According to a 2012 IGM panel (cf. reference below), most experts believe that a federal income tax cut would lead to a higher GDP in five years, ceteris paribus. Is this effect purely Keynesian, and based on a presumption that the U.S. was still recovering from the recession and that greater fiscal stimulus was called for, or does it truly reflect a belief among the majority of mainstream economists that the U.S. federal tax regime is sitting on the wrong side of the Laffer curve as the title indicates?

Source: http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_2irlrss5UC27YXi

  • $\begingroup$ If your aim is to maximise a function with a Laffer curve's shape against the tax rate, be it tax revenue or income before or after tax, both "sides" of the optimum are "wrong" in the sense they are of lower utility. $\endgroup$ – J.G. Nov 7 '16 at 18:35

Question B in the link answers your question: most participants believe that taxable income would not rise enough to offset the tax cut, indicating that they do not believe we are on the wrong side of the Laffer Curve.

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To be the wrong side of the Laffer curve would require there to be another lower tax rate which produced the same or greater tax revenues

That is not what was being said:

  • Question A addressed the sign of the impact on GDP, not on tax revenues;
  • Question B addressed the sign of the impact on tax revenues; nobody agreed and the large majority disagreed

so the consensus was that lower tax rates would lead to slightly higher GDP and slightly lower tax revenues

This is what usually happens when you are the correct side of the Laffer curve, and allows political debate about issues such as government deficits, public and private expenditure, and stimulating growth and inflation. Being the wrong side of the Laffer curve would instead lead to Pareto optimality issues, but that is not the case here

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  • $\begingroup$ Re:"This is what usually happens when you are the correct side of the Laffer curve,"...This makes the HUGE assumption that political bias does not create irrational conclusions by large numbers of people; which is not even remotely true since Jan 2017. $\endgroup$ – Dunk Jul 3 '18 at 16:10
  • $\begingroup$ @Dunk - There are people who think higher tax rates will lead to higher GDP and other people who think that reducing tax rates will always lead to higher tax revenues. My view is that both thoughts are usually wrong and often biased, though may sometimes be correct; I try not to ascribe rationality or lack of it $\endgroup$ – Henry Jul 3 '18 at 16:15
  • $\begingroup$ At the risk of sounding nit-picky: Any reason you highlight Pareto Optimality issues for the "wrong" side? I can totally get behind more general problems of "macroeconomic inefficiencies," or inefficient taxation, etc., but Pareto optimality itself isn't quite the issue here, is it? We could pretty easily come up with utility functions where inefficient taxation could still be Pareto efficient, especially if we consider the more practical question of how a society might spend that additional revenue. $\endgroup$ – AndrewC Jul 3 '18 at 20:53
  • $\begingroup$ @AndrewC You might be correct if my utility increases when your income decreases. But if the economy is the wrong side of the Laffer curve, then a small reduction in the tax rate should increase both post-tax private incomes incomes and tax receipts making everybody better off $\endgroup$ – Henry Jul 3 '18 at 22:54
  • $\begingroup$ I still think you're applying additional modeling assumptions beyond what the question is asking and what's necessary. First, the Laffer Curve technically is an "observation" regarding tax revenue and tax rates- it's really agnostic to post-tax income levels (while you're probably correct that they'd increase under Laffer's model, that's imposing additional structure the question doesn't include). Second, invoking Pareto efficiency without any restrictions on the classes of permissible utility functions is usually not advisable. For example, if an agent cares more for "fairness," or equality> $\endgroup$ – AndrewC Jul 5 '18 at 13:07

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