Shelby County Trustee David Lenoir, and the Laffer Curve

While addressing the Memphis Rotary Club earlier this month, Shelby County Trustee David Lenoir told the crowd that “higher taxes don’t always equate to increased revenue.”

The county trustee – whose remarks came at a time when both the city and county governments are trying to wrap up their latest fiscal year budgets – was describing an economic concept known as the Laffer Curve.

It can be illustrated in the form of a parabola. There are three important points on that parabola. Two of the points are at both the ends. Say a government decides to collect zero percent in taxes from its citizens. Now say that government chooses to collect 100 percent.

At both of those rates, the government probably won’t be collecting any money. The reason why is obvious at zero percent. At 100 percent, no one would probably show up for work the next day, if all their money goes to the government.

Here’s the third important point on that parabola. Presumably, there is some mid-point on the curve where the government is collecting the maximum amount of money it can. Any rate past that point, and it starts becoming more and more counterproductive (people move, shift their income to avoid taxation, etc).

That’s what Lenoir was referring to. Here’s how he continued:

“I think sometimes elected officials forget the fact that as they increase taxes that money is mobile. And they wonder why folks are leaving the city and going to the county or leaving the county and going to the surrounding counties. The reality is increasing tax rates is not the answer.”