The New Statesman includes a brilliant article by Johann Hari called Cooking the Books. What it amounts to is a complete destruction of the Laffer curve principle, so beloved by the Right and invented by, as Hari says :
a group of men who were untrained in economics - and, as it happens, borderline-insane.
As he notes, the universally discredited Dick Cheney was one of those involved. He saw it:
presented in a simple, easily digestible form the messianic power of tax cuts.
There was just one problem. It was, of course, a complete work of fiction. Read the article. It's well worth it.
PS Thanks to TJN for the title.
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How can the laffer curve be a complete work of fiction? It is totally logical and realistic:
– as you increase the rate of taxation, you will increase tax revenue.
– after a certain point, you will decease taxation revenue raised as you incease the rate of tax, as tax payers can afford to pay more!
What alternative model are you proposing for tax revenue?
Can you disagree with the economic reality of Ireland and other European countries reducing tax rates and increasing revenue? What about the UK examples from the past 30 years?
Economic models are realistic if they either describe or predict behaviour accurately.
There is no credible serious evidence (and I’ve looked for it) that suggests that the Laffer curve has ever done either.
Whenever policy has been adopted along the line of its prediction i.e. taxes have been cut with the aim of stimulating the economy with the beleif that tax yield will rise the reverse has happened.
So, if Laffer is true the only obvious conclusion is that most countries are on the upward sloping part of the curve and the downturn starts at very high rates. In fact, the only study I ever found that did suggest Laffer might be right considered only one country was, possible, on the dowmward slope of the curve – and that was Sweden in the 1990s, and the evdience was not certain.
For everyone else if Laffer was right then taxes could be raised with benefit.
The problem with Laffer is that those who believe it also believe as an article of faith that the maximum efficient tax rate has been reached – this is why they are in la-la land. Anyone who persistently believes in something in the absence of evidence has to either admit that the bleief is a faith, but not a fact or they’re wrong. In economics there are enough facts to eman that by and large we can get by without too much faith – so the predictions of supply side economics are wrong.