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The Peak of the Laffer Curve is Not the Place to Be

April 25, 2012 by Four Percent

Bob Krumm, bobkrumm.com Peter Diamond and Emanuel Saez have penned an op-ed in today’s Wall Street Journal asserting that a tax rate on top earners of between 50% and 70% will not reduce tax revenues. They argue that this is possible because, “We’re not close to the peak of the Laffer Curve.” J. Bradford DeLong, an economist alongside Mr. Saez at the University of California, Berkeley, takes their argument beyond economics and into the social justice realm:

We have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them — to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue. [emphasis added]

All three economists rely upon the Laffer Curve to make their argument.  The Laffer Curve is a much maligned and often misunderstood concept, but it is actually quite simple. Named for economist Arthur Laffer, it postulates that there exists a tax rate that maximizes tax revenues. Mr. Laffer theorized that if the tax rate was 0% the government would definitionally receive zero dollars. At the other end of the curve, a tax rate of 100%, would also yield zero tax revenues, since if citizens were to lose every dollar they made, they would have no incentive to produce any taxable income (or at least to report it). Therefore, somewhere between 0% and 100%, tax revenues are at a peak. Read More