Where does the Laffer curve peak?*

Ezra Klein asks "Where does the Laffer Curve bend?" but he's really asking where it peaks.  It bends at the origin, of course, a tax rate of 0.1  percent. 

Many experts think the Laffer Curve peaks around 60-70 percent, but I'm confident none of them would recommend this as the target rate.  Maximizing government revenue is a hideous goal, fit for the likes of Kim Il Sung.  The goal, one would hope, is to maximize human welfare.  This starts with considerations of private wealth generation, should include deference to liberty and personal property, and end with careful appreciation of long-term growth.  All of those point to an optimal lower rate which would be lower relative to the preferences of the respondents.  My guess is that even the most ardent social planners would opt for a rate no higher than 50 percent. But it would be pretty easy to argue for a top rate of 15 percent.

It's a shame that very little empirical evidence is known on this question.  I've been working on some experiments, but need to finish up those working papers with the results.  At minimum, this seems like ripe material for the next blogger's survey, no?

Comments

[Dave]

The peak occurs at a different rate for a static analyis than it does for a time-series analysis. The static rate would be higher, but would result in diminished economic growth, strongly suggesting a much lower rate over time.

[John Galt]

In my opinion, any calculation of total tax burden should include the "embedded tax" of products. For a pair of shoes, that includes such things as the tariffs and taxes at the port of entry, the tax on the labor of the longshoremen and truck drivers who carry the shoes to market, the tax on the fuel in the delivery vehicles, and the utility tax on lighting the retail store. I suspect the "embedded tax" on a pair of shoes is $50 to $75 per $100.

[Alan Reynolds]

Research on the elasticity of taxable income is summarized in my recent WSJ article http://www.cato.org/pub_display.php?pub_id=11631

Consistent with optimal tax theory, higher marginal tax rates appear ineffective in generating a sustained increase in tax revenues among those with very high incomes.

Also, capital gains tax rates above about 15-20% appear to lose revenue. The revenue-maximizing rate on dividends may not be as low as 15% but it is surely lower than 40%.

Most countries (Europe, China, etc.) have cut the corporate tax to 13-25% without anyone complaining that revenues fell as a result. That suggests a 25-30% corporate tax rate in the U.S. would likely raise receipts from that tax, but partly by shifting partnership and Subchapter-S business income back in to C-Corporations.

[David]

This causes me to recall the Rahm Curve. What's the Rahm Curve? I'll let this guy explain it:

http://www.youtube.com/watch?v=uj6lRFXC5rA

~David~

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