Here’s a letter to the Chronicle of Higher Education:
Todd Gitlin classifies the “Laffer curve” as a “crackpot idea,” thereby implying that only crackpots deny that raising tax rates always increases – or at least never decreases – government’s tax receipts (“Expertise, Dogma, and the Journalism of Crackpot Ideas ,” July 31).
Contrary to Mr. Gitlin’s apparent misconception, the Laffer curve does not demonstrate that all cuts in tax rates increase tax receipts. It demonstrates, rather, that tax rates can be so high that the resulting tax receipts are lower than they’d be if tax rates were lower. The Laffer curve, to be a bit technical, is simply an application of what economists call “elasticity” – a concept denied only by genuine crackpots.
Just as the revenue McDonald’s would earn on Big Macs would fall if it hikes the price of each Big Mac to $100 (How many people would buy Big Macs at that high price?), so, too, would tax receipts fall if government hikes income-tax rates to very high levels. If it’s not crackpot to see that, in response to higher Big Mac prices, fast-food diners change their activities in ways that can cause Big Mac revenues to fall, it’s not crackpot to see that, in response to higher tax rates, income earners change their activities in ways that can cause tax receipts to fall.
Donald J. Boudreaux
(HT to Nathaniel Clarkson for alerting me to Gitlin’s essay)