i think i've posted
this before, but as it pertains to the discussion:
While some have disputed the Laffer Curve concept, what they really disputed was where we are on it. The concept itself is a truism. If we are on the "left" side of the peak, government could raise tax rates and collect more money. But if we are on the "right" side, government just loses more money the more it raises tax rates.
So where are we on the Laffer Curve? A couple of economists (Harold Uhlig and Mathias Trabandt) figured it out and published the results last August.
The chart below shows their curve for taxes on "labor" (i.e., wages). (The multiple curves are for differing technical assumptions, but all results are similar. The two ends do not go down to zero because other, non-labor, taxes would still exist in the assumptions of this chart. The vertical axis is total government revenue, with 100 being what the government collects now, or did in 2006.)
...That graph says that our wages are taxed only at 28%, but the government would maximize its revenue by raising our tax rates to about 60%. If the government did that, it could raise its revenues by 30%. Bad news: We are looking like a hamburger to a starving man.
Taxes on capital (capital gains, dividends, interest) are a slightly different story. If government raised them from the current 36% to about 65%, it could increase its revenues by only about 6%, everything else equal....
...Now, some folks are trying to use these results to make Laffer Curve enthusiasts eat crow and confess that tax increases would really raise revenue. Reagan was wrong!
Not so fast.
Our economists also looked at what would happen if we changed tax rates on both labor and capital together. Their result is summarized by the chart below...
Look at it as a contour map of a hill, with the hill's peak being that little point that says "131." At that point, the government would raise 31% more than it does now. That means that the government would actually make more money by cutting taxes on capital and raising them on labor. The best place to be for a ruthless revenue-maximizer is a tax rate on labor of about 65% (from the current 28%) and a tax rate on capital of about 22% (from the current 36%).
That's not something tax-lovers want to hear. If they want to buy the "good parts" of this Laffer Curve story, they also need to buy the part that says that Warren Buffet and others who don't "earn" their income should get their tax rates cut by over a third, while those who work for a paycheck should have theirs more than doubled. Sell that to the AFL-CIO.
If you read that chart correctly, tax rates on capital make little difference on what the government actually collects. At most points on that "hill," you have to go a long way "north" (higher tax rates on capital) to get much higher up the hill (more money to government). Yet go too far "north" in many places, and you actually go downhill.
In short, taxing "unearned income" buys just about nothing, and could even cost you, even if you are ruthless in maximizing government revenue.... There's a reason you haven't heard of this analysis. The supply-siders don't want to hear that we are on the left side of the Laffer Curve. And the tax-lovers don't want to admit all that stuff about tax cuts for the rich and "still not enough."
Reality just keeps biting. As Maggie Thatcher said, "eventually, you run out of other people's money." "Eventually" will happen within the next ten years.