the limit to Obamanomics: the Laffer Curve and Hauser's

The Laffer Curve made (relatively) famous what is well-known in economics-- that marginal tax rates are positively related to tax revenues up to some point. After that point, marginal tax rates are, ironically, inversely related. (The following graph implies that the peak will be reached at 50%, but that is unlikely-- and the theory does not indicate what the level would be...only that it exists, by definition.)

One can argue against higher marginal tax rates for some income classes on the basis of equity or fairness. But this is a practical consideration-- even for those who want higher marginal tax rates on the wealthy: if such rates lead to less revenue, does the lefty want higher rates or higher revenue?

An important recent example is the 1981 cut in the top marginal tax rate from 70% to 28%. (Not the average rate, the marginal rate-- the rate on the last dollar earned, or the tax rate applied only to the income earned in a given "tax bracket".) Reagan, a Republican Senate, and an overwhelmingly Democratic House passed the tax decrease. It resulted in more money from the wealthy-- despite lower rates.

Here's David Ranson in the WSJ on an empirical update to the Laffer Curve: what he proposes to call "Hauser's Law". The idea is that federal government revenue is about 19.5% of GDP no matter what the marginal tax rates are. Again, this is something relatively well-known among economists. (Ranson is inexplicably pessimistic about acceptance of both of these-- especially the Laffer Curve.) But both may see increasing light with such educational efforts and with an Obama administraton.