The Left's Laffer Curve?

by | June 17, 2009

Megan McArdle says there is "a growing frustration among reputable conservative economists that the promises of health care cost control have turned into the Laffer Curve of the left: a way to pretend that their favored policies don't have any costs." As something of a student of the Laffer Curve, I find the comparison preposterous. First, health care reformers are committed to finding offsetting tax hikes or spending cuts for every dollar of costs for expanded coverage. On top of that, they hope that cost-control measures can reduce rising health care costs. But even if every single cost control measure fails completely, an extreme worst-case scenario, then health care reform would be budget neutral. This is a diametrical contrast with proposing tax cuts with no offsetting savings in the hope that they will somehow pay for themselves.

McArdle continues her comparison like so:

It is true that some countries have controlled costs, and therefore made it easier to afford coverage for more people.  It is also true that some countries have cut marginal tax rates, and thereby actually raised the tax revenue they collected. 

Let's consider these two propositions in reverse order. Is it true that some countries have cut taxes and thereby increased their revenue base? I don't know of any. True, sometimes higher tax revenues follow tax cuts, but this is usually a business cycle phenomenon, in which an economy that was growing already produces higher revenues but not necessarily higher revenues than would have been produced at the higher rate. McArdle does not produce any instances of this phenomenon she asserts has happened. Moreover, even if it had happened somewhere -- I could imagine it in some country with confiscatory rates -- there's no reason to believe it could plausibly happen in the United States, which has, and has long had, low tax rates by international standards.

By contrast, are their "some countries" that have controlled health care costs while providing universal coverage? Actually, every advanced country has universal health care coverage and lower costs than the United States:

Exhibit 1
Total Health Expenditures Per Capita, U.S. and Selected Countries, 2003

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So McArdle's comparison -- some countries have cut taxes and thereby raised revenues, some countries have controlled costs with universal coverage -- turns out to be true if you replace the first "some" with "zero" and the second "some" with "all." Other than that, great comparison!

There does seem to be a pattern here of McArdle trying to explain away the influence of supply-siders on the conservative movement and the Republican Party. Two years ago, in response to me, she huffed that Laffer Curve devotees amounted to no more than a tiny fringe within the GOP. ("This motley collection of names is hardly proof that the Supply Siders Have Taken Over the Building.") Shortly after, in a hilarious bout of karma, McArdle had a book review spiked by a major conservative publication because, in the course of her otherwise orthodox argument, she noted that the Laffer Curve does not depict present-day tax rates in the U.S. (I would say better evidence of McArdle being wrong was the fact that the last Republican president and every GOP primary candidate in the 2008 election asserted that tax cuts could revenues to grow.)

So then, in the course of issuing a mea culpa, McArdle asserted that the same dynamic exists on the left with regard to unwillingness to criticize teachers unions. It was quickly pointed out that criticizing teachers unions is not only common but practically de rigeur among liberal columnists, magazines, think tanks, and even elected officials. So now, in her quest to show that it's not just conservatives, everybody does it, she's reaching for an even more preposterous comparison.

--Jonathan Chait

Source URL: http://www.newrepublic.com//blog/the-plank/the-lefts-laffer-curve