Tuesday, January 26, 2010

The Laffer Limit

I woke up at 4:30 this morning with the phrase "Laffer Limit" in my head. So I googled it. Google turned up 38 hits, but only listed 14. The rest were "very similar."

Of the 14, 9 had the word tax (or taxes or taxation) in the text displayed along with the search results. One of the others had the phrase "the top rate on earned income." And one contained "not a moral license for government to take as much as it can." So eleven of 14 hits -- 78.6% -- are immediately identifiable as related to tax issues.

Of the remaining three, one is a URL with no text. One concerns the passing of Robert Novak. And one links to a Google book. I'm betting these three also associate the phrase "Laffer Limit" with taxes. That would make all of the results tax-related.

The Laffer Curve was all about taxes. It was a sort of shared experience, a simple, profound analysis that we intuitively understood, and it held out the promise of lower taxes.

The Laffer Curve was all about taxes. But the Laffer Limit is a practical maximum. In one of those Google hits, J.H. Cochrane refers to "the 'Laffer limit' of taxation." That suggests there can be Laffer limits on things other than taxes.

If you are a government trying to raise revenue, increasing the tax rate brings in more revenue up to a point; beyond the Laffer Limit it brings in less revenue.

If you are a gardener fertilizing your flowers, adding more fertilizer improves the garden up to a point; beyond the Laffer Limit it starts ruining the garden.

If you watch an economy using credit for growth, using more credit increases growth up to a point; beyond the Laffer Limit it starts ruining the economy.

The Laffer Limit refers to the notion of a practical maximum.

Laffer Limit: The point at which continuing to do the same thing begins to have the opposite effect.

Updated 30 Jan 2010

1 comment:

Orphe said...

Absolutely love your reasoning. Excellent for an economics or calculus course!

Would you mind viewing the following videos about the laffer curve? Care to comment for all to see on your blog? your opinion is greatly appreciated.