Unless you’re a policy wonk, I realize “exciting” may not be the right word to describe new developments in public-finance economics. For nerds, however, three economists at the Joint Committee on Taxation have some important new research on the Laffer Curve.

The study, authored by Rachel Moore, Brandon Pecoraro, and David Splinter, concludes that the United States already is very close to the revenue-maximizing tax rate (which is not the ideal rate, incidentally).

Perhaps even more important, their research finds that the Laffer Curve is relatively flat at the top. This means that raising the top tax rate would do a lot of damage per dollar collected.

Here’s their estimate (solid red line) of the actual Laffer Curve.

For readers who want the main takeaways, here’s study’s abstract.

The Laffer curve peaks at the revenue-maximizing top tax rate, where revenue losses from behavioral responses offset revenue gains from a higher tax rate. Prior studies, however, largely overlook the Laffer curve’s shape, rely on simplified tax functions, and often omit shifting across business types and tax interactions. We show that modeling distinct tax bases more accurately and incorporating these interactions lowers the revenue-maximizing top tax rate and the associated revenue gains, yielding “flat” Laffer curves. Over this flat region, increasing the top tax rate raises relatively little revenue. Instead, raising top rates primarily trades off between progressivity and growth.

For wonkier readers, here are some excerpts that caught my attention.

Using a detailed representation of U.S. federal taxes, we find that long-run Laffer curves are relatively “flat.” This has significant policy implications—large changes in top tax rates around the revenue-maximizing rate yield small changes to revenue. Over the flat part of the Laffer curve, the relevant policy choice is between tax progressivity and growth: the equity-efficiency tradeoff. …Under our true base, three behavioral responses offset mechanical tax-rate increases: reduced labor and capital income in the ordinary base, reduced capital income in the preferential base, and shifts in activity across corporate and noncorporate sectors. …The true tax base yields a flatter Laffer curve and decreases potential revenues by over one percentage point. Allowing for full sectoral shifting responses further flattens the Laffer curve, reducing potential revenues by nearly another percentage point. …These results imply less emphasis should be placed on the precise revenue-maximizing rate, as only modest long-run revenue gains result from increasing the top rate along a flat Laffer curve.

A “flat” Laffer Curve has major implications, some of which I discussed when analyzing other academic research back in 2012.

Here’s what the JCT authors concluded.

Laffer curves are relatively flat—meaning that even substantial changes in the top tax rate around the revenue-maximizing rate have only modest effects on total tax revenues. Rather than raising more tax revenue, the central policy tradeoff concerns the balance between tax progressivity and growth: the equity-efficiency tradeoff. …The true tax base lies between the narrow and the broad base. The Laffer curve estimated using the tax calculator and true base reaches a more modest peak (only 1.3% more tax revenue) at a top tax rate of 47%. Notably, this additional federal income tax revenue is only about 0.1% of GDP. Relative to both the narrow and broad bases, the true base implies smaller potential revenue gains and a lower revenue-maximizing top tax rate.

Notice an important implication.

Regardless of the revenue-maximizing tax rate, a Laffer Curve that is flat at the top implies a lot of foregone economic output per dollar raised for politicians.

In other words, as noted in my two-part series (here and here), there is a meaningful tradeoff between tax rates and growth.

Indeed, Figure 2 from the study (especially Panel B) presents the Arthur Okun tradeoff and informs us that ever-higher tax rates generate no revenue because of foregone growth.

Indeed, revenues actually fall as tax rates get too high.

Here are some concluding thoughts from the authors.

…the tax calculator with a true base shows a relatively flat Laffer curve. …For flat Laffer curves, deviations of the top tax rate around the revenue-maximizing rate have minor effects on federal individual income tax revenue. …Under the tax calculator with a true tax base, increasing the top tax rate two percentage points to 39% raises total taxes by only about 0.2%. Thus, when considering all levels of government, increasing the top rate to the revenue-maximizing level results in total revenue gains of less than 0.1% of GDP. … in the neighborhood of the revenue-maximizing tax rate, further raising top tax rates presents a tradeoff between tax progressivity and growth, rather than an opportunity to raise substantially more revenue.

For my concluding thoughts, it is noteworthy that the authors are from the Joint Committee on Taxation because that is the body on Capitol Hill that does the official revenue estimates for congressional legislation.

In the past, I was critical of the JCT for not properly assessing the negative effects of higher tax rates when estimating proposed policy changes. Hopefully, that problem might be a thing of the past.

P.S. Class-warfare cranks such as Thomas Piketty and Gabriel Zucman will not be pleased by this research.