Why the Laffer Curve is garbage
Legislators and the voting public have consistently been persuaded by a false premise that if we reduce our tax rates on the wealthy and large corporations, our economy will improve. The rationale goes: By decreasing taxes on these two groups, our gross domestic product will increase due to investment in research and development, bolstered business infrastructure, new job opportunities, better pay and improved business climate which welcomes capital.
This flawed ideology, touted by Arthur Laffer in his book “The Laffer Curve,” rests on theories that don’t stand up to any level of scrutiny.
The Laffer Curve simply wears a thin veneer of economic theory. Laffer argues that if we implement a zero percent tax rate, we will raise no revenue. Alternatively, if we tax at 100 percent, we won’t generate any revenue either. There is supposedly some sweet spot, between zero percent and 100 percent for optimal tax receipts.
This model rests on the rational actor model, that people exclusively act in their economic interests at all times and everyone has equal access to the same information. Not only have numerous studies and authors debunked these economic underpinnings, but the model itself is an unreliable predictor of economic outcomes.
There has never been a conclusive study that demonstrates a connection between lowered tax rates on the wealthy and GDP growth or increased tax receipts. During the 1940s and the 1970s, the top marginal tax rate was anywhere between 70 percent and 94 percent. In this same period, we experienced the largest GDP growth our country has ever seen, and we were able to invest in the future of our children, economy and environment.
After the 1980s, when the top marginal tax rate began its steady decline, we haven’t seen nearly the GDP gains that we saw during our post-World War II boom. Currently, our top marginal tax rate rests at 39.6 percent.
To understand why The Laffer Curve is garbage economics, we need to look past first order consequences. Rather, we need to try to determine the second and third level effects of the given cause.
Let’s say the top tax rate is a punishing 99 percent of income over $5 million, but all other aspects of the tax code are intact. These income earners are unlikely to take a dollar over that $5 million, but the excess money doesn’t simply evaporate – it came to them through profits the business.
There are two places where this money could go: back into the business or the hands of employees. Shareholders benefit either way, through increased capital reserve or infrastructure investment or happier, better-paid labor. That is one very important purpose of a strong progressive tax structure – it incentivizes those on the top to take less for themselves and invest in their business.
Adjusting income tax rates does not completely remediate the problem. Capital earners pay nearly half of what top income earners pay. It is these capital earners who most distort our economic and political systems. As a result of this tax schema, the share of the economic pie the wealthy command is metastasizing. We need to revisit how we tax capital, too.
Ultimately, the longer term issue is this: The wealthy can hire lobbyists, funnel money to fund supply-side doctrine in our higher education system, and claim complete control of the political system by expending limitless dark money. Jane Mayer’s “Dark Money” is a scary look into how multi-billionaire mega-donors have been perverting the system for decades.
As a state legislator, I receive a weekly supply of laissez-faire doctrine from the Connecticut Business & Industry Association and Yankee Institute. Yet, it is on me to educate myself on economic theory.
With our current trajectory, I worry that our economic and democratic systems are going to break. It may take deep societal fissures before we can harness the will to appropriately tax our wealthy again. There is no reason to believe that we can’t have bread lines again in this country, nor is it unreasonable to believe that if enough people feel that government isn’t working for them, social turbulence will boil over into increased crime or over-reliance on strongmen.
It is important for people to understand exactly why the supply-side doctrine of “give money to rich people” is simply a deception. While the vast majority of us are working longer hours for less pay, burdened by higher tax rates, with the vanishing hope of retiring in comfort, Apple is paying a corporate tax rate of zero percent, CEOs are paying a lower effective tax rate than their secretaries, and conglomerates are amassing at ever-faster rates. When we force the next generation to take on a lifetime’s worth of debt simply to be able to enter the workforce, we have essentially resurrected indentured servitude.
We are exactly where our grandparents were before the Great Depression. While people can sit back and claim to be apolitical, apoliticism is still a form of politicism. We need to act now and institute a tax structure that lifts up our lower and middle class, and grows our economic pie so it can be distributed equitably.
State Rep. Josh Elliott, D-Hamden, represents District 88 in the Connecticut House of Representatives.
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