Consider the tax rates that might generate the maximum amount of revenue for state coffers. A 100 percent tax rate removes any incentive to work; a tax rate of 0 collects no tax. Somewhere in between is an optimal tax rate that maximizes state tax revenues.
What Laffer originally got right is that when nations tax citizens at confiscatory levels -- think 90 percent -- behavior changes dramatically: People won’t work, or they'll seek tax shelters, or, as the Rolling Stones did, they'll simply move to a friendlier venue (preferably with better weather).
Over the years, supply-siders seem to have extrapolated Laffer's original thought to infinity. This is why the tax cuts of Ronald Reagan and George Bush were advocated as generators of more revenue than they cost. As the revenue portions of our deficits show, they don’t. Not every tax cut pays for itself -- indeed, most do not.
A fair argument for incremental tax cuts is about the proper level of taxation. Claims they pay for themselves are intellectually dishonest nonsense.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
This article was provided by Bloomberg News.