Jun 22
Why don't people talk about a 3D Laffer curve?
When it comes to the Laffer curve, there is a lot of noise in the debate. The idea that at some point between 0% and 100%, that the government can immediately raise more money by cutting taxes is true, but it is also trivial. When we ask ourselves where we are on the Laffer curve, we shouldn't think of the curve as merely two dimensional, the third dimension of time should be included.What many supply-siders who talk about the Laffer curve assume is that a cut in taxes isn't just about incentivizing people to work more during one tax year, but it is also going to result in increased trend economic growth. This is probably true when the tax cut is coincident with increased private sector control of the economy, but may not be true for tax cuts that just increase the deficit. Increased economic growth leads to higher future revenue. From this we can conclude that in many more country's tax rates are on the right side of the Laffer curve, but only with a time horizon of 10, 20 or even 50 years. From this perspective, it can be said that the US implemented policies that other European countries who are on the right side of the Laffer curve did not, and is able to raise just as much money with lower taxes.
