Where does the Laffer curve bend?

With the Bush tax cuts due to expire soon and debates about raising top rates further to cut the budget deficit soon to follow, the Laffer curve is bound to come up again. The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away.

Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

I decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks -- that is, what that revenue-maximizing rate is. The responses were varied, to say the least. Let's start with the experts.

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the pros and cons of VAT

LIBERALS oppose a value-added tax because it falls more heavily on the poor. Conservatives oppose it because it is a money machine. Larry Summers, Barack Obama’s chief economic adviser, once predicted that America would get a VAT when the two sides reversed positions. That moment may be approaching. Several prominent liberals and a handful of conservatives now see it as the most promising way to raise revenue, reduce the deficit and make the tax system more efficient.

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Tobin Tax

Tobin, or not Tobin? That is the question. The answer seems to be the latter, judging from the slings and arrows that finance ministers have aimed forcefully at the idea.
When Gordon Brown, British prime minister, unexpectedly popped up at the weekend’s meeting of G20 finance ministers and floated the possibility of a “Tobin tax” on financial transactions, it represented something of a volte-face on his part. But the largely hostile reaction from other countries and his own rapid backtracking suggested that he had either misread his audience or was bashing bankers for domestic political ends.

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