Laughed out of the Laffer curve

In class today I presented a seminar on, among other things, the uses and abuses of the Laffer curve. Why it is not called the Laffer bell curve I have no idea; it is always drawn like one. The students were kosher at the extremes: a tax rate of 100% was likely to lead to near zero income tax for the state; similarly they totally grasped as would anyone that a 0 % tax rate times anything was zero. But then the chuckles started.

I suspect it would be a stronger argument if the Laffer curve was bell shaped but at the summit it was flat over say a range of at least twenty percent. The students simply would not buy that a reduction from say 60% on the income of the supper rich to 40 % would not only yield the same but greater tax revenues for the state. And it did not matter how many ad hoc conjectures I threw in: increase in hours worked from the supper rich and the increase in support staff that implied and thus the increase in national output and thus a larger economic pie to tax.

It was more than just that they did not believe that people worked that way it is that they immediately understood it as trojan horse for the rich to decrease their marginal tax rates. 30% of 10 million is still 3 million who would not take that? But I had to explain for the super rich the labour market really is a choice between leisure and income. And when you are super rich you just might ask yourself do I really need another million dollars?

But then there were the questions about the augmentation of state revenues through a reduction in the top marginal rates. And I said I only know of one: Russia. To which we all had to laugh.


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