Two of my favorite things in life are the Laffer Curve and the Georgia Bulldogs.
So you know I’m going to approve when an economics professor from the University of Georgia writes a column about the power of the Laffer Curve.
And since I’m a libertarian and the specific issue is about curtailing the foolish Drug War, it goes without saying that this is something that belongs on this blog. Especially when we get to celebrate some evidence that statists are acknowledging that tax rates matter!
Here are some excerpts from Jeffrey Dorfman’s column at Real Clear Markets.
Now that the state will let people legally purchase marijuana for recreational use (medicinal use was already legal), the state wants to collect tax revenue from the new industry. What is fascinating about this is that many people who have probably long argued against the concept of the Laffer Curve are suddenly embracing it. …the politicians in Colorado are openly discussing the fact that if they set the tax rate too high on marijuana, people will buy it on the illegal market and avoid the taxes. If the tax rate is set too low, potential tax revenue that is to be designated for school construction would be left on the table. They are searching for just the right tax rate that will bring in the most new tax revenue. In other words, they have accepted the Laffer Curve. The exact same arguments apply to income taxes. If too high a tax rate is levied, people will search for ways around it (loopholes, less work effort, and outright tax fraud). Taxes too low will not produce sufficient tax revenue to fund government. The ideal income tax rate is in the middle somewhere.
I have to interrupt at this point. Professor Dorfman isn’t saying that the goal is to maximize revenue, but I’m worried some people may jump to the wrong conclusion.
The ideal point on the Laffer Curve is very low, sufficient to raise the modest amount of revenue needed to finance the legitimate – and very limited – functions of government.
Let’s continue with another excerpt.
There is an old saying that politics makes strange bedfellows. This is a classic such case. Now that liberals have found a business they like, businesses should be protected from excessive taxes. Suddenly people do respond to taxes by changing their behavior. Finally, we have agreement that incentives matter and taxing something means there will be less of the item that got taxed. Getting liberals to agree with these usually conservative beliefs more broadly is by no means certain. After all, liberals have long held that high cigarette and gas taxes encourage people to change their behavior, convincing people to smoke less and drive more fuel-efficient cars. Yet these same liberals have refused to believe that high income taxes encourage people to earn less (taxable) income. Conservatives, whether in favor of legalizing marijuana or not, should applaud the liberals who now agree with them that tax rates matter to businesses and people and that the Laffer Curve is a reality.
So does this mean that leftists are waking up to reality?
The answer is yes and no. There are some advocates of class warfare who want higher tax rates even if the government doesn’t collect any additional revenue. If you think I’m exaggerating and such people don’t exist, watch this video – especially beginning about the 4:30 mark.
But there are other leftists who are more reasonable, even among those working for traditionally statist international bureaucracies.
- Such as this study from the OECD acknowledging that lower tax rates can lead to more taxable income.
- Or this study by the IMF, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.
- Or this European Central Bank study showing substantial Laffer-Curve effects.
- Or the United Nations admitting that the Laffer Curve limits the feasible amount of taxes that can be imposed.
Unfortunately, the ideological left still controls the Joint Committee on Taxation, the congressional bureaucracy that refuses to acknowledge that changes in tax policy can impact economic performance.
Maybe they’ll be less dogmatic if we send them to Colorado for some “field research”?
