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Saturday, August 28, 2010

Where does the Laffer curve bend?

Ezra Klein:
With the Bush tax cuts due to expire soon and debates about raising top rates further to cut the budget deficit soon to follow, the Laffer curve is bound to come up again. The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away. Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

The Tax Experts

Emmanuel Saez, ...73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes)...
Joel Slemrod ..."I would venture that the answer is 60% or higher.... The idea that we're on the wrong side has almost no support among academics who have looked at this....
Read Saez, Slemrod, and Seth Giertz's latest paper (PDF) on the subject.
...

Bruce Bartlett ..."Anthony Atkinson, probably the leading public finance economist in England, estimates (PDF) that the top rate could go as high as 63% to 83% before it became counterproductive in terms of revenue...The European Central Bank...finds that only two European countries are on the wrong side of the Laffer Curve. All other countries could raise substantial additional revenue by raising tax rates."

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