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Tax column off base

December 12, 2015

Cecil Bohanon and Bill Styring present a basic model of the Laffer Curve [Soaking rich doesn’t necessarily fill tax coffers, Nov. 30 IBJ] and ask whether raising taxes will lead to more revenue. They claim to have no idea which side of the Laffer Curve we are on, but warn politicians of the consequences of raising taxes. In recent years, there has been significant research into the Laffer Curve and behavior in the labor market. Estimates of the revenue maximizing point for income taxes are between 60 percent and 75 percent. There is certainly no empirical evidence to suggest that our current marginal tax rate is too high for the purposes of generating revenue.

Further, recent U.S. history supports the relationship between higher tax rates and increased revenue. In the 1980s President Reagan’s tax cuts led to high deficits. Marginal tax increases by first George H. W. Bush and then Bill Clinton led to a balanced budget by the end of the decade. Tax cuts pushed by the George W. Bush administration in the 2000s led to high deficits once again.

I am not suggesting that the top marginal tax rate should be 70 percent. The goal of tax policy is to efficiently collect revenue to fund necessary government services, not maximize revenues. But to suggest that raising the top rate above 39 percent might lead to lower tax revenue is blatantly and demonstrably false. We would be better served by editorialists who based their comments on research and facts rather than simplistic models and scare tactics.

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Kyle J. Anderson
Indiana University Kelley School of Business economist
 

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