Saturday, December 2, 2017

Econ202: on the Laffer Curve and "Supply-Side" economics

Such things are difficult to measure in Macro, but the evidence seems to indicate that the Reagan tax cuts did increase tax revenues. Then again, he was cutting the top marginal tax rate (MTR) from 70% to 28%. (See also: JFK cutting the top MTR from 91% to 70%. For probably counterexamples, see the various MTR changes since then by every president since Reagan.)

The stats/graph/concept here is usually described as "the Laffer Curve"-- the necessarily upside-down-U-shaped relation between tax revenues and MTR's. It's impossible in Macro to discern the exact location of the top of the curve. But clearly, there are tax rate levels where lower MTR's get you higher revenues.

The relevant econ principles here are called "supply-side economics"-- the idea that lower MTR's necessarily increase incentives on the "supply-side" (labor, capital, entrepreneurial activity, etc.)

The extent to which incentives translate into behavior is, as always, an important practical/statistical consideration. But the econ/logic behind the Laffer Curve and the point about incentives are as solid and obvious as gravity.


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