Draw-a-line Contest

July 17, 2007Posted by Jay Livingston

My previous post was about methodological dishonesty. Here we go again.

A line is a convenient way of illustrating the relation between variables, a quick way to make sense of the trend in an array of points. Here’s a graph showing two variables – the percent of income that corporations supposedly pay (X-axis) and the percent of GDP accounted for by taxes.

Your assignment is to draw a line that shows the relation between these to variables. (Try doing it before you scroll down to see my solution.)

Here’s what I got.

The line is not quite straight – I used Paint, and I haven’t figured out how to draw a straight line – but you get the idea. The higher the tax rate, the more money for the government. That’s only common sense. And the graph seems to show that it holds true even when that money is figured as a proportion of GDP.

If these data points were hours of study time and GPA, we’d conclude that studying generally raises your GPA.

Norway is an “outlier” and we’d need to take a closer look at it to figure out why its tax revenues are so much higher, relative to GDP, than are those in countries with similar corporate tax rates. (If this were studying and GPA, we’d probably conclude that Norway must be unusually smart.)

But that’s not how conservative economists want things to work. They believe in something called the Laffer curve. It’s based on the idea that if you raise taxes too much, people and corporations will be discouraged and not bother working. For example, if the government taxed 100% of your income, would you work? Of course not, and the government would get no taxes from you.

Conversely, if you lower taxes, revenue will actually go up because people will work more, make more money, and even though the percentage paid is lower, the total amount paid will be higher. Twenty percent of $100,000 is more than 30% of $50,000.

When the Cheney-Bush administration proposed huge tax cuts back in 2001, some people thought the loss of tax revenue would erase the surpluses built up in the Clinton years and create a deficit. But the conservatives hauled out the Laffer-curve theory to counter these arguments. Of course they were wrong. The tax cuts quickly wiped out the surplus and ran up huge deficits.

So what’s a Laffer believer like the editorial page of the Wall Street Journal to do with this array of points? Look at the line they draw to illustrate the relation between tax rates and revenue.

Now Norway, instead of being an outlier, is the point that best allows the Journal to draw the Laffer curve. It's a bit of a stretch, much like travelling from the United Arab Emirates to France by going through Norway

Usually, we try to draw a line so that it minimizes the distance of points from the line. The Wall Street Journal line maximizes the distances. Seems like a good idea, doesn't it. If you studied a fair amount and still wanted to improve your GPA, I guess the Journal would suggest cutting down on book time. Let’s party.

Hat tip: Several other bloggers have picked up on this bit of nonsense. Kieran Healy, in his own commentary, links to several of them

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