AOC at Met Gala - "Tax the Rich"

[Celerity]

118. it is poor, over-simplistic economics

https://www.investopedia.com/terms/l/laffercurve.asp



Is the Laffer Curve Too Simple a Theory?

There are some fundamental problems with the Laffer Curve—notably that it is far too simplistic in its assumptions. First, that the optimal tax revenue-maximizing tax rate T* is unique and static, or at least stable. Second that the shape of the Laffer Curve, at least in the vicinity of the current tax rate and T* is known or even knowable to policymakers. Lastly, that maximizing or even increasing tax revenue is a desirable policy goal. In the first case, the existence and position of T* depend entirely on the shape of the Laffer Curve. The underlying concept of the Laffer Curve only requires that tax revenue be zero at 0% and at 100%, and positive in between. It says nothing about the specific shape of the curve at points in between 0% and 100% or the position of T*.

The shape of the actual Laffer Curve might be dramatically different from the simple, single peaked curve commonly depicted. If the curve has multiple peaks, flat spots, or discontinuities, then multiple T*’s might exist. If the curve is skewed deeply to the left or right, T* might occur at extreme tax rates like 1% tax rate or a 99% tax rate, which might put tax revenue-maximizing policy into serious conflict with social equity or other policy goals. Furthermore, just as the basic concept does not necessarily imply a simply shaped curve, it does not imply that a Laffer Curve of any shape would be static. The Laffer Curve might easily shift and change shape over time, which would mean that to maximize revenue, or just avoid falling revenue, policymakers would have to constantly adjust tax rates.

This leads to the second criticism, that policymakers would be in practice unable to observe the shape of the Laffer Curve, the location of T*, whether multiple T*’s exist, or whether and how the Laffer Curve might shift over time. The only thing policymakers can reliably observe is the current tax rate and associated revenue receipts (and past combinations of rates and revenue). Economists can guess what the shape might be, but only trial and error could actually reveal the true shape of the curve, and only at those tax rates that are actually implemented. Raising or lowering tax rates might move the rate toward T*, or it might not. Moreover, if the Laffer Curve has any shape other than the assumed simple, single peaked parabola, then tax revenue at points between the current tax rate and T* could have any range of values higher or lower than revenue at the current rate and the same or lower than T*. An increase in tax revenue after a rate change would not necessarily signal that the new rate is closer to T* (nor a decrease in revenue signal that it is further away). Even worse, because tax policy changes are made and applied over time, the shape of the Laffer Curve could shift; policymakers could never know if an increase in tax revenue in response to a tax rate change represented a movement along the Laffer Curve toward T*, or a shift in the Laffer Curve itself, with a new T*. Policymakers trying to reach T* would effectively be groping in the dark after a moving target.

Lastly, it is not clear on economic grounds that maximizing or increasing government revenue (by moving toward T* on the Laffer Curve) is even an appropriate goal for choosing tax rates. It might easily be the case that a government could meet the otherwise unmet needs of its citizens and provide any necessary public goods at some level of revenue lower than the maximum it can potentially extract from the economy, perhaps much lower depending on the position of T*. If so, then given the well-researched principal-agent problems, rent-seeking, and knowledge problems that arise with the politically driven allocation of resources, putting additional funds in public coffers beyond this socially optimal level might just produce additional unnecessary social costs, inefficiencies, and dead-weight losses. Maximizing government tax revenue by taxing at T* would also likely maximize these costs. A more appropriate goal might be to reach the minimum tax revenue necessary to achieve only those socially necessary policy goals, which would seem to be almost the exact opposite of the purpose of the Laffer Curve.