California's Laffer Curve

By David Henderson.

"Joshua Rauh, an economist at Stanford University and a senior fellow with the Hoover Institution, has co-authored an important study of the effects on revenues of a major increase in marginal tax rates in California. In 2012, Californians voted to increase the top marginal tax rate from the then-high 9.3 percent to rates ranging from 10.3 percent to 12.3 percent. Add in the pre-existing 1-percentage-point extra tax on people making over $1 million a year, and you get rates ranging from 10.3 percent to 13.3 percent.

Rauh and co-author Ryan Shyu of Stanford’s Graduate School of Business find that of the extra revenue the state government would have raised if high-income people had gone on with business as usual, 55.6 percent was lost over the first three years of the higher taxes. That was due to people leaving the state and to the high-income “stayers” making less income than otherwise in response to the higher tax rates. The effects were even larger in the last of the three years the economists studied. That makes sense because the longer the taxes were in force, the more time people had to adjust.

The Laffer Curve in California is alive and well. Which is more than can be said for California.

These are the closing paragraphs of David R. Henderson, “California’s Laffer Curve,” IPI TaxBytes, October 25, 2022. Read the whole thing, which is not long."