Art Laffer’s only serious contribution to policy thinking – no sarcasm intended – is the Laffer Curve. His insight that no revenue would be collected at either zero or 100% tax rates, so that somewhere in the middle would collect the most revenue for a given level of output, has generated a good bit of study over the years. Much like calls for “dynamic scoring” of budgets, efforts to discover the optimal tax rate a la Laffer have not produced outcomes that right-wing tax cutters like. Turns out, the truth has a liberal bias. Here is perhaps the most widely cited effort to estimate Laffer optimum tax rates:
https://www.nber.org/papers/w15343
In that paper, Trabant and Uhlig find that tax rates just above 60% are optimal for raising revenue. Tax rates in the U.S. are currently well below optimal levels. Trabant and Uhlig estimated at the time that federal revenue could be increased by 30% by raising personal income tax rates and 8% by raising corporate income tax rates. When their paper was most recently revised, in 2011, the relevant rate was maybe slightly lower than today. (I’m not qualified to say, because the top marginal rate isn’t the appropriate rate, nor is some average across marginal rates – it’s complicated.) So instead of 38%, lets say higher tax rates could only raise revenue by 30%. That would mean a revenue increase of roughly $975 billion per year, against a deficit of $1.8 trillion. We could cut the deficit in half. If we got a 38% increase, it would raise more like $1.235 trillion, and we’d be looking at a reasonably sustainable deficit. Fund the IRS adequately and maybe we’d erase the deficit entirely.
If the tax code and government in general is merely a weapon of class warfare, none of this matters a bit. If government is, instead, intended to ensure the general welfare, then we need to keep the Trabant and Uhlig estimates of Laffer’s optimal tax rate firmly in mind.
Here’s a fun little stab at finding out what the middle of Laffer’s curve looks like:
https://medium.com/swlh/a-data-driven-analysis-of-the-laffer-curve-354bbc9297e4
The author, who admits to knowing little about economics, manages to think pretty well about the issues and uses the data nicely. Reading through his efforts can help those without the skills of Trabant and Uhlig understand the difficulties in doing this sort of work.
