Tuesday, March 2, 2010

Laffer Curve Redux

Some of you may be old enough to remember the Laffer Curve. The story that circulated at the time it was popularized was that it was an illustration, allegedly drawn on a napkin. (Here's more information on the Laffer Curve courtesy of Wikipedia.) It purported to show how a tax cut could result in increased revenues. It really was nothing more than a marginal productivity curve applied to taxes - saying that at some rate, higher tax rates produce less revenue. It was just applied in reverse.

Much of this has to do with the incentive effects of marginal tax rates: higher marginal taxes are a disincentive to work and produce; lower rates are an incentive to work and produce. It was quite controversial at the time and is still debated by some.

I take you on this nostalgia trip to bring your attention to this post on Division of Labor. Anecdotes are not data, but this still makes an intriguing example of how taxes influence behavior by changing incentives through prices. Please share your thoughts.

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