Michael Kinsley has a column up at The Politico in which he claims to debunk a series of Reagan myths. The one that annoys me the most is the one that is obviously and clearly incorrect and at the same time gets the least explanation from Kinsley. Here it is:

6. The Reagan tax cuts paid for themselves because of the Laffer Curve. Please.

With every other “myth” Kinsley takes on, he at least feels the need to explain himself. Not so with the Laffer Curve. I suspect the reason Kinsley doesn’t narrate here is because the slightest bit of examination would reveal that the Laffer Curve is AXIOMATICALLY TRUE.

Too much? No. The Laffer Curve is undeniable. It looks like this:

It is very simple. If you tax at either 0% or 100% you will get nothing because either there is no tax OR the effort of making money is not worth it. You can increase taxes to some optimum point where you will continue to get more revenue up to the point where increased taxation becomes counterproductive because it causes people to reduce their effort. We observed this phenomenon actually occurring in the United States when we had ultra-high marginal tax rates. Various types of earners curtailed their effort once they hit the magic level at which they would begin to pay the highest rates. They preferred to put off additional activity until the next year. Famously, the detective novels about Nero Wolfe mentioned his tendency to take a few months off at the end of the year because of the top rates of taxation.

Because people react rationally to high rates of taxation, you will realize less revenue because of a reduction in taxable activity. What exactly is Kinsley saying “Please.” about? Does he deny that moving from a 70% tax on the highest earners to a rate in the 30′s or high 20′s could lead to increased revenue as top producers expand their efforts and investments AND stop working so hard to conceal money they have made and otherwise evade taxation? At a lower rate, it is obvious that non-compliance becomes a risk much less worth taking.

No, Reagan’s embrace of the Laffer Curve was the most rock-solid common sense. And by the way, look at federal revenues after the tax reduction. Real federal revenues increased quite nicely.

The only way the Laffer Curve would be wrong is if one misinterpreted it, as some do. For example, anyone suggesting you would gain more revenue by reducing a 20% tax rate to 10% is probably wrong. But moving out of the prohibitive zone, which is likely anything over 50%, is a shrewd policy decision.

  • Roger McKinney

    Reagan reduced the published tax rate schedule, but are we certain the Reagan actually reduced taxes? Along with the reduction in rates came the closure of many loopholes. Even though the published top rate was 90%, few people paid that rate and if I remember correctly the effective rate (due to loopholes and deductions) was close to 35%.

    • johnbpowers

      That is the whole idea. Get more productive investment, rather than stupid tax shelters. Grows the economy and the tax base.

  • Austin Chrzanowski

    This is a bit simple minded. While, yes, I’ll give the Laffer curve credit in that it, in a general sense, holds true, its practical application is much more complicated. To say that *anything* is “axiomatically true” in the context of economics is just asking for criticism. The real question is where the line is drawn (where the “prohibitive range” begins), and unless I’m misinformed, neither Reagan’s nor George W. Bush’s tax cuts led to any real federal revenue growth.

    • http://hunterbaker.wordpress.com/ Hunter Baker

      Yes, Austin, you are mistaken. The Reagan and Kennedy tax cuts both led to real increases in federal revenue.

      • johnbpowers

        So did George Bush tax cuts. Total Federal Revenue went up by 40%+ during his tenure.

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