new-found revenue on anti-vaxxers, so it’s kind of hard to work into a clean mathematical model.

But simply trotting out a one-variable model based on a thought experiment is far from a good argument.


* Hahahahahahaha lol n00b, you (justly) cry, like that’s ever going to happen! Hey, if Paul Martin can do it, anyone can.


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anarchocapitalist agitprop

Be advised

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Statistics FTW


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