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Cake day: October 6th, 2023

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  • I think we agree about the nature of scientific enquiry, how it is all based on inductive reasoning and cannot provide the certainty of mathematics. Additionally, it looks like we agree that the Laffer Curve has been used to justify bad policy in the past.

    However, I don’t think that the theory has been debunked in the way you are describing. There is broadly a difference of opinion between Keynesian economists who are skeptical of the theory and then Supply-Side economists who endorse it; and then a whole spectrum of views in the middle from Behavioural economists or other schools of thought who are more ambivalent.

    Academics who do support the view have done empirical studies over the years that they believe suggest that the Laffer Curve is real, see:

    • Romer & Romer, 2007: The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks
    • Mertens & Ravn, 2013: The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States
    • Trabandt & Uhlig, 2009: How Far Are We From The Slippery Slope? The Laffer Curve Revisited

    It’s a matter of live debate in the field regardless of your opinion of the theory.


  • All economic theories are unproven, approximations about how economists think people might behave. There’s a reason it is often referred to as the ‘dismal science’. Quite often they are based on counterfactuals and projections of what might have happened.

    The Laffer Curve is not a rule which always reflects reality but it has explanatory power in certain situations, since logically there has to be a point where avoiding taxes becomes more appealing than paying them.

    Regan, et al deploying the theory as part of their political rhetoric - potentially in bad faith - shouldn’t discredit the concept itself because doing so would be throwing the baby out with the bath water. It’s an ad hominen attack against an economic theory; a bit like saying capital controls are always bad because President Xi in China frequently uses them.


  • Back in the 50s and 60s after WW2 the UK had a 95% tax band for the highest earners. This was due to the country struggling to pay off its debts to the USA after WW2. The Beatles even wrote their song Taxman about it in 1966.

    Ultimately there is a problem with these super high taxbands whereby countries that try them will often encounter something called the Laffer Curve whereby overall tax take decreases as the tax rate increases. This isn’t even necessarily tax evasion, all it takes is for wealthy people to be suitably motivated to avoid taxes.

    In the UK now if your income breaches £100k then you are paying a higher rate of tax on everything earned over that amount but also you lose the £12.5k tax free allowance that all citizens are entitled to. Overall breaching £100k leads to you paying a marginal rate of tax of 60% even if you don’t earn much over it. Because of this high earning jobs often let you put money into salary sacrifice pension schemes to avoid breaching the £100k mark. It only becomes worthwhile earning over £100k when you reach the region of ~£130k, which is substantially more. Essentially the system encourages tax avoidance by having this cliff which people who are behaving like rational agents will do anything to avoid. If it were less punative then some economists argue that the government would raise more money.