Krugman, Stiglitz and Samuelson all won the nobel prize for economics.
So did Friedman and perhaps not as directly relevant, Hayek.
Laffer didn't, but he was hardly a comic book character, and his famous "curve" was a quite serious, and true idea. Some distortions of it (by both it supporters and its opponents) are questionable or even false, but his actually idea, is not just true, its obviously true to anyone with even a moderate amount of economic understanding.
The idea is that at 0% tax, you get 0 revenue. And that at 100% tax, you get close to zero revenue (either taxes will be avoided, or there is no incentive to be economically productive as you can not make after tax wages or profits). That some point between these two points was where you had maximum revenue, with increases or decreases from that point producing less revenue. That you could graph the revenue on a curve that would go up and then down again.
That's basically the Laffer curve, in its basic form. Laffer, and supporters of his ideas would also (correctly) point out that typically as taxes increase you don't get the same size increase in revenue, even if taxes are below the point of maximum revenue. Lets say maximum revenue was at 40%. Well if you increase taxes from 15% to 30%, you've doubled the tax rate but you won't double the revenue. Partially because your providing extra incentive to legally avoid, or illegally evade taxes, and partially because you are disincentivizing investment and productive activity.
Because you disincentive productive activity, you create a dead weight loss. The gain to the treasury will be less than the loss to the private economy.
And its not just Laffer, and Friedman, and Hayek that would recognize this, so would Krugman, Stiglitz and Samuelson. They might consider it to be a slightly smaller factor, but the would recognize it. |
