Laffer Curve

 

Walk On The Wild Side

Jackie is just speeding away
Thought she was James Dean for a day
Then I guess she had to crash
Valium would've helped that bash
She said, "Hey, babe, take a walk on the wild side"
I said, "Hey, honey, take a walk on the wild side"

Just don’t take a walk on the Laffer, aka Supply-side.

Today’s Explain It Daily email was on the Laffer Curve, also known as supply-side economics.  It tries to uses fancy language but let’s call a spade a spade.  The Laffer curve, the basis for Reaganomics, Thatcherism, the Tea Party, tax cuts and what almost bankrupt the state of Kansas under Governor Sam Brownback, is a fraud.  It is based on the proposition that a curve can be constructed of tax revenue based on total income.  The problem is that it tries to explain the curve as a parabola instead of as a hyperbola. 

When the revenue approaches zero, the curve requires that at zero taxes there is zero revenue.  This requires two roots at zero income but mathematically tax revenue using an inverted parabola must become imaginary for incomes less than the roots of that inverted parabola, i.e. negative incomes.  A more reasonable interpretation that never goes imaginary and where incomes do NOT become negative is that tax revenues are a hyperbola, not a parabola, In a hyperbola, tax revenue approaches, but does not equal, zero at two points.  In fact,  the distribution of tax revenue seems to follow a sech squared, logistics distribution. This does a better job of explaining the observations of revenue.  In fact then the optimal tax rate would be 1/6 of income, or 16.67%.  The maximum normal rates then would be 8.33% for the lowest rate and 33.33% for the highest rate.  These are the effective rates.  

In addition to confusing parabolas with hyperbolas, the proponents  of the Laffer supply side curve also confuse marginal/first derivative rates with effective, no derivative, actual tax rates.  The highest effective tax rate would be 33.33%.  The marginal rate at this rate would be 100% but that 100% is the percentage of the effective rate, which at its maximum should be 100%.   So the Laffer curve is a mathematical mistake , but that mistake is no Laffing matter.