Fall 2015 BPEA 1:00 PM Th: I read House and Tesar. They say that attempting a 4%-point increase in government revenue as a share of GDP in Greece may well push you over the top of the Laffer curve:
We consider spending reductions or tax increases sufficient to generate an average flow increase in the primary balance of one percent of 2014 GDP… a quarter of the repayment required to fully meet the stream of debt payments…. We do not push the model to generate the full 4 percent increase in the primary balance as a share of 2014 GDP…. Policy shifts that satisfy (or attempt to satisfy) the full 4 percent increase could push capital and labor taxes into the downward sloping portions of the Laffer curve…
Does it not follow immediately that the excess burdens of a 1%-point increase are overwhelmingly large? It then follows that any tax increases at all are inadvisable. Thus the only policies that might possibly be advisable are those that cut spending.
Thus, if I were to set out to write House and Tesar’s paper, it would consist of that one paragraph–that Greece is near the top of the Laffer Curve, hence what it urgently does not need is any tax increases.
Then would come fifteen pages documenting this claim on which all else depends: that Greece is near the top of the Laffer Curve. Yet those fifteen pages are missing. Instead, we have fifteen pages confirming that when you are near the top of the Laffer Curve raising taxes for any purpose is a really bad idea.
Do we think Greece is near the top of the Laffer Curve? Why do we think that Greece is near the top of the Laffer Curve?