The right way to think about the Laffer Curve

The caricature of Chicago Phd Art Laffer's "Laffer Curve" is that it's a free lunch fraud where 'right wingers' pretend that cutting tax rates is so economically stimulating that governments can cut taxes and end up with more money than they started with - a capitalist perpetual motion machine.  This is a lie.  The Laffer curve simply posits that when you shift the marginal dollar of private spending into the public sector via tax increases or back to the private sector in tax cuts you need to consider the marginal utility of that dollar on both sides.  There is a trade off for public spending:  every dollar taken in taxes reduces private prosperity and resources.  Therefore governments should only do things that have positive returns that exceed the returns to private investors.  Police and fire forces versus universal preschool, for example.  Because if the forgone wealth exceeds the return on government spending for the next marginal dollar shifted from the private to the public sector then the society should leave that dollar in private hands.  In other words the goal should be to allocate spending so as to maximize the return on spending for society as a whole.  Let me use an Illustration from my favorite Kurdish-Swedish Chicago economist:  Tino Sandanaji

The important paper from Uhlig that Bartlett cites is interpreted by most economists as a strong case in favor of lower taxes, not higher taxes. Harald Uhlig is a brilliant U-Chicago macro-economists. 

Now, remember always that the criteria for an optimal tax rate is not to maximize revenue. Long before the revenue maximizing rate is reached, the government is destroying 2 dollars or more from the private sector just to collect 1 dollar for the public sector. 

The marginal government expenditure it is quite unlikely to produce twice or several times as much social good than what is spent. 

Uhlig thus concludes that “In the EU-14 economy 54% of a labor tax cut and 79% of a capital tax cut are self-financing.” 

A 54% self-financing tax cut means that if the state puts more than 2$ in the pockets of the tax-payers, government spending only has to go down with less than 1$. 

A 79% self-financing tax cut means that the state can give 5$ to the private sector with only a loss of 1$ for the public sector. Only fools or committed socialists would defend this rate of taxation.
This is evidence of a deeply dysfunctional system, not something the United States should emulate, as Bartlett wants to do. 

We can rank the social value of everything the state spends on from best to least necessary. Sure, there are some public expenditure items that may be worth 5 times what they cost, such as (say) police and cancer research. But in countries where 40-50% of national income is public (the United States is getting close to this as well), there are lots and lots of marginal forms of public expenditure, such as subsidies to leisure activity, subsidies to weak sectors and agriculture, various forms of unemployment and sick leave expenditure. 

Many people do not not really understand the Laffer curve. They think as long as we are to the left of the revenue maximizing point, everything is fine. The uninformed seem to think that preferably we should be exactly on top, maximizing revenue as a share of GDP. 

But getting close to the top of the Laffer curve means that we are exponentionally getting closer to an infinite marginal cost of government activity. At the top, that is the cost of government activity. After the top we are in negative region, every tax dollar destroys lots of private activity as well as lowering public sector activity. 

You can quibble with Uhlig's numbers but his logic is iron clad:  at some point getting incremental tax revenue destroys so much private wealth so as to be insane.  Europe is already at the insane level and America is headed there.  This is the real Laffer argument:  is the incremental government spending funded by the destruction of private wealth worth it to the society at large?  And it's the question in the land of Cash for Junkers and Solar Pork that is never asked.  It's almost as if the left made up the Laffer caricature to avoid a reality that is uncongenial to their goals.

Of course this assumes that the goal of economic policy is prosperity, liberty and independence for normal people.  If the goal is instead 'equality' or 'conformity' or centralized power then destroying private wealth is an end in itself, regardless of the value of any government activity.  Governments pursuing these goals could bury the money they take from the economy and still meet their goals.