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Lower Taxes, Higher Revenue

Discusses the Laffer Curve, which is a curve that charts the revenue received at different tax rates

The curve necessarily has a hump – the government will not receive any revenues at 100% taxation nor will they receive revenue at 0% taxation.  Economists agree on this, but they disagree on where exactly the hump is.

Christina Romer and her husband found the hump is around 33%.  Romer is a liberal economist under President Obama.

Unfortunately, I can’t fact check this due to the length of the paper (59 pages), but it seems like some claims are overstated.  I’ve linked the paper below as well as a NYTimes article written by the author.



New York Times article

“This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these changes on taxable income using time-series/cross-section analysis of data on income and taxes by small slices of the income distribution. We find that the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated (a t-statistic over 6). The estimate is highly robust. We also examine the time-series response of available indicators of investment and entrepreneurial activity to changes in marginal rates. We find suggestive evidence of an impact on business formation, but no evidence of an important impact on other indicators.”