Tuesday, August 01, 2006

So much for the Laffer Curve

Herewith Jason Furman, courtesy of the U.S. Treasury Department.

I suppose they'll have to fire the real economists there and find people who are willing to make false estimates.

Just as clarification, the Laffer Curve is an economically valid idea. Only, for taxing labor income (the main component of the income tax), rates might have to go up to 80 or 90 percent before it would start to apply. So it's not exactly relevant with regard to the Bush tax cuts. (For capital gains, by contrast, the Laffer Curve may kick in at 30 to 40 percent, although it's hard to disentangle temporary from permanent effects.)

2 comments:

David Gamage said...

Dan,

Have you looked over the actual dynamic analysis? As far as I can tell, even the result where the tax cuts increase output by .7% if funded by reduced spending is completely unrealistic.

If I'm reading the report correctly, that result assumes that the government spending which would be cut is entirely waste -- "government consumption purchases do not enter household utility functions . . . . That is, government spending is not valued by households." (page 8 of the report).

If you've looked over the report, I'd love to hear what you think about this.

thanks,

David

Daniel Shaviro said...

I've only glanced at the report, but Furman mentions this point - i.e., that one needs ridiculous assumptions to come up with anything. With a budget constraint, it's utterly absurd to think that unfunded tax cuts, as a general matter, boost economic growth - they have to be funded for economic theory to suggest any such generalization.