Best Curve-Fitting Ever

Cosmic VarianceBy Sean CarrollJul 14, 2007 12:03 AM


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From Mark Thoma, via Brad DeLong, comes what will henceforth be my absolutely favorite example of twisting data to fit your theories. Observe the following graph of corporate tax rates vs. revenue in units of GDP:

Pretty straightforward, really. As you raise taxes, the government collects more revenue. Norway seems to collect more than its fair share, which might be interesting to dig into, but the trend seems clear. But there's something nagging at the back of your mind -- aren't there people out there in the world who believe that raising taxes actually decreases revenue past some certain not-very-high tax rate? "Supply-side economists," or something like that? People who exert a wildly disproportionate influence on U.S. tax policy? What would they make of such a graph? Yes, Virginia, there is such a thing as supply-side economics, and you can find its practitioners in such out-of-the way places as the American Enterprise Institute and the editorial pages of the Wall Street Journal. Here is how such people view these data:

No, I am not being unfair. I did not draw the "Laffer Curve" on top of those data in order to embarrass the WSJ or AEI. They did it themselves; the second graph is how the plot was actually published by the Journal, while the first one was Mark Thoma's subsequent reality-based-community version of the plot. As Kevin Drum says, it's "like those people who find an outline of the Virgin Mary in a potato chip." Among other features, we note with amusement that the plotted curve implies that tax revenues hit zero at a corporate tax rate of about 33%, and become dramatically negative thereafter. As of this writing, it is unclear what advanced statistical software package was used to fit the Laffer Curve to the data; the smart money seems to be on MS Paint.

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