Wednesday, August 11, 2010

Where Does the Laffer Curve Bend?

An interesting inquiry among economists by Dylan Matthews, for the Washington Post. Left leaning economists tend to answer with higher estimates of the revenue maximizing tax rate than conservatives do.

Greg Mankiw rightly points to the difference between the short-run tax rate elasticity of government revenues and the long-run value. The latter should be smaller since demand and supply elasticities are higher in the long-run

But to me the best answer is Martin Feldstein’s:

"Why look for the rate that maximizes revenue? As the tax rate rises, the "deadweight loss" (real loss to the economy) rises, so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue.... I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living."

Have a look at the complete panel answers here .

Hat tip: Tyler Cowen.

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