I’ve been writing about the Laffer Curve for decades, making the simple point that there’s not a linear relationship between tax rates and tax revenue.
To help people understand, I ask them to imagine that they owned a restaurant and decided to double prices. 
Would they expect twice as much revenue?
Of course not, because people respond. Customers would go to other restaurants, or decide to eat at home. Depending on how customers reacted, the restaurant might even wind up with less revenue.
Well, that’s how the Laffer Curve works. When tax rates change, that alters incentives to engage in productive behavior (i.e., how much income they earn). In other words, to figure out tax revenue, you have to look at taxable income in addition to tax rates.
For some odd reason, this is a controversial issue.
My wayward buddy Bruce Bartlett posted a video on Facebook from Samantha Bee’s Full Frontal show. The goal was to mock the Laffer Curve, and here’s the part of the video featuring economists dismissing the concept as a “joke.”
Wow, that’s pretty damning. Economists from Stanford, Harvard, MIT, and the University of Chicago are on the other side of the issue.
Should I give up and retract all my writings and analysis?
Fortunately, that won’t be necessary since I have an unexpected ally. As shown in this excerpt from the video, Paul Krugman agrees with me about the Laffer Curve.
And Krugman’s not alone. Many other left-leaning economists also admit there is a Laffer Curve.
To be sure, as Krugman noted, there is considerable disagreement about the revenue-maximizing tax rate. Folks on the left often say tax rates could be 70 percent while folks on the right think the revenue-maximizing rate is much lower.
I have two thoughts about this debate. First, if the revenue-maximizing rate is 70 percent, then why did the IRS collect so much additional revenue from upper-income taxpayers when Reagan lowered the top rate from 70 percent to 28 percent?
Second, I don’t want to maximize revenue for government. That’s why I always make sure my depictions of the Laffer Curve show both the revenue-maximizing point and the growth-maximizing point. At the risk of stating the obvious, I prefer the growth-maximizing point.
The bottom line is that I think the revenue-maximizing point is probably closer to 30 percent, as shown in my chart. Especially in the long run.
But I wouldn’t care if the revenue-maximizing rate was actually 50 percent. Politicians should only collect the relatively small amount of revenue that is needed to finance the growth-maximizing level of government spending.
P.S. As tax rates get closer and closer to the revenue-maximizing point, that means an increasing amount of economic damage per dollar collected.
P.P.S. Paul Krugman is also right that value-added taxes are not good for exports.
Addendum: This post was updated on August 12 to add the clip of selected economists mocking the Laffer Curve.
International Liberty 
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[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] To be fair, while it’s very common for Krugman to screw up, he’s not always wrong. […]
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[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
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[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
[…] revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right […]
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When Alexandria Cortez claimed she met with a Nobel Prize winning economist, the first name that came to mind was Paul Krugman. Sad that Krugman has shown himself to be nothing but a political hack, he predicted that the economy would crash under a President Trump, but even a broken clock is right twice a day. He is wasted talent. https://www.politico.com/story/2016/11/krugman-trump-global-recession-2016-231055
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I think some partisan economists look at the economy from a static basis. They think because you will likely collect more taxes the first few years that future growth rates are static and don’t respond to incentives/disincentives.
This is a bit of an abstract and simple example, but many liberal economists greatly discount the incentives that promote innovation and ensuing growth. Some believe much innovation just occurs as some natural phenomenon impervious to the economic environment. As has been pointed out before, why doesn’t Europe have anything that remotely compares to Silicon Valley and its technological prowess?
Sid,
The growth-maximizing tax rate is greater than zero. That’s because the economy needs some government to operate smoothly. Judicial system, military, police, etc. A minimum structure that protects people from theft, fraud, violence. Small government IS better for growth, but we need some govt, so we need some taxes. (Although it doesn’t have to be income tax.)
If you want to see more on this, you can visit my site CaseForCapitalism.com and look at the ‘foundation’ post with the word Spectrum.
It seems that the growth maximizing tax rate should be zero, no?
[…] is a partisan hack, so I don’t take anything he says seriously. Still, it is interesting, as Dan Mitchell points out, that Krugman subscribes to the Laffer […]
[…] is a partisan hack, so I don’t take anything he says seriously. Still, it is interesting, as Dan Mitchell points out, that Krugman subscribes to the Laffer […]
With all due resect to the late olitical economist JFK, it is not a paradoxica fact that
But even better than more cash in people’s pockets are the improved incentives to work, save, and invest.
As John Kennedy said in the 60s, “it is a paradoxical fact that reducing taxes, increases revenue to the Treasury”.
2/3rds of the US economy is consumer spending So if people have more money in their pocket, they will spend or invest it, resulting in a growing economy which increases revenue to the treasury.
Reblogged this on James' Ramblings.
I would like to see an extended model of the Laffer Curve reflecting revenues from several taxing authorities as each one independently raises taxes. For example, in Connecticut residents have both a Federal and State income tax. How does the additive sum of the two relate to the curve and revenue each might expect to gain or lose by increasing taxes?
For example, let’s say there is a 28% Federal tax rate and a 6% State tax rate. I would expect a one percent increase in the state income tax to reduce federal revenues, but increase state revenues.
Krugman is an idiot.