The fiscal cliffhanger playing out in Washington is boring. Do I really believe two groups who agree they don’t want choice A are going to fail to come up with choice B? I don’t. The only way choice A happens is if one or both groups secretly want it.
But let’s play along anyway, shall we?
I keep hearing Republicans say that raising taxes on the rich will cause less production in the economy.
But that’s not always the case, is it? According to the Laffer curve, there is an “optimal tax” where government can collect the most money without decreasing production (and therefore tax revenue). It’s right there at the top of the graph.
But the graph clearly means that before getting to the optimum tax rate, government can raise taxes without affecting production. Production only takes a hit on the far side of Arthur Laffer’s curve.
So before we can declare that we will negatively affect production with higher taxes, aren’t we first required to determine where on the Laffer curve society’s producers are right now? Are they climbing the hill, atop it or on the downside?
How do we know?
Disclaimer: Just because there exists an “optimal” tax doesn’t mean I think we should try to tax at that rate. If government can run with lesser taxes (or no income tax) it should, even if the tax rate is not at the top of Laffer’s curve.