Jonathan Swift on the Laffer Curve

But I will tell you a secret, which I learned many years ago from the commissioners of the customs in London; they said, when any commodity appeared to be taxed above a moderate rate, the consequence was, to lessen that branch of the revenue by one half; and one of those gentlemen pleasantly told me, that the mistake of parliaments, on such occasions, was owing to an errour of computing two and two to make four; whereas in the business of laying impositions, two and two never made more than one; which happens by lessening the import, and the strong temptation of running such goods as paid high duties, at least in this kingdom.

From An Answer to a Paper called a Memorial of the Poor Inhabitants, Tradesmen, and Labourers of Ireland, The Works of the Rev. Jonathan Swift, Volume 9

I found this reference in David Hume’s classic essay Of the Balance of Trade which is on the reading list of my International Economics class next Fall.

Monopoly power and corporate taxes

There has been a fair amount of debate about corporate taxes in the econ blogosphere. The debate was framed early on by a cute little exercise on Greg Mankiw’s blog which was supposed to  show that, in a small-open economy with perfect competition, a 1 dollar cut in capital taxes raises wage income by more than 1 dollar.

Paul Krugman and others have rightly pointed out that Mankiw’s toy example, its cuteness notwithstanding, provides little to no insight into the real policy debate now going on in the US, because (i) the US is not a small open economy and (ii) there is evidence that much of corporate profits are monopoly rents rather than returns to capital, which casts doubt on the relevance of perfect competition models.

Indeed, there’s a new paper documenting that mark-ups (difference between price and marginal costs) have increased in practically every industry in recent decades. The paper has not yet gone through peer review, so it’s probably wise not to jump to conclusions from it. Nevertheless, it’s useful to think about potential implications.

One of the basic results in public finance is that taxes on rents produce no deadweight loss. So if corporate profits are just monopoly rents, we can tax them away at zero social cost. Right?

Wrong.

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