The Big Questions | Steve Landsburg | Laffering All The Way at Steven LandsburgThey're talking general income tax rates of course, but this is also one of the problems I have with a lot of specific taxes and sin taxes and "user fees" and "excises" and whatever else they get called. Tobacco taxes have long stopped being about the negative externalities of smoking and have become a way to extract money from people with an unpopular habit. Ditto alcohol taxes, "big box" retailers, importers, employers who hire low-skilled labor, etc. It's no longer "what's appropriate for citizens to contribute?" Now it's "what can the fisc get away with taking?" And as I said in the last post, it's only a matter of time before citizens jump on the "what can I get away with claiming for myself?" train.
The Washington Post’s Ezra Klein had a great idea this week: He asked a bunch of economists and pundits to tell him where the Laffer curve bends. In other words, what is the marginal tax rate above which higher taxes lead to lower revenues? [...]
Greg Mankiw made the excellent point that it matters whether we’re talking about short-run or long-run effects. If I cut your wage by 20%, you probably won’t change your hours very much right away — but eventually you’ll look for a different job with different hours. So the long-run Laffer peak is probably well to the left of the short-run peak.
But Martin Feldstein gave the best answer of all, which was, in essence, that the whole question is stupid. Nobody, not even the most way-out leftist, thinks that the goal of tax policy should be to maximize government revenue. We also care about things like, you know, the quality of life.
Asking “what tax rate maximizes government revenue?” is like asking “what conscription rate maximizes the size of the army?”. Who cares? The right question is: What tax rate, and what conscription rate, will make us happiest in the long run? There is more to life than feeding the government."
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[Edited 17 Aug 2010 — That was Dylan Matthews writing in Ezra Klein's space in the Post, not Klein himself. I mistakenly propogated Landsburg's misattribution, not that that's an excuse. Thank to Jim for pointing that out.]