Arthur Laffer vs. The Beatles

The Laffer Curve has been a favorite bit of Republican pixie dust since the Reagan years, the core idea of “voodoo economics.” So simple that the idea fits, famously, on a cocktail napkin. If the tax rate is zero, the government receives no income. If the tax rate is 100%, the government also receives no income because no one is willing to work for nothing. Therefore, the idea goes, there must be a curve in-between zero and 100 that contains a point where government revenue is maximized.

The pixie dust part comes from claiming that current tax policy puts us on the side of the curve where reducing rates will actually increase revenue. That’s where The Beatles come in.

Taxman” is a tune that shares the feelings of the high earning musicians when they learn that they are paying a marginal tax rate of 95% on their income. “There’s one for you, nineteen for me,” says the taxman.

And what happened then? Was that the point when The Beatles downed tools and went on strike for a lower tax rate? No. They just grumbled and kept on making hit music.

Nobody stops working because they pay a lot of taxes. That is the craziness of the Laffer Curve. 95% rates aren’t enough to stop people from working. During wartime, top tax rates in Britain went to 98% and people still worked hard.

So by the argument of the Laffer Curve itself, we now know which side of the curve we are on. If we want to maximize revenue, raise taxes.

Of course, the government is not in the tax-farming business. We don’t want a revenue-maximizing rate. We want a rate that allows us to pay for the government services we want and to pay off previous debts. That rate is still higher than what we have today. And it is a progressive rate, where very rich people pay a lot in taxes.

(Yes, there is a difference between the marginal rate and the actual, blended rate. But for those making millions of dollars a year, the difference is small and not one that invalidates the argument against the Laffer Curve.)

 

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