11 February 2008

Good Video on the Laffer Curve

Cafe Hayek has a link to this nice video explanation of the Laffer Curve by Cato Institute Fellow Dan Mitchell. This is a great video because it explains the Laffer Curve concept very clearly, but it avoids the woo woo enthusiasm of some Laffer acolytes.

He states very clearly, as any good economist (as opposed to bad economists--who usually aren't economists at all, just political enthusiasts who think that an antipathy to government spending is all one needs to know about economics) that not all tax cuts pay for themselves. He even explicitly points out that tax increases will raise more revenue, if the tax rate is on the upward slope of the Laffer Curve. These are points that any competent graph reader would understand from looking at the Curve, but most woo woo types miss, or if you do point it out they stick their fingers in their ears and start singing, "la la la la, I can't heeeeaaaar you."

He also points out that only tax cuts that actually encourage productive behavior are relevant. The child tax credits I get for my three darling daughters won't create more investment, won't help the economy grow, and so reducing my taxes that way won't result in increased tax revenues.

The only point I'd argue with is his quick sidebar that "it goes without saying, of course, that a simple and fair flat tax is the best way to finance [government] expenses. It doesn't go without saying. Personally, I don't know where I stand on the flat tax idea--it's just not so simple that it goes without saying. Overall, though, for those confused by talk about the Laffer Curve--and that includes conservatives who worship the concept--this is an excellent short intro.


James K said...

I can't really watch the viedo until I get my next month's broadband allowance, but your summary sounds like a cogent description of the Laffer Curve (though I'd expect good quality from someone recommended by Cafe Hayek).

The flat tax point does seem a little glib, but there are good reasons to support flat taxes. The shape of the Laffer curve can be changed by policy settings, the easier it is to evade or avoid taxes and the higher the cost of preparing a tax return, the lower the Laffer-peak will be. Because of this, flat taxes tend to allow for higher revenue collection.

But you're right, its not so simple that it requires no explanation.

James K said...

OK, I watched the video and its a good solid description of the Laffer Curve. It has this economist's seal of approval.