In the past seven days I've caught two conservatives misusing the term "Laffer Curve." They seem to think it's an economic model that demonstrates the virtue of lower tax rates on higher earners and/or a flat tax.
This is what a Laffer Curve really is:
The Laffer curve argues that there is an optimum level of taxation, too low and the Government lacks the revenues to fulfill it’s functions, too high and oppressive taxation inhibits economic activity because private business lacks revenue to operate and/or expand, which means that there’s less revenue to tax, which means the Government actually collects less by taxing too much.
Both Liberals and Conservatives operate under Laffer Curve assumptions, they just move the optimum point back and forth along the Y axis, because Laffer never quantified what the optimum point was.
Laffer curve arguments applied to real world policies always fall apart for two reasons, both related to how, though as a metaphor it is elegant, it is far too simplistic to serve as a model.
1.) Laffer curve assumes that tax revenue is used to provide a public good that is detached from economic utility and labor supply. In other words it inherently assumes that infrastructure, education, and subsidized health care and housing for the working poor do not have economic utility.
2.) It assumes a single tax rate and a single labor supply, neither of which ever existed in this, or I think any, country.
The biggest problem with the Conservative embrace of the Laffer Curve is that it ignores hysteresis, or the dependence of a system not only on its current environment but also on its past environment because the system can be in more than one internal state. The Curve ties the increase and decrease of revenue to the collection rate of said revenue as strong as the cars are linked on a freight train, bound to all move at the same time, and at the same rate. But we have real world evidence tax cuts do not inevitably translate into more private revenue (Bush tax cuts saw massive job losses in the private sector and government deficit) and that tax increases do not inevitably translate into less private revenue (massive economic expansion and a government awash with money when Eisenhower pushed tax rates to highest levels in American history).
The Laffer curve was adopted by the Right because it was Arthur Laffer who introduced it to Dick Cheney, who in turn introduced it to Ronald Reagan, but Laffer admits he didn't invent it. It was actually created by 14th-century Muslim scholar Ibn Khaldun and popularized in western economics by (I want you to sit down before you read this) John Maynard Keynes.
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