Laffer Curve

Drum posted this a little while back and I kept meaning to get around to it.  Anyway, the whole basis of Supply Side economics is based on the laffer curve– the principle that at some point marginal tax rates are so high that it actually discourages work and thus lowering rates will encourage more work and thus actually create more tax revenue as well.  This is the intellectual foundation for most Republican tax policy.  At some level, it clearly makes sense.  Thing is, that level is not the top rate in the mid-to-upper 30’s we’re currently dealing with.

Actually, Krugman is being conservative here. If you assume a broad base and no deductions, Diamond and Saez peg the revenue maximizing rate for top earners at 76 percent. That’s for federal income tax only. (See page 173 here.)

You can decide for yourself if you think top marginal rates should be that high. After all, revenue maximization isn’t our only social goal. Roughly speaking, though, this is a calculation of the peak of the famous Laffer Curve. (For top earners, anyway.) Above 76 percent, you really can generate higher revenues by lowering tax rates. Below that, higher rates generate higher revenue, just like you’d think.

Republicans were right to advocate for lower rates when are top rates where way up there.  But that world is long gone.  Cutting top tax rates at the levels we’re talking about in contemporary America will do many things.  What it won’t do is increase government revenue.


Photo of the day

Daniel Day-Lewis makes a pretty good Abe Lincoln (thanks JDW):

Professor Gingrich

Well, now that our fun with Herman Cain seems to be running out, it’s time for fun with Newt.  Here’s hoping it lasts a lot longer.  Anyway, the Post recently ran their 5 myths series on him and I was intrigued by the first one:

1.Gingrich is an academic.

He earned a PhD in history and taught college before winning a seat in Congress. He has often spoken of himself as a historian. In 1995, he told CNN’s Bob Franken: “I am the most seriously professorial politician since Woodrow Wilson.”

But whereas Wilson spent years publishing scholarly works, Gingrich was more like the professor who wins popularity awards from undergraduates but doesn’t get tenure because he doesn’t publish anything significant. He even told a college newspaper in 1977 that “I made the decision two or three years ago that I’d rather run for Congress than publish the papers or academic books necessary to get promoted.”

Since then, he has given countless lectures and written more than 20 books, but has never produced truly serious scholarship. A typical Gingrich work is full of aphorisms and historical references — and devoid of the hallmarks of academic research: rigor, nuance and consideration of alternative views. Conservative political scientist James Q. Wilson once assessed materials for a televised history course that Gingrich was teaching as a “mishmash of undefined terms. . . misleading claims . . . and unclear distinctions.”

Now, here’s the thing, just because you are not actively publishing scholarly work does not mean you are not an academic.  If you are a college professor, you are an academic.  Period.  Many fine institutions expect their faculty to be teachers first, with very little expectations for original research.  That doesn’t mean these people are not academic experts in their field.  That said, I had always assumed Gingrich was at least a serious historical scholar before leaving academia.  Apparently not.

Of course, that’s still plenty good enough to fool journalists who seem to be impressed simply by the frequency or outlandishness of ideas, as in this absurdly fawning Post piece.  Headline: “Newt Gingrich as president could turn the White House into an ideas factory.”  If anybody else came up with as many absurd ideas as Newt, they’d just be laughed at, but those former college professor credentials go along way.

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