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Friday, July 13, 2007

The Laugher Curve

As a non-economist, Kevin Drum has one of the better economic minds going. He looks at the graph on the right, drawn by the Wall Street Journal editorial board and the American Enterprise Institute and rightly points out that the data points illustrated have no relationship whatever with the so-called "Laffer Curve" that they try to fit them to. Indeed, you could just as easily fit a picture of a dog chasing a cat to those points as fitting the "Laffer Curve." [Note: If I could draw a dog and a cat, I'd prove it, but I can't draw worth beans]. Moreover, as Kevin points out, there are huge measurement errors in the data (for instance the statutory corporate tax rate in the U.S. bears almost no relationship to the effective tax rate on corporations). And, the "Laffer Curve" they draw makes no economic sense whatsoever, indicating, as it does, that revenues will fall from 10% of GDP to nothing if tax rates are increased from about 29% to 33%.

I mean they really need to change the name of this curve to the "Laugher Curve."


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