Monday, August 13, 2007

Laffer Curve Comment Rescue

I wanted to return to this comment to my most recent post on the bogus Laffer curve that miraculously appeared in the editorial pages of the Wall Street Journal:
OK, the WSJ graph was incompetent, but isn't the "quadratic regression" line laffer-like? Doesn't it show the US on the wrong side of the maximum?
Now, ignoring the lines altogether, the data points show the US with comparatively high corporate tax rates and comparatively low tax collections relative to GDP. It appears the US should cut its corporate tax rate!
So Norway is an outlier in part because of its energy production? Maybe that's why Iceland looks so good in this data too. It appears the US should start drilling ANWR and offshore where oil production is now banned.
Isn't it true that corporate tax collections went up dramatically after the recent tax rate cut in the US?
-Jerry B.
In response, I wrote:
Good questions, Jerry.
First, exploiting the oil reserves in ANWR would not bring the U.S. close to matching Norway's oil production when compared to relative GDP.
The curve is not pronounced, and becomes even flatter as outliers like Norway and the U.A.E. are removed from the data.
It is true that U.S. corporate tax revenues have increased over the last three years. However, U.S. corporate tax rates were last cut in 1994.
By the way, the data in the graph are from 2004, before the recent increase in corporate tax revenue.
The recent increase in U.S. corporate tax revenues would not dramatically shift the data point on the chart for the U.S. on the chart. But the fact that corporate tax revenues have sharply increased in the last three years, a decade after the last cut in the corporate tax rate, should at the least demonstrate that tax revenues are driven by factors other than the tax rate itself. That is, unless you want to argue that the Laffer curve includes a time delay effect on the order of ten years.

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