Our Reverence for the Laffer Curve Obscures the Purpose of Taxation
I fully agree that the Laffer curve for recurring revenues collected each year versus the tax rate on a given activity has a maximum at some rate of government expropriation below 100%.
Despite this, I think that the way we discuss the Laffer curve hinders our ability to make sensible economic decisions. The goal of a taxation system for an economic conservative is not to maximize the revenues available to the government. As conservatives, we rarely exclaim how much we enjoy federal spending, so why do we try to espouse the development of a tax system that maximizes the food for Fedzilla?
A better goal would be to seek a tax system that maximizes the aggregate size of the economy, not the federal government. I find it very hard to believe that maximal economic activity occurs at the Laffer maximum for government revenues. In all likelihood, economic activity is maximized at tax rates lower than those that maximize federal revenues. We should be pushing for tax cuts even if they cause drops in revenue and we should be cutting wasteful spending.
I tend to expect that Obama’s planned increases on tax rates will not just result in a drop in federal revenues as our rates are already at or near the Laffer maximum, but will most likely remove incentives for work and investment, causing a larger aggregate drop in economic activity than the loss in federal revenues. This isn’t a mathematical stretch. If federal tax receipts drop despite an increase in the tax rate, then this means that the underlying activity rate dropped to a greater extent than the increase in the tax rate.