New Times,
New Thinking.

22 March 2013

The Laffer curve shows the real victory of the left

Conservatives arguing for revenue maximisation.

By Alex Hern

It always interests me that the Laffer Curve is seen as a right-wing idea. The economic theory – famously scribbled on the back of a napkin – holds that there are times when cutting tax rates can increase revenue. It is demonstrated from first principles: at 0 per cent, clearly no revenue is brought in; at 100 per cent, no revenue is brought in because no-one has any motivation to work; and, since revenue is brought in at rates in between those two, there must be a peak.

Now, there are problems even with that – the fact that there might be multiple peaks, that people frequently do work for no pay, and that the theory provides no hints as to working out what side of the peak you might be on – but the thing is, every time the Laffer curve is wheeled out, I can’t help but feel the left is winning.

Take this example, from Ryan Bourne in these pages earlier this week:

Cut Capital Gains Tax immediately, as it is above the revenue maximising rate.

The “revenue maximising rate” is the peak of the Laffer Curve. Whether CGT is to the right of that peak is a question of fact, and something which both left and right could agree on if the right evidence were presented. And if it were the case that CGT is above the revenue maximising rate, most people would agree that it ought to be cut – although some on the left might argue that the value of redistribution in cutting equality is high enough to take a slight revenue hit.

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But the corollary of that argument, presumably, is that if it turned out that CGT were below the revenue maximisation rate, the CPS would be in favour of raising it.

Fundamentally, the idea that tax rates should be set to maximise government revenue is an idea that the right ought to be naturally afraid of. The fact that instead, it’s become the cornerstone of their tax-cutting arguments suggests that in one corner at least, “big government” arguments have conclusively won the day.

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