The Laffer Curve and American Taxes

I don’t think highly of the Laffer Curve, as it has been used by Republicans to justify their belief that one should always lower taxes.  I plan to write more about this later, but my basic feeling is that there is broad truth to the idea that there is a level where taxes are so high that they restrict growth.  The problem is that Republicans think the Laffer Curve looks like the curve y=1/x.

We are on the left side, which means more tax means more revenue.

Fortunately for me, Matthias Trabandt and and Harald Uhlig, have just published a paper through the National Bureau of Economic Research.  (H/T to both Matt Yglesias and Tyler Cowen.) That version is gated, but Professor Trabandt has an ungated, older .pdf on his site.  “For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation,” they find.  Cowen summarizes this by remarking, “I guess some of those countries should cut their tax rates.”  That’s a bit disingenuous, because the authors also say that America could raise its taxes while raising revenue.  In other words, Cowen is a very smart guy, but he can be a bit biased.