Incentives matter

I recommend reading Alan Reynolds’ piece in Wall Street Journal Opinion today, Why 70% Tax Rates Won’t Work.

The table below from the article says it all.

With some wide range of experiences on where the tax rates have been set, there really wasn’t much difference in the tax revenues generated as a percent of GDP.  The high-end outlier was, counter-intuitive for most, on the lower end of the tax rate experience.

Alan Reynolds sums it up:

Still, pundits cling to the myth that lower tax rates mean lower revenues. “You do probably get a modest boost to GDP from tax cuts,” concedes the Atlantic’s Megan McCardle. “But you also get falling tax revenue. It can’t be said too often—and there you are, I’ve said it again.”

Yet the chart nearby clearly shows that reductions in U.S. marginal tax rates did not cause “falling tax revenue.” It is not necessary to argue that tax rate reduction paid for itself by increasing economic growth. Lowering top marginal tax rates in stages from 91% to 28% paid for itself regardless of what happened to GDP.

Do pundits ignore this evidence?  Do they think there’s something wrong with it?

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3 thoughts on “Incentives matter

  1. The Laffer curve is very real. You can argue shape differences, and where we might be on it. But I don’t think a sane person can deny it exists.

  2. Pingback: The Laffer Curve Is Real … | The Pretense of Knowledge

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