In the Long Run, There Is No Curve

curve 1

Dylan Matthews did an interesting survey yesterday, asking various figures what they think the revenue-maximizing tax rate is. The liberals generally look at the research and conclude that the Laffer Curve Inflection Point is in the 60-70% range, while the conservatives duck and cover. But it’s Greg Mankiw who, I think, makes the most important point, to wit: “the short-run answer and the long-run answer are quite different . . . the long-run answer is actually more important for policy purposes than the short-run answer.”

To perhaps put this in a more pointed way, over the long-run the revenue-maximizing tax rate and the growth-maximizing tax rate should be identical. Guinea and Portugal both have about 10 million people, but the government of Portugal has dramatically more revenue simply because Portugal is so much richer. And that’s how it works in general over the long-term. Government revenue will increase rapidly if the economy grows rapidly and not otherwise. The question is whether short-term revenue is valuable because it’s funding important growth-enhancing public services, or whether short-term revenue is harmful because it’s funding waste and bloat.

Meanwhile, the growth implications of tax system design—how do you raise your revenue, not just how much revenue do you raise—are much more important than the political debate commonly recognizes.