I had the opportunity, while reading the Friday (7/13/2007) Wall Street Journal editorial section, to learn for the first time about a fascinating taxation argument known as the Laffer Curve. It’s not a new concept, but I wasn’t a business owner during the Reagan days of supply-side economics, so it probably would have escaped my attention anyway.

(This link appears to provide free access – http://online.wsj.com/article/SB118428874152665452.html?mod=opinion&ojcontent=otep. This link – http://en.wikipedia.org/wiki/Laffer_curve – also makes for interesting reading since, whereas the Journal piece is decidedly pro-, the wikipedia one is somewhat balanced to con-.)

Anyway, the premise is that there’s an optimum rate of taxation, above and below which the government’s income drops off. Below the optimum, there’s money being left on the table. Above the optimum, companies (for example) are incentivised (gotta love that word) to find more loopholes, to move their operations to more favorable business climates overseas, etc, in order to mitigate an overly-burdensome domestic tax rate.

The example cited is Ireland, which taxes its corporations at a quite low 12.5%, but collects 3.6% of its GDP from corp tax sources. Compare to the US, which has a corp tax of 34.4% and collects only 2.5% of its GDP from that base.

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