Scott Sumner On Taxes, Revenue And The Laffer Curve

See Progressive wishful thinking. Excerpts:

"In May 2010 Greg Mankiw reported some data on tax revenue per person in some big economies. From that data I’d guess that the US and European tax systems raise roughly equal amounts of revenue per person, even though US taxes are slightly less than 30% of GDP, and European taxes are closer to 40% of GDP.

Mankiw didn’t even comment on the data, he merely reported it. But the post received all sorts of criticism, none of it valid. I’d go much farther than Mankiw. I’d argue that this data is strongly supportive of the view that both the US and Europe are near to tops of the Laffer Curve for total taxation. I did not say then, nor do I claim now, that we are precisely at the top. But I also don’t see any reason to believe that if we raised taxes from 28% to 40% of GDP, that revenue would rise anywhere near proportionately, with no change in GDP per capita.

The progressive response is that the Laffer Curve idea is far-fetched, and that higher tax rates don’t reduce GDP per capita. Instead they argue that the lower European GDP/person represents mysterious cultural differences, a preference for leisure. Even worse, this cultural trait developed only recently, as during the 1960s (when French tax rates were similar to those in America), they worked just as hard as we did.

All this may be true, but progressives can’t point to any European models (except perhaps special cases like Norway and Luxembourg) that raise the sort of revenue they claim the US would raise if we boosted taxes as a share of GDP to European levels. For instance, in Mankiw’s data the Germans raise $13,893/person with taxes of 40.6% of GDP. The US raises $13,097/person, with taxes of just 28.2% of GDP. The progressive denial of the Laffer Curve is an implied claim that if we raised our tax rate to German levels, our GDP would not decline, instead we’d raise an astounding $18,856/person in tax revenue, despite the fact that no other major country with Euro-style tax rates comes close to raising that kind of revenue. Quite a leap of faith."