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Thoughts on the Laffer Curve

By Alan S. Blinder


-the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. —J. M. Keynes The first part of the paper by Canto, Joines, and Laffer, which is the only part I will discuss, sets up a simple general equilibrium model with two factors (both taxed proportionately) and one output, and proceeds to grind out the solutions. The model, while not entirely unobjectionable, is certainly not outlandish in any important respect. The authors make no claims that the model tells us anything about the U.S. economy; nor do they draw any policy conclusions. They use the model to provide intellectual underpinnings for the celebrated “Laffer Curve”—the notion that the function relating tax receipts to tax rates rises to a peak and then falls. Since, as I will point out shortly, the analytical foundations of the Laffer curve were in fact established centuries ago, and require no economic analysis at all, I will devote my comments to the critical empirical issue: is it possible that taxes in the U.S. have passed the points at which tax receipts cease rising? Is the U.S. tax system over the Laffer hill? Let me note at the outset why this is an important question. Certainly not because of the implications for the government deficit. Surely what a tax change does to the budget deficit must be one of the least important questions to ask. It is important to know which taxes, if any, have reached the downside of the Laffer hill because, in an optimal taxation framework, tax rates should be set to raise whatever revenues are required with minimum deadweight loss. ’ Since a tax that is past this point causes deadweight loss an

Year: 2011
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