Laffer Curve No Laughing Matter

The Laffer curve is the economic model that purports to demonstrate that by decreasing marginal tax rates, tax receipts may actually increase. It is a central concept of supply-side economics, famously denounced by George H.W. Bush as “voodoo economics” during his Republican presidential primary run against Ronald Reagan. Setting aside the debate over what constitutes an “optimal level of taxation” and the Laffer curve’s other political implications, Maryland provides a good example of how “soak-the-rich” tax policies can lead to disastrous fiscal results.

From the Wall Street Journal:

Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”

One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.