Looking for a Laffer curve

Madsen Pirie says the boom in US tax revenues vindicates the idea of the Laffer curve - that cuts in tax rates can lead to higher tax revenues by boosting supply.
I fear he might be committing two fallacies here - post hoc ergo propter hoc and the confirmation bias, for three reasons.
1. As Brad DeLong points out, even Bush's own economists don't think tax cuts have paid for themselves.
2. Recent research - both macro modelling and laboratory experiments (pdf) - suggest we are to the left of the Laffer curve - tax rates generally are below the levels at which tax cuts would stimulate more effort.
3. There's an obvious other possible cause of the boom in tax receipts. It's that profits have boomed, boosting top pay and dividends. And this profit boom owes more to the consumer boom than to the supply-side effects of tax cuts.
None of this is to deny that Laffer curves exist in theory. It's trivial that they do. The place we happen to be on the curve is an empirical matter that Madsen has not illuminated.
Nor is it to deny that there might be some particular taxes where cuts might raise revenue.
Still less am I denying that there's a case for tax cuts. It's  just that the case is libertarian, not consequentialist.
Arguments for lower taxes are not helped by sloppy economics.

Comments

[Pat]

Could the laffer curve apply to the rich (from whom most of the increased revenue was collected)?

Since they have the highest marginal rates, if the laffer curve applies to anyone, it would be them.

My guess is that the "tax cuts for the rich" has led to more taxes being collected from the rich

[claus vistesen]

Spot on Chris ...

'Could the laffer curve apply to the rich (from whom most of the increased revenue was collected)?'

That could very well be Pat, at least in the US. Especially when we take into account the narrative (empirically backed I might add) of a correlation between productivity growth and income inequality. The Econ sphere is littered with good posts and references about this ... give me a shout if you want to know more. I even think Mr. Dillow has discussed this ... ?

The main argument here would exactly be what Chris mentions in number 3.

[dsquared]

[None of this is to deny that Laffer curves exist in theory. It's trivial that they do. ]

No it isn't! It is never trivial to assume the existence of any economic relationship, still less that it is a one-to-one mapping, still less that it has a particular functional form.

The proposition that "it is possible in circumstances for a tax cut to increase revenues" is the one which could be considered to be intuitively supportable (though hardly trivial) but the Laffer curve is a definite statement about a particular relationship between revenue and the tax rate. (it is not even trivial to prove the existence of a relevant "tax rate" for any real world tax system!)

[chris]

D2 - By "trivial" I was merely referring to the fact that tax rates of zero and 100% will both yield no revenues, but intermediate rates will. That gives us a curve. What's NOT at all trivial of course is the shape or stability of this curve.
Everyone else - I'm not at all sure why tax cuts specifically for the rich should stimulate more effort. A priori, it's quite possible that extra tax-free income for higher earners will allow them to take early retirement sooner. And we had a naturalish experiment with the Lawson tax cuts of 1988. Did these really boost the supply side? It ain't obvious.

[Tim Worstall]

88 Lawson cuts. What about the earlier ones, from 83% to 60? And the unearned income surcharge?

[chris]

Tim - it's very difficult to disentangle the effects of those cuts from contemporaneous policies such as the attack on unions and lifting of exchange controls (which helped rejuvenate the City and so increase top wages). And I'm not sure how relevant it is, because few people advocate a return to 83% taxes, whilst many support (say) a 50% rate.

[angry_economist]

Hey the Laffer Curve - its an unproven theory, right?!

It seems more like wishful thinking sometimes.

[dsquared]

[By "trivial" I was merely referring to the fact that tax rates of zero and 100% will both yield no revenues, but intermediate rates will. That gives us a curve. ]

It absolutely doesn't. It doesn't even give us a basis for assuming the existence of any function mapping tax rates onto revenues. (I reiterate that we are not even able to take the existence of a "tax rate" as given without proving that the tax system we have has a representative marginal rate).

In any case it is not at all trivial to assume that a tax rate of 100% would deliver zero revenue. This has never been tried and we don't know what would happen (most likely, there would be a huge black economy and people would declare something less than their full income for 100% tax. Also, evn if production stopped altogether in the UK, we would still own substantial foreign assets which would continue to make interest and dividend payments for the government to confiscate).

It is trivial to assume that Laffer curves exist "in theory", except that by "in theory", one actually means "in a model with vast numbers of unrealistic simplifying assumptions equivalent to assuming the existence of Laffer curves".

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I don't know people figured out that kind of thing. because it sounded flaw since the beginning and it is like that.