The Laffer Curve is named after Arthur Laffer, who worked for the Reagan administration. I am not a huge fan of Art Laffer, especially after his embarrassing (afterwards) exchange with Peter Schiff. Laffer was calling Schiff crazy for saying that there was a bubble that would burst. While Laffer was certainly proven wrong on that one, he is not a dumb guy. He understands some economics and the graph named after him is an interesting topic.
So should libertarians/ followers of Austrian economics pay any attention to the Laffer Curve? I think it is useful in some ways, but not as the typical Republican uses it.
The Laffer Curve basically says that, at some point, if you raise taxes, it will actually lead to less tax collections by the government. The Laffer Curve does not claim to know where this point lies. It could be a 20% marginal tax rate or a 70% marginal tax rate or really almost anything else. Just by common sense, we can realize that it probably would not be a really low tax rate like 1% or a really high tax rate like 99%.
It is kind of ironic that Art Laffer is most famous for the Laffer Curve. It really isn’t any great revelation. Unless you are a dedicated Democrat/ socialist who isn’t willing to think with an open mind for one minute, then the Laffer Curve is mostly common sense. If you have a tax rate of 0%, then the government will not collect any money from that tax. If you have a tax rate of 100%, then the government will not collect much money from that tax either. There might be a moron or two who will actually work just so that every single dollar made can be handed over to the government, but it wouldn’t be much. Most people are not going to work for free, especially if the government is the charity involved. Therefore, at a 100% tax rate, the government will barely collect anything at all. It will be almost zero.
Somewhere between 0% and 100% there will be a tax rate where tax collections will be maximized. If the rate goes higher than that point, then it will actually lead to less in the way of government tax collections even with the higher rate. This is because of human action. There is less incentive to work and the higher tax rates cause a slower economy and less growth.
Unfortunately, many Republicans have used the Laffer Curve to justify higher spending. They actually want to maximize the amount collected by government. They say that we need to grow our way out of debt and they imply that we can simply cut taxes and resolve the debt issues without addressing spending.
As a libertarian, I don’t want the government to maximize tax collections. I want less taxes and less spending. The less of both, the better. I would ultimately like to see zero taxes, or at least zero involuntary taxes.
So while many of the Democratic politicians are stupid (or they think their constituents are stupid) for thinking that raising taxes will solve a debt and spending problem, the Republican politicians are just as stupid for implying that we can simply lower taxes without addressing spending.
Income tax rates were lowered during the Reagan administration. There were also other taxes that were raised. But after the recession ended, government tax collections went up quite a bit. The problem is that government spending went up even more and the debt grew during the 1980’s. Lowering the highest tax rate from 70% to 28% did not lower the amount collected by government. This was the correct thing to do. In fact, it should have gone much further. But there was a major spending problem and there still is, of course.
In conclusion, I think the Laffer Curve is useful to libertarians in pointing out human action. It is a useful argument against Democrats who always seem to want to raise taxes. However, the Laffer Curve should never be used to deflect a spending problem. Spending is ultimately more important that the tax rates. Almost everything that is spent by the government is first obtained by taxes, inflation, or more debt. I want less spending, followed by lower taxes.