Back on July 13, the Wall Street Journal editorial page published an editorial (sub. req.) claiming that "Lower corporate tax rates with fewer loopholes can lead to more, not less, tax revenue from business," a claim that it attempted to support with this graphic:
But as numerous bloggers pointed out at the time, the alleged "Laffer curve" drawn in the graph is absurd. It's fitted directly through the data point for Norway, an obvious outlier with significant oil revenue (and an omitted excise tax), and then plunges straight down toward zero (who knew that increasing your corporate tax rate from 28% to 32% was so destructive?).
Well, Kevin Hassett of the American Enterprise Institute, who provided some of the WSJ's data, released a defense of the Laffer curve yesterday (PDF) that he co-wrote with Alex Brill. By using the data sources he provided, I was able to reconstruct the Journal's data exactly. (Replication data and the Stata .do file for this analysis are here.)
Unsurprisingly, when I fit linear and quadratic models to the same data (29 OECD countries plus the United Arab Emirates in 2004) using the approach of Brill and Hassett (regressions with a linear and squared term), the predictions come nowhere close to WSJ's "Laffer curve":
When we exclude the UAE, which is not directly comparable to OECD countries and seems mostly to be included because it has a zero corporate tax rate, the results become still less favorable to the WSJ:
When we exclude three possible problem countries identified by Brill and Hassett: "Ireland (a noted tax haven), Norway (a country with unusual oil revenues), and Switzerland (a country with significant internal variation in taxation)," there is again virtually no difference between the predictions of the linear and the quadratic model and certainly no evidence of a "Laffer curve":
The difference from the original WSJ graphic is especially clear when we put these results on the same scale and place the graphs side-by-side:
In sum, let's just say that Rupert Murdoch shouldn't let these guys do his books...
(Postscript: As for the larger issues Hassett raises, I haven't replicated his analysis, but I remain skeptical that the negative sign on the squared term in his quadratic models is evidence of a substantial Laffer effect for a variety of reasons.)
Update 8/2 2:10 PM: As commenters have pointed out on the blogs of Matthew Yglesias and Kevin Drum, the dependent variable here -- corporate tax revenue as a percentage of GDP -- doesn't make a whole lot of sense. I agree -- that's part of what I was alluding to in the postscript about my skepticism. The purpose of this post, however, is simply to show that even if we grant that the WSJ's measures are appropriate, the data don't prove what the Journal claims. I make no claims about the value of my regression results, which are provided solely as a counterpoint to the original graph.