

What is the revenue maximizing tax rate? - known
http://voices.washingtonpost.com/ezra-klein/2010/08/where_does_the_laffer_curve_be.html

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alan-crowe
The title of the article is: Where does the Laffer curve bend? I think it is
more interesting to ask about _when_ rather than _where_.

Consider this old argument which purports to show that raising taxes and
raising them again will still bring in the revenue. Rich people spend future
income. They look at their income and take out a loan to buy a sports car or a
boat. Now they are on the hook for their out goings. If income tax goes up,
they are going to have to work harder to find extra money to pay the tax and
keep up their payments.

I don't like this argument. Which is different from saying that I think it is
false. I think it has psychological realism, people would rather work harder
than sell the boat and repay the loan. But I don't like the argument because I
think it is cruel and short-termist. People who get caught on that hook aren't
going to enjoy the experience. Perhaps they pay off the loan and cut back.
Perhaps they suffer from stress and have to take some months off work.
Whatever. Five years later they will be off the hook, one way or another and
they will not forget.

When is the Laffer curve? If taxes rates go too high that might not be
immediately apparent as it takes a few years for the decline in revenue to
take place as people wriggle off the hook. If tax rates come back down I
cannot see people who have be burned before rushing to rejoin the rat-race.
Revenues will rise with a demographic slowness as those who have down-shifted
age out of the workplace.

There is also a generational aspect with many of the next generation of
doctors, lawyers, and businessmen being the children of doctors, lawyers, and
businessmen. Building a career takes a lot of discipline and it is much easier
if you have a parent or aunt or uncle showing you the way and living a well
rewarded life that shows you that it is worth it.

The really tricky _when_ question is: what level of taxation blocks the inter-
generational transmission of cultural capital and results in a new 1960's in
which young people turn on, tune in, and drop out.

