Brad DeLong highlights an article by Charles Wheelan that contains the following interesting analogy:
The Laffer Curve offers the false promise that we can cut taxes without making any sacrifice on the spending side, and that's simply not true. It's the economic equivalent of arguing that you can lose weight by eating more.
I think that may be an apt comparison, though perhaps for slightly different reason than Dr. Wheelan intends. As someone well-acquainted with the need for a diet, I am often given the advice to not starve myself in an attempt to lose weight, as doing so will cause my internal metabolic regulators to kick into survival mode, thus sustaining those pesky pounds I'm trying to shed. In other words, in some circumstances, I might lose weight by eating more!
The appropriate response would be that this observation may apply in limited circumstances, but it does not apply in most cases, including mine: One more bag of potato chips is not my path to a sleek physique. It is not that theory absolutely rules out losing weight by eating more. It is simply that the situations in which it is so are few, and the advice is irrelevant in most situations.
That, in fact, seems to me what Dr. Wheelan is saying. Here is another passage from his article:
In fairness to Mr. Laffer, there's nothing wrong with this theory. It's almost certainly true at very high rates of taxation. If you consider the extreme, say a 99 percent marginal tax rate, then the government will probably not be collecting a lot of revenue. To begin with, citizens are going to hide as much income as possible. (The more honest ones will turn to barter and avoid the tax system entirely.) And no one is going to rush out and take a second job or build a factory if they get to keep only $1 of every $100 that they earn.
So it's entirely plausible that slashing tax rates from 99 percent to 30 percent could increase government tax revenues. It would deflate the black market and provide a huge new incentive to work and invest.
But:
But here's the problem when we take Laffer's theory and try to apply it in the U.S.: We don't have a 99 percent marginal tax rate. Or 70 percent. Or even 50 percent. We start with low marginal tax rates relative to the rest of the developed world. (Yes, I understand that it may not feel that way after the check you wrote last month.)
So cutting the tax rate from 36 percent to 33 percent is not going to give you the same kind of economic jolt as slashing a tax rate from 90 percent to 50 percent. There's no huge black market to be shut down, no big supply of skilled workers to be lured back into the labor market, and so on.
I often tell students that a great many -- maybe most -- disagreements among economists are not about theory, but about how to quantify our economic models. And the answer to that can only be adjudicated by evidence that rarely delivers a clean verdict.
I am very definitely with those who argue that, as a general proposition applied to U.S. policy today, you should not bet on tax cuts financing themselves. The burden of proof is, in my opinion, on those who would argue otherwise. But I'm always willing to listen, and entertain the not inconsiderable possibility that I'm wrong.