Jul 18, 2007 12:00 AM
They claim that this figure is an accurately derived Laffer curve describing the relationship between tax rates and tax revenues for different countries; and that the US has the highest corporate tax rates in the world. ... The resulting curve is blatantly ridiculous - the tax rate smoothly increases in an almost linear way up to almost 25%; slows to crest over about 3%, and then falls into an almost perfectly vertical line over the next 4%. It's a terrible curve fit, which is just simple foolishly wrong.The reason this matters, by the way, is that this kind of "evidence" is often used to back up the notion that we should lower taxes on corporations. I'm not arguing that either way--merely pointing out that if this is the justification for such policies, it's a completely flawed justification. Update:
1. As I noted in my original post on the topic, I didn't actually estimate the line (I didn't have the data), I just eyeballed that line as a rough approximation. I was just making the point that it is pretty clear that there is an upward linear trend in the data, and that it would have a much better fit than the silly thing they drew, but I made sure to note it wasn't formally estimated. When the line is estimated, as many have done since, it looks pretty much like I sketched, but the slope coefficient does not turn out to be significant. 2. Many people rebut a straight line model by noting that if you add a quadratic term, you will get a peak somewhere between 30%-40%. However, as Brad DeLong at Berkeley notes, the Norway observation is not plotted correctly. He says: "One more point, with respect to "omitting Norway": Personally I see no need to omit Norway. I do see a need to plot the Norway point on the graph correctly. The revenues plotted on the vertical scale include oil excise taxes levied on corporations. The tax rates plotted on the horizontal scale do not--hence the Norway "tax rate" of 28% rather than the correct 52%. Move Norway out to its proper position--with the same tax concept on both axes--and everything is fine."
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