Horrible tragedy: Berkeley professor forgets about Laffer curve

This is from a new Brad DeLong post:

**FLASH** MUST CREDIT DELONG **FLASH**: Horrible Tragedy: Republicans Read Greg Mankiw, Move to North Korea Seeking Low-Tax Country

If you are a Republican, you think a low-tax country is the right place to live, right? And now if you read Greg Mankiw he proves that North Korea is the lowest tax country.

South Korean police have been trying to keep Republican lobbyists from trying to cross the border minefields without success all morning.

An April Fool’s joke?  Then why was it posted on March 31?  DeLong is almost correct, but just forgot one thing.  Republicans like low tax jurisdictions that are on the left side of the Laffer curve peak more than low tax places that are on the right side of the Laffer curve peak.  That’s why more Republicans are moving to Texas than North Korea.  (Not to mention that Republicans tend to like steak more than kimchi.)  Yes, 100% MTRs don’t produce much revenue, but they sure do produce a lot of hunger.

Mankiw’s implicit argument was that we may be near the peak of the Laffer Curve, and that it’s better to have a given amount of tax revenue with a lower tax rate.  But he didn’t explicitly make that argument.  I think he was trying to get others to reach that conclusion on their own.

PS.  For a slightly more serious analysis, read my previous post.

HT:  Mark Sadowski

Update:  I just noticed that Mankiw posted an addendum where he suggests that he wasn’t trying to draw any controversial inferences from the data.  Consider my previous post to be an attempt to probe Mankiw’s subconscious thoughts.

Update#2:  Speaking of April fool’s jokes, did you know that Guam may tip over?



7 Responses to “Horrible tragedy: Berkeley professor forgets about Laffer curve”

  1. Gravatar of Lord Lord
    1. April 2010 at 14:24

    Well Republicans moving to North Korea would increase the quality of governance, both here and there.

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. April 2010 at 16:24

    Hey, I just just got credited with an HT on Sumner’s blog! Er wait a minute, it’s April Fools Day. Darn!

  3. Gravatar of Chris Chris
    1. April 2010 at 17:53

    Speaking of stupid things Congressmen say, have you seen this 2005 video of Barney Frank making a speech on the floor of the House of Representatives denying there is a housing bubble, saying there is not “excessive leverage” in the market, and that we won’t see a collapse like we did during the dot.com bubble? It’s hard to imagine someone being more wrong at the time than Frank was, and yet we are putting this guy in charge of financial reform. Wow.


  4. Gravatar of Jimmy Jimmy
    1. April 2010 at 19:29

    I don’t think DeLong forgot about the Laffer curve. I think if you asked either DeLong or Mankiw, they would tell you that we are currently way to the left of the peak of the curve and that’s about the last thing that should come up in a debate about U.S. tax policy.

  5. Gravatar of scott sumner scott sumner
    2. April 2010 at 07:11

    Lord, Touche.

    mark, Get sending me softballs that are easy to hit.

    Chris. Thanks, He’s my Congressman, so I was aware of his views. But I hadn’t seen that video.

    Jimmy, DeLong, yes. But I am not so sure about Mankiw. certainly he thinks we are to the left of the peak (I also think so.) But far to the left? I’d rather put it this way; I’m not sure we are all that far from the peak in the vertical direction (which is what matters), given our economic structure. Raising taxes rate 50% and bring in 10% more revenue would be a horrible idea. So the key issue is not the horizontal distance from the peak. See my new post.

  6. Gravatar of Alex Alex
    3. April 2010 at 12:45

    I don’t think your criticism of DeLong is entirely fair. Mankiw was working with this equation:

    Taxes/GDP x GDP/Person = Taxes/Person

    Now, you’ve brought up the Laffer curve. This would be relevant for the “Taxes/GDP” part of the equation. This can onyl take a value between 0 and 1. For Texas, closer to 0; for North Korea, closer to 1. But Texas is not going to have a value below 0.1, so the difference in these two values will be less than an order of magnitude.

    Meanwhile, GDP per capita is a lot higher in Texas than North Korea. More than an order of magnitude. So the product of those two values (“Taxes/Person”), will be higher for Texas than North Korea. Therefore, as DeLong was pointing out, if you follow Mankiw’s logic, then North Korea is a low tax country. But we all know it isn’t. Therefore, Mankiw’s logic is wrong, and some other method must be devised for working out whether a country is low tax or not.

  7. Gravatar of ssumner ssumner
    4. April 2010 at 17:26

    Alex, If that was DeLong’s argument, I think he misread Mankiw. Mankiw made it quite clear that tax rates were one thing, and tax revenues were another. Mankiw was showing that Americans pay a lot of taxes in revenue terms, so if we have an inadequate welfare state, it’s not because we don’t pay enough taxes. Also that higher tax rates don’t imply higher revenues. DeLong may have been reading intentions that weren’t there.

    I still say there is nothing stupid about Mankiw’s argument, whereas DeLong and Avent both clearly thought it was silly. So I think they must have misunderstood it.

    DeLong seemed to imply that if Mankiw was correct then by this logic Republicans should want to move to N.Korea. But that’s not at all the implication of Mankiw’s argument.

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