Friday, December 7, 2012

Speaking about the Laffer (think Laugher) Curve

So, the Laugher curve is one of the most cited and least understood principles of economics. The Laugher curve is the theory that there is a hypothetical point of where the optimal tax rate is where revenue is at its maximum and that if you increase taxes beyond that point you will have a net loss in economic output. This is heavily cited by conservatives, and is a hypothesis. It is not a theory. The reason I say that is because I can't find anyone who has graphed real-world changes in tax-rates and has come out with the Laugher curve. However, there is a graph on wikipedia that is from which cites the National Bureau of Economic Research as the institute who does the research that tried to prove the Laugher curve.

If you just want the graph, here it is on Wikipedia.

Oops, not information found to prove, but a good amount to disprove from a valiant effort.

If the laugher curver was real, the chart above would be a quadratic equation, which is not true, it is a flat line with a statistical outlier of Ireland, which because it is so unusual is probably due to other factors.

So, here you are. Real absolute proof that despite having wildly varied differences in their tax changes over 30 years there was no considerable difference in their economic growth. Spain and Switzerland kept about the same tax rates and they had very different economic growth rates. The United States had a substantial difference in their top marginal tax rate, yet had about the same level of growth as Germany that barely changed its top rate.

Of course, the Neocons will ignore this survey as propaganda, without presenting any evidence of their own demonstrating their Laugher curve as reality.

Because when you get down to it, there is no evidence for Reaganomics ever doing anything good for the world, as we saw with President Herbert Hoover, who was an absolutely perfect president when it comes to his religious observance of laissez-faire, Reaganomics, or Austerity, whatever you want to call it. With the longest economic downturn in American history lasting four years with absolutely no movement from the free market to move it up he is rightfully ranked as one of our worst presidents.

Of course, the Neocons will ignore this because it conflicts with their view of how the world should be.

This leads to my number one wish for economists. GROW. UP. Economics should not be as controversial as it is today. In every other branch of science if you make a claim you need to present some level of evidence that your claim is real. Economics is a science. If a pseudo-biologist walked into a conference and denied evolution, the first thing the biologists would ask him is for some proof for his claim, because he made the claim he has the burden of proof. He would of course be unable to present any evidence to contradict the DNA, fossil record, geological record, and short-term mutations in bacterial genomes that have all been observed that prove evolution beyond a reasonable doubt and he would be embarrassed and leave the conference a fool never to be invited to another conference again.

In economics, people routinely deny things that have been observed, e.g. that cutting jobs raises unemployment, unemployment hurts the economy, the government can create jobs, there are two sides to the economics equation supply and demand, and they never raise their burden of proof expecting themselves to be believed on faith alone. This is immature, and no one is special enough for such treatment.

Denying facts does not make you cool. Denying facts does not make you smart, it makes you look like an idiot. Adults don't say things without backing up their claims. Adults don't expect people to believe them on faith alone. Children expect people to believe their claims without backing it up, which is exactly what people like Laffer behaves like, and every Neo-conservative economist I have ever read expects to be believed not on their proof but because they sound good.

Don't believe anyone on faith alone. Trust statistics which are measured from reality and use the statistics to formulate your viewpoint, and if the statistics don't fit your preconceived notion do not twist the facts, do not deny the facts, and do not claim the facts which are empirically measured are wrong just because they don't fit your previous beliefs. Real economists use real facts to back up their claims, real historical events, and look for other possible explanations for why things may happen, and before they even publish their paper on their claim will try to refute it using hypothesis testing. Before publishing that the Laffer curve is real Laffer should have included another hypothesis, which is that he was wrong and try to disprove it. Every economist needs to do this, otherwise we get bogus pseudo-economics that don't fit what has been empirically observed, like the laffer curve.

I am right here going to say I read only two economists, Robert Reich, and Paul Krugman. I don't agree with them on everything (and I have a previous post about how I disagreed with their original analysis on Europe's austerity crisis) but I read everything they post. I don't do this because I already agree with most of their viewpoints, because Robert Reich is a Keynesian economist, Democrat, and former secretary, and Paul Krugman is another Keynesian Democrat economist, and certainly not because he is a Nobel Laureate, but because of how they formulate their viewpoints. They use real facts and source where they get it from. This is the only reason I trust them.

"Conservative" economists need to stop calling themselves conservative and call them what they are, Mercantilist. They aren't interested in increasing economic growth, they are only interested in improving their own wealth. They are only interested in reducing costs to their corporations, padding their pockets, and they don't care about the rest of us. We are collateral damage and they don't care.

Please economists, if you are going to claim a new theory, provide data and evidence to back up your plan before putting it into force. Don't expect to be treated differently because people already agree with you.

The same message for political theorists.


  1. 1. The Laffer Curve plots the tax rate against tax revenue. It contains no information whatsoever about economic growth. It follows that no chart showing a relationship between taxes and economic growth can verify or falsify Laffer's hypothesis.

    2. The supposed refutation comes from data about the change in the top marginal tax rate. Three problems:

    a) The top marginal tax rate is not the actual tax rate. That is, if I make $200k per year and pay a 20% marginal tax on the first $100k and a 40% marginal tax on the second $100k, the actual amount that I pay in taxes is only 30% of my income, not 40%. That means that the incentive structure captured by the Laffer Curve, the total incentive to work, is not accurately translated between these two spaces.

    b) The Laffer Curve shows a response to the absolute tax rate, not the change in the tax rate. Even if this data were plotted against government revenues instead of against economic growth, it would be insufficient to disprove the Laffer Curve because the curve could just be flat over the range of absolute tax rates described. Laffer's theory is not wedded to a symmetric, quadratic curve, but merely to the existence of some curve passing through the points (0%, 0 revenue), (100%, 0 revenue) and having some maximum value within that range.

    c) Marginal tax rates don't capture other changes, for example in tax exemptions, capital gains taxes, depreciation allowances, or transfers of wealth. So the x-axis data in your chart doesn't capture what the Laffer curve actually addresses, it is non-responsive to the Laffer Curve hypothesis.

    So long story short, no credible economist should ever claim that the Laffer Curve directly relates to economic growth. Growth theory is a set of entirely separate, dynamic models, whereas the Laffer Curve is a static model saying nothing about inter-temporal economic changes.

  2. Thanks. I clearly still have a lot to learn as a college sophomore (I am clearly just beginning my exploration in economics), I misunderstood the application of the Laffer curve. Double checking on the wikipedia article, it says that it predits there is "at least one point" where revenue reaches it maximum, and past that point revenue decreases. I confused that with the constant Conservative drums saying the way to stimulate the economy is to create tax cuts. The comparison would be more appropriate to disprove that myth that decresing taxes will stimulate economic growth, but not the Laffer Curve. I just want to say there were other factors at play during Reagan's term that caused economic growth to grow, particularly when OPEC stopped the inflation of the price of gas like it was doing in the 1970s.