Keith Weiner of The Daily Capitalist wrote an interesting article titled “The Laffer Curve And Austrian School Economics“. As I was writing a comment to the post, I decided that it would be too long and should be a short blog post instead. Here are some observations: (Note: Maximizing government revenue is NOT a worthy goal. The correct approach to taxation is to decrease the absolute amount of revenue collected while doing as little harm to the economy as possible. This is of course assuming a minarchist view. The anarcho-capitalist view is obvious.)
- Why would one assume that a given Laffer curve has a unique global maximum? Suppose that there are three global maxima at 10%, 50%, and 90%. Then the tax rate will be chosen on ideological grounds as opposed to using maximization of government revenue as a criterion.
- Mathematical economics has an awful record of making predictions. Mises and Hayek discussed the problem at length decades ago, but this has not stopped the mathematical economists from creating ever more elaborate models that continue to fail to replicate economic reality. Given such a long record of failure in what is, from a fundamental epistemological view, a hopeless task, why would anyone assume that a computed Laffer curve had any relation to reality? The only thing that can be stated with certainty is that government revenue is 0 at a 0% tax rate and that the concept of government revenue at a 100% tax rate is meaningless as the entire society effectively becomes the government. For any rate in between, the models can only produce unreliable numbers.
- The type of taxes levied is not neutral. Consider two extremes. First, all revenue is collected from property taxes. Second, all revenue is collected from tariffs. Such vastly different forms of taxation will necessarily have different Laffer curves (assuming that we could generate such curves)
- Economic time series are not generated by statistically stable processes. Let us assume that the method of taxation is fixed and that the overall tax rates are changed over time such that a rough estimate of a Laffer curve can be computed. Assume that it takes 10 years to accomplish this. Why would one assume that a given tax policy will have the same economic effects, and thus yield the same amount of revenue, despite changing societal conditions? Changes in demographics, technology, resource use, events around the world, etc. would result in different Laffer curves that are constantly changing. Who knows at what rate such changes take place?
In short, the static, technocratic view of the world encapsulated in the overly simplistic Laffer curve cannot be used to guide tax policy except for the obvious effect of the two extremes of 0% and 100% tax rates.