Fiscal responsibility and/or madness? Lithuania, a case for the Laffer curve!

Posted on April 5, 2010 by


By Orphe P. Divounguy

On April1 2010, the New York Times published an article entitled “From Lithuania, a view of Austerity’s cost”.  Lithuania, a highly indebted country took stringent measures to balance its budget.  The Lithuanian government cut spending drastically by slashing public sector wages and reducing pensions.  Although I would like to praise them for their efforts, unfortunately, the Lithuanians also raised consumer sales tax on a variety of goods and they also raised corporate taxes.  Why then is everyone surprised that unemployment in that country jumped to a high of 14 percent and total output fell by 15 percent?  Although the Lithuanian government is making a serious effort to teach world policymakers about fiscal responsibility, they obviously did not watch Cato Institute’s own Dan Mitchell’s videos about the Laffer curve.  Dan Mitchell is a prominent economist, currently a senior fellow at the Cato Institute (Leading think tank in Washington DC).  He has been a strong advocate of low flat tax and has tried to educate policymakers and the general public about the effects of taxation.  The Laffer curve predicts that an increase (decrease) in taxes will lead to lower (higher) taxable income.  Lithuania is real world evidence of Laffer curve theory.  Output fell, unemployment rose and taxable income is down.  Individuals and businesses are leaving town.  The New York Times article goes on quoting Dr Charles Woolfson, professor of labor studies at the University of Glasgow who has expertise in the Baltics:

Professor Woolfson points out that deepening social alienation in Lithuania has resulted in the sharpest rise in emigration since the country joined the European Union in 2004.  “Then it was the migration of the hopeful,” he said, “Now it is the migration of the despairing.”