Monday, July 26, 2010

Wolf explores la-la-land

In November 2007 we wrote a brief blog entitled "Laffer in la-la land" which pointed to a New Statesman article exploring the insanity (and political cunning) of an ideology built around the mythical Laffer Curve, which seems to suggest that you can cut taxes to make revenues rise. It has become an article of faith in the Republican Party in the U.S. (and sits alongside another theory that you should cut taxes to "starve the beast" - which is based on the notion that if you cut taxes, revenues will fall, not rise. Few people notice the contradiction between the two.)

Well, Martin Wolf is exploring this same issue in the Financial Times, and he reaches similar conclusions. Worth reading - though beware: it is depressing.


Blogger Physiocrat said...

What is taxed is as important as how much tax is collected.

VAT on restaurant meals in Sweden is 25%, higher than the standard rate of 20%. The effect is to encourage people to eat at home. This is a nasty little job-destroyer, and the some of the jobs destroyed are those which could be done by people with low-skills such as school-leavers and immigrants. Levels of unemployment are exceptionally high in both of these groups. So in this case the Laffer curve is not a myth.

On the other hand, we should never forget that the rental value of land can be taxed up to a rate of 100% with no detrimental effect and no loss of revenue.

2:14 am  

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