As Arthur Laffer disrupted conventional economic thinking, Prager University disrupts higher education

Tim Groseclose | Professor, UCLA

For anyone who is tired of the near-monolithic leftward perspective at U.S. universities, a refreshing alternative is Prager University. Founded by best-selling author and syndicated talk-radio host Dennis Prager, the university is a dynamic website that lists a set of high-quality, five-minute videos, which the university calls “courses.” The courses cover a very wide array of topics, including “The Moral Promise of Free Enterprise,” “Hiroshima: Why America Dropped the Bomb,” and “Happiness is a Moral Obligation.”

I asked Allen Estrin, the chancellor of the university and the executive producer of Prager’s radio show, if he expects Prager University someday to become a “real” university. By that, I meant one with physical classrooms and professors assigning homework and grades. “We don’t know where it’s going,” said Estrin.

Wherever it’s going, I predict it will be extraordinary and possibly a revolutionary force in higher education.

Today, the university will release a new course, “When Are Taxes Too High?” The course will discuss the Laffer Curve, one of the most important of all economic concepts. I’m the instructor of the course.

Many conservatives are already familiar with the main insight of the Laffer Curve: that when a government raises taxes, it can actually cause tax revenue to fall (because of the disincentives to work). However, as the course explains, other aspects of the Laffer Curve might not be so familiar, even to conservatives. One aspect is just how few and self-evident are the assumptions upon which the Laffer Curve relies. These assumptions are: (i) When the government charges a zero tax rate, it receives zero revenue. (ii) When the government charges a very low (but non-zero) tax rate, it receives some revenue. (iii) When the government charges a 100% tax rate, it receives no revenue (since no one is willing to work).

As the course shows, when you illustrate these assumptions on a graph, it becomes obvious that the tax-revenue curve of the government must have a hump — i.e., a rate at which tax revenue is maximized — and if the tax rate becomes higher, the government actually loses revenue. Importantly, the existence of the hump is not an empirical question — i.e., it does not require one to conduct statistical studies to prove it. Rather, its existence is a logical truism — it follows necessarily from the above assumptions.

All economists agree that the hump exists. That part is not controversial. What is controversial is where, in practice, the hump occurs. For instance, when I took my first economics course — in 1984 at Stanford University — the textbook claimed that the hump occurred around a 70% tax rate. Accordingly, that would mean that in countries like the U.S., where tax rates are much lower than 70%, if the government increases tax rates, then the main insight of the Laffer Curve would not apply: An increase in tax rates would still cause an increase in total revenue for the government.

However, as the course discusses, some new evidence suggests that the hump occurs at a much lower tax rate. The evidence comes from a very unlikely source: President Obama’s former chair of the Council of Economic Advisers, Christina Romer. She and her husband David Romer, a professor at the University of California, Berkeley, published an article at the most prestigious peer-reviewed journal in economics, the American Economic Review. They found that, on average, for every 1% that the government raises tax rates, GDP falls about 3%.

This implies that the hump in the Laffer Curve occurs at a 33% tax rate. (Although Romer and Romer did not discuss the Laffer Curve in their article, this fact follows from a few uncontroversial mathematical equations, which you can find on my blog or on the Prager University blog.)

If true, this new finding has some profound political implications. It means that even if you are an extreme socialist, only interested in maximizing the size of government, then you should want taxes to be no higher than 33%. And if you significantly value other goals — such as economic growth or allowing people the freedom to keep more of the money that they earn — then you should want a much lower rate.

The study by Romer and Romer is big news. Yet very few people are aware of it. It is astounding that the mainstream media have not reported it more widely.

The latter fact is one more demonstration of the importance of alternative media and alternative education sources — sources such as The Daily Caller and Prager University.

Tim Groseclose, in addition to being a faculty member at Prager University, is a professor of political science and economics at UCLA.

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