I am, of course, entirely on board with
slapping down educating Republicans who maintain, against all evidence, that we can cut taxes and dramatically increase revenues. Still, I have been puzzled by the number of liberal bloggers who have been taken with Dylan Matthews' compendium of economists and politicians commenting on where the Laffer Curve might maximize.
I mean, it's an interesting side question, but it doesn't really tell us much about policy, unless you actually think that the object of policy is to maximize the share of income the government takes. Knowing that the curve maximizes tax revenue around marginal rates of 60% or 70% or 80% doesn't tell you that we maximize public welfare at those rates. The negative effects of high taxes will kick in long before we've extracted that very last feasible dollar.
And no, I don't just mean the negative effects for those who pay the taxes. All taxes involve what is known as deadweight loss. That's money that is lost by the taxed, but doesn't go to the government. Here's what it looks like in a very simple graphic model:
In a tax free labor market, Q number of employees are employed at wage W. But then we introduce a tax, which for simplicity's sake we'll say is borne equally by employer and employee. Suddenly, the employee feels that he is making a lower wage, while the employer feels like he is paying a higher one; the result is that both supply and demand of labor drop to a new quantity, QTax. The loss of the utility/output/cash being produced from those voluntary transactions is not gained by the government; it just disappears.