Friday, July 13, 2007

Connecting favourite dots

The above is a chart from the lead editorial in Friday's Wall Street Journal (subs. req'd). It aims to prove the existence of the Laffer curve i.e. that it's possible to have set a tax rate so high that one could increase revenue by lowering the rate. This is of course true for the nonsensical experiment of a 100 percent tax rate. But it has formed the rationale for George Bush's self-financing tax cuts -- tax cuts that in fact caused huge deficits.

Anyway, the curve is in slightly better shape for corporate tax rates because corporations are very good at shifting their revenue around to low tax regimes. Like the Republic of Ireland, as the WSJ points out (and not for the 1st time) --

Ireland is the classic case of a nation on the "correct side" of this curve. It has a 12.5% corporate rate, nearly the lowest in the world, and yet collects 3.6% of GDP in corporate revenues, well above the international average.

But the WSJ wants to claim that the US is on the wrong side of the curve. Hence that bizarre curve drawn around the data points. Notice the trickery. They anchor the line at the UAE, which raises zero corporate tax revenue from a zero corporate tax rate, then hook it up to Norway before heading it down to where the US is.

The curve is not even close to what the line of best fit would do, which would would cut through the main cluster of data points and likely show no relationship between corporate tax rates and tax revenue. Which is probably because the corporate tax rate says so little about the overall structure of corporate taxes, filled with allowances, credits, and deductions. Not to mention that their Norway peak has high corporate tax revenue because of taxes collected from oil companies.

Now that's not to say that a cut in US corporate taxes would not pull some money out of Ireland, and maybe add some revenue to the US -- it would, but only until the next tax dodge came along. But there's no need to subject the numbers to "enhanced interrogation techniques" to make that point.

UPDATE: The clearly rigged curve-drawing attracts more attention [also here].

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