Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
The Laffer Curve: Grizz's First Lesson
#1
Here is the Grizz's first lesson in economics, made especially for him, so he will understand more on how the world really works. And this lesson is on something that is really quite simple in its elegance, yet controversial in its acceptance: The Laffer Curve.

The reason why is it so controversial is that at its heart is the element of human "Dynamic" considerations versus mathematically "Static" Thinking. Firstly, it is far easier to look at things statically and plug in numbers in order to come up with a preconceived result, than to have to figure out human nature. In other words, one side allows for intellectual narrowed mindedness, and the other side refuses to accept that.

And secondly, many quarters tend to think that using something so elementary as the Laffer Curve allows many to work their way out of contributing their 'fair share' to the system. But the simple fact is that human nature is as human nature does. And those same humans are possessed with the "Self-Interest" gene, and don't appreciate being forced to allow their 'altruism' gene to outweigh their 'self-interest' gene.



So first up is a Youtube video, which shows, in its simplest form, how the Curve works.



And here is the original class as presented by Jude Wanniski. It is a single lesson. Later S-S lessons had the Laffer Curve broken down into two, or three, different lessons, but for you Grizz, I'll keep it simple for starters.

Quote:Taxes, Revenues and the Laffer Curve
Written by Jude Wanniski

Memo To: Students of Supply-Side University
From: Jude Wanniski
Re: Taxes, Revenues and the Laffer Curve

In studying public finance, there is nothing more important than an appreciation of the Laffer Curve. Nothing. Empires have been built on the wisdom of a few men who understood the law of diminishing returns as it applies to tax policy. Caesar Augustus understood. Napoleon understood. The architects of the Byzantine Empire understood. So did the Founding Fathers of the United States. The temporary, but sharp decline of the U.S. economy in the 1970s was the result of the failure of our political leaders to realize the law of diminishing returns was eroding the economy in a new and different way. The tax rates themselves were constant, but because of the inflation that began to take hold in 1967 when the U.S. commitment to a dollar/gold standard began to waver, real rates of taxation were rising and had passed the point of diminishing returns. We were inflating our way up the progressive tax schedules of the income-tax code.

Robert Mundell and Arthur Laffer were the first economists on earth to realize that basic fact and to predict the bad things that followed. The law of diminishing returns simply means that once you pass a certain point in anything you do that seems pleasurable, the pleasure diminishes. Eat ice cream to a point and the pleasure in eating more diminishes rapidly. Raise tax rates too high and commerce will be stifled to the point that tax revenues will decline. At that point a reduction in tax rates will stimulate commerce and revenues will rise.

[Image: laffercurve.gif]

This is all the Laffer Curve demonstrates. As early as 1972, Art Laffer explained to me that there always are two rates of taxation that will produce the same revenue, one at a higher level of national production and one at a lower level. The only exception is if you are at exactly the point where the rate is optimum, which means revenues will fall if you raise or lower rates of taxation. When I met Robert Mundell in May 1974, he elaborated on this concept by teaching me that if a government were in the high range of the tax rate, it could lower the rate safely even though the aggregate revenue immediately declines -- as long as the economy grows faster and produces more revenue than the level predicted by the static assumption of no behavioral change.

Keynesian demand-siders will argue that any reduction in taxes will produce this result, including rebates on taxes already paid. In the supply-side model, only certain kinds of tax cuts will have positive supply effects. Tax rebates, of the kind passed in 2001 by the Bush administration, have no supply-side effects, and in fact were designed by the President’s chief economic counselor, a conservative Keynesian, Lawrence Lindsey. The tax cuts passed this spring were correctly designed, reducing unnecessarily high tax rates on capital, which is why the stock market has been rising since mid-March when the first signs of the legislation taking shape began to appear.

Mundell has argued the deficit could increase if tax rates swollen by inflation were cut, and interest rates on government bonds would decline! In other words, if the rate is cut by 10%, the static prediction would be that revenues would fall by 10%. If the economy grew faster because of the incentives of the lower rate, perhaps revenues would only fall by 8% or 9% in the fiscal year ahead. By this analysis, he said,therevenuedifference <i>at least would have to be sufficient to pay the interest on the bonds the government would float to cover thetemporaryrevenueshortfall</i>.

In this sense, the government would be investing in the productive potential of the people, betting that they would respond to the lower rate in a way that would produce a permanent return on that investment. It was this insight that enabled me to see, where others did not, that the Reagan tax cuts, although accompanied by an increase in the deficit, also were accompanied by falling interest rates. There have been tens of millions of words written about the Laffer Curve since I first watched Laffer scribble it on a cocktail napkin to demonstrate the idea for Vice President Dick Cheney, when Cheney was deputy chief-of-staff to President Gerald Ford in December 1974. Almost everything written has been wrong, in that reporters or critics of the Curve thought it showed an immediate response, where there would be no deficit increase in the 12 months following the cut.

I still get mail from serious people who tell me "Supply-side economics is a fraud," because the Reagan tax cuts led to budget deficits. The deficits themselves caused economic growth because of demand-side Keynesian effects, they say, but the deficits would have to be paid down in future years with higher taxes. This would be true if the deficits were accompanied by higher interest rates, but interest rates declined as the Reagan tax cuts took effect and the deficits swelled. That combination led me to predict that as the lower tax rates would steadily increase the rate of economic growth over several fiscal years, the budget deficits would turn to surpluses.

The phenomenon is accepted when it is seen in the microeconomic world of the private firm. The bond market assesses a corporation`s bond floatation by examining the uses to which the funds will be deployed. If it believes the issue will produce a positive return on investment (ROI), the interest rate on the bond will be favorable, and the corporation`s other debt may even trade up in the secondary market. There is no reason why government bond finance should not be treated the same way, especially when the bonds are being issued explicitly to finance tax cuts.

Conservatives fear such daring by governments because they worry governments routinely will go into debt for "investments" that have no chance of producing a positive return. Fed Chairman Alan Greenspan is in that position, always arguing that spending cuts take precedence over tax cuts. But even Greenspan will support a cut in the capital gains tax without offsetting spending cuts. This is because he believes that any cut in the capital gains tax will produce a positive ROI for the nation. The reason is the capital gains tax is the most destructive of all taxes, in that even at 1% it immediately reduces the willingness of the market to finance equity investments. Tax rates on ordinary income can run up to higher levels in order to finance government spending. But in order to get a capital gain, an individual has to pay taxes on ordinary income and invest some portion of what remains, hoping the investment increases in value. Greenspan told me years ago this is a direct tax on the nation`s standard of living and he would never hesitate to cut it, even down to zero.

With a few exceptions, liberal Democrats have opposed the Laffer Curve concept, rejecting the idea that high tax rates could be cut and thus produce more revenues for liberal spending programs. This is because they are reluctant to concede that the economy can expand at the expense of government, especially if the result is a widening of the gap between high incomes and low incomes. A former Democratic Speaker of the House of Representatives once told me over a pleasant lunch that he conceded a lower capital gains tax would cause the economy to expand, but said he had to oppose it because it would lead to greater “unfairness” in incomes. In other words, everyone would get wealthier, but the rich would get richer, faster. Even this is false. Lowering the tax rate on capital elicits more capital from the economic system, with the difference made available to those who can only hope to become rich by having access to capital and credit.

In this sense, President John F. Kennedy was a “supply-sider,” arguing for lower tax rates on incomes and capital gains. In presenting his tax package in 1962, he argued “a rising tide lifts all boats.” By contrast, his brother Edward “Ted” Kennedy, the Senator from Massachusetts, rejects those supply-side arguments and insists on government spending as the route to greater economic welfare. Tax the rich and spend the revenues on the non-rich.

This approach also can have positive economic effects, as long as the spending programs have a positive return on investment. After WWII, the GI bill that subsidized college tuition for veterans, for example, almost certainly had positive supply effects. On the other hand, the welfare spending of the Great Society had negative returns in requiring there be no “man in the house” for a family to receive welfare checks. This had the effect of destroying black families when unemployed fathers abandoned their families so they would be eligible for welfare. To be consistent, supply-siders have to accept the fact that government programs that have positive returns deserve to be supported, even if it would mean raising taxes. In the early Reagan years, I supported an increase in the federal gasoline tax, on the grounds that inflation had reduced the purchasing power of the specific five-cent tax. Revenues were insufficient to repair the national highway system, I argued, and the costs of commerce were climbing as potholes tore up the tires of cars and trucks. In the debates since 2001, I did criticize the Bush/Lindsey tax rebates and supported selective parts of the Democratic spending agenda.

It is important to note that when policymakers or political leaders examine a tax structure, looking for places to raise or lower taxes, they must analyze each one individually. When the federal budget was throwing off big surpluses prior to 2001, every politician had a pet tax he or she wanted to cut. The cultural conservatives wanted to fix the marriage-tax penalty, for example, on the theory that it encourages mates to remain outside wedlock. Others wanted to use the surpluses to finance a bigger earned-income tax credit, which gives workers extra cash if they earn less than the lowest income-tax bracket. There are all sorts of tax credits offered to one group or the other, to foster bigger families, or bigger charities, or to subsidize cultural activities. Generally speaking, these have negative effects on economic growth and because they do, their enactment would cause interest rates to rise. That is, they are poor investments for the federal government to be making. In the remainder of this semester,we will spend considerable time on the themes and variations of the Laffer Curve. Next week I plan to run an essay I wrote as an adaptation of Chapter Six of my 1978 book The Way the World Works, which discusses in detail the Curve as it is pictured above.

* * * * *

Now, here is Daniel J. Mitchell, of the CATO Institute, who is an Austrian, not a Supply-Sider. And here is his take on this concept that is really thousands of years old.





___________________________________________________________________________________________________
--- SCHiST Happens! ---
Reply
#2
The Roemers may have come up with 33% as the ideal - but it should be noted that is a guesstimate that varies with the times. In a tattered economy like today's, growth is far more important that just revenue coming in. Dr. Mitchell was right to say, if he had his druthers, the tax rate would be at 0% for maximum growth.

The answer is, of course, to cut spending to stay under point B on the Laffer Curve. Keynesians have complex ratios that equate tax rate to joblessness and debt. They have been shown to be so much hog wash - but the Keynesian economists throw them out anyway every time they are questioned.

There are many corollaries of the Laffer Curve. One is that higher tax rates affect the level of unemployment also. Another is that wage rates are also affected. A low tax rate allows businesses to maximize profits, which leads to increased hiring levels, which in turn forces employers to pay more for competitive workers. Compound high taxes on businesses with a high minimum wage, and there will be virtually no employment for entry-level workers. Lower the rates, and workers get what they are worth. Entry level workers aren't worth much - but when other businesses will hire them away from you, you increase pay to get the workforce you need. Minimum Wage tends to telescope the Laffer Curve. The higher it is, the worse the effect on the workers.

What occurred during Reagan, was that the lowered tax rates so spurred the economy, that businesses added benefits to attract better workers. During the Reagan years, many Leftists love to skew the massive raise in personal wealth that came with added benefits. The take home pay was increased measurably, but the benefit packages far overshadowed mere salary.
Reply
#3
Caught lying again, Bill. Reagan significantly raised the taxes on incomes below $50,000. I bet the majority of Americans made less per year in the years of dear leader Ronald. He was lucky that the oil price collapsed, and his predecessor had deregulated the markets already, airlines, trucking, railroads, telephones, natural gas, and banking.
"You know, Paul, Reagan proved that deficits don't matter." Dick Cheney
Reply
#4
(09-11-2012, 04:58 AM)quadrat Wrote: Caught lying again, Bill. Reagan significantly raised the taxes on incomes below $50,000. I bet the majority of Americans made less per year in the years of dear leader Ronald. He was lucky that the oil price collapsed, and his predecessor had deregulated the markets already, airlines, trucking, railroads, telephones, natural gas, and banking.
Don't worry Q. All that those people making $50,000 has to do is quit spending their money and let the economy denigrate. (They will be the ones going past point B of the Laffer Curve.) S22

I wonder just how much money I need to get an off shore account started? My goodness I hope that it's not a million dollars or I'm going to be in a bad way. S11

What puzzles me is if the rich are using ways to hide their taxable income once it goes past point B, than what is stopping them to continue that practice while taxable income for the rich is low. Answer? Nothing. Absolutely nothing.

Note to JohnL or anyone else: theoretically it can be done.
"The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations." `Thomas Jefferson

Reply
#5
Grizz, that is interesting, but really has nothing to do with the Laffer Curve. Are you saying you completely understand and agree with the concept? Have you watched the videos and read the article from Uncle Jude?

Lets discuss it if you have any questions. S1
___________________________________________________________________________________________________
--- SCHiST Happens! ---
Reply
#6
Sorry, if the information has not been fully digested ... but ... has anyone ever studied the effect of skyrocketing debt on the curve? Perhaps the trajectory shifts a bit as the reality that ALL the bills eventually come due begins to sink in? If you can borrow the difference between the revenue that ought be coming in ... vs the revenue actually IS coming in, it makes the curve 'seem' irrelevant ... at least for a brief while. Does anyone really think that the Greeks felt the need to concern themselves with something as dull as the Laffer curve? Why trifle with reality when you can live in Candyland?
"Democracy is the theory that the common people know what they want and deserve to get it good and hard."
-- Henry Mencken
Reply
#7
(09-11-2012, 09:39 PM)mr_yak Wrote: Sorry, if the information has not been fully digested ... but ... has anyone ever studied the effect of skyrocketing debt on the curve? Perhaps the trajectory shifts a bit as the reality that ALL the bills eventually come due begins to sink in? If you can borrow the difference between the revenue that ought be coming in ... vs the revenue actually IS coming in, it makes the curve 'seem' irrelevant ... at least for a brief while. Does anyone really think that the Greeks felt the need to concern themselves with something as dull as the Laffer curve? Why trifle with reality when you can live in Candyland?

You skip a few steps in logic. ALL the bills have always come due. It is nothing new because of skyrocketing debt. There is no borrowing to cover revenue that ought to be coming in - we are past that point.

Look at it this way. There is spending. There is revenue. There is borrowing which is actually more spending. Borrowing does not make money - it uses it up. The only way to balance spending with revenue is to decrease spending to match revenue. To increase revenue, one must grow the economy. It is not higher rates that bring in more revenue - it is a larger economy. To grow the economy, the only way shown to work is cutting taxes.

It is not all that hard to figure out.

The funny thing is, that cutting taxes to make the economy grow is one of the markers used by the banks to qualify you for borrowing. It was the threat of no growth in the economy caused by faulty tax policy that caused threats on our rating.
Reply
#8
I'm just cutting to the chase ... sorry about clipping the corners. There are two possibilities when our fiscal conduct is considered.

1. Maintain some semblance of the illusive notion that our creditors will all eventually be paid in tangible terms.

2. Begin producing monetary currency that is completely worthless.

Pick one or the other.

Sure, there has always been debt. Sure there have always been bills. But the "faith and trust" that supports our monetary system begins to crumble when we abandon all pretense at keeping anything resembling a 'straight' set of books. Debt allows you to ignore the 'balance' that you mentioned ... it makes it irrelevant ... but only temporarily ... right up to the point that "faith and trust" collapses. And when it does, there is nothing but (hot) air holding up the system. The Jackass delusion is that "somebody else" will pay the bills ... the reality is (for quantitative reasons that John points out) that it ain't likely to happen. ... so then what? ... try to 'unspend' all the expenditures? ... maybe ask for forgiveness??
"Democracy is the theory that the common people know what they want and deserve to get it good and hard."
-- Henry Mencken
Reply
#9
I'm hoping Grizz will ask question here. Let's try to engage him, because I really want him to start learning something of value, regarding economics. He's so uneducated there that the more he learns the better he is able to see why things just don't work as his emotions tell him they really should.
___________________________________________________________________________________________________
--- SCHiST Happens! ---
Reply
#10
(09-11-2012, 05:06 PM)John L Wrote: Grizz, that is interesting, but really has nothing to do with the Laffer Curve. Are you saying you completely understand and agree with the concept? Have you watched the videos and read the article from Uncle Jude?

Lets discuss it if you have any questions. S1

I guess you and he differ on where the optimal taxation is for the rich on that curve. Everybody can make one of his own, and it's good for nothing. And yes, zero taxation has been tried. Also known as communism.
"You know, Paul, Reagan proved that deficits don't matter." Dick Cheney
Reply
#11
Here is a short quote from Jude that explains why the attacks on Reagan are so disinformational.

Jude Wrote:The media reported: "When Reagan cut taxes after he was elected, the result was less tax revenue, not more," wrote a prominent Harvard professor in 1998 in his best-selling economics textbook. "Revenue from personal income taxes (per person, adjusted for inflation) fell by 9% from 1980 to 1984, even though average income (per person, adjusted for inflation) grew by 4% over this period."

This is sophistry, in parenthesis. When we see that revenues “adjusted for inflation” actually fell after the Reagan tax cuts, the case seems to be closed. But the inflation occurred in the Carter years, as gold leaped to $625 from $120. In the Reagan years, the inflation baked in Carter’s gold cake rose, but the gold price fell to $350. If revenues are “adjusted for deflation” they are stupendous. This is why Reagan won his landslide re-election victory, as the electorate knew how the tax cuts had worked their magic. [Those who did not live through this economic miracle, that proved the Keynesian model did not work, are often unable to learn about it through the media.]
Reply
#12
(09-11-2012, 05:06 PM)John L Wrote: Grizz, that is interesting, but really has nothing to do with the Laffer Curve. Are you saying you completely understand and agree with the concept? Have you watched the videos and read the article from Uncle Jude?

Lets discuss it if you have any questions. S1
Yeah, I understand the Laffer Curve, John; however, my question still stands: If a rich man can find ways to conceal his money once he is past point B, than what is stopping him from continuing the same process with low tax rates?

My idea? Absolutely nothing!

Even if tax rates were 2% for him, he could still make it 0% with no trouble at all.

And now on to Bill Lambert.

(09-11-2012, 10:42 PM)WmLambert Wrote: Here is a short quote from Jude that explains why the attacks on Reagan are so disinformational.

Jude Wrote:The media reported: "When Reagan cut taxes after he was elected, the result was less tax revenue, not more," wrote a prominent Harvard professor in 1998 in his best-selling economics textbook. "Revenue from personal income taxes (per person, adjusted for inflation) fell by 9% from 1980 to 1984, even though average income (per person, adjusted for inflation) grew by 4% over this period."

This is sophistry, in parenthesis. When we see that revenues “adjusted for inflation” actually fell after the Reagan tax cuts, the case seems to be closed. But the inflation occurred in the Carter years, as gold leaped to $625 from $120. In the Reagan years, the inflation baked in Carter’s gold cake rose, but the gold price fell to $350. If revenues are “adjusted for deflation” they are stupendous. This is why Reagan won his landslide re-election victory, as the electorate knew how the tax cuts had worked their magic. [Those who did not live through this economic miracle, that proved the Keynesian model did not work, are often unable to learn about it through the media.]
Here is an argument against supply-side:

NYT Wrote:A Political Comeback: Supply-Side Economics


By LOUIS UCHITELLE

When Ronald Reagan ran for president in 1980, he promised to cut taxes in what seemed, at the time, a magical way. Tax revenue would go up, not down, he said, as the economy boomed in response to lower rates.

Since then, supply-side economics, as it was called — first with derision but then as a label embraced by its supporters — has become a central tenet of Republican political and economic thinking. That’s despite the fact that the big supply-side tax cuts of the 1980s and the 2000s did not work out as advertised, as even most supporters acknowledge.

But advocates see broader economic benefits from lowering tax rates, which is one of the reasons the concept has reappeared as a point of contention in this year’s election campaign, in an amended form.

“What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.”

Even with a growing economy, however, the promised boon in tax revenue never materialized. Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues “rise dramatically” when tax rates are cut.

In the 1980s, though, during the initial era of supply-side tax cuts, per capita revenue from personal income taxes, adjusted for inflation, rose an average of just 0.7 percent annually throughout the Reagan presidency, according to the White House Office of Management and Budget.

That was far below what turned out to be an average annual increase of 6.5 percent in the eight years of the Clinton administration, when tax rates at the high end of the income ladder were raised.

Since 2001, the annual per capita revenue from income taxes fell 1 percent under President Bush even though tax collections picked up sharply starting in 2005. The budget surplus Mr. Bush inherited turned into a deficit.

“If you are cutting taxes without offsetting the cuts through reductions in spending, then all you are doing is increasing the debt and postponing the taxes,” said Jason Furman, director of the Hamilton Project at the Brookings Institution, and also a policy adviser to the Democratic presidential candidates.

Circumstances vary across the decades, of course, and it is difficult to sort out all the various influences on the economy and tax revenues. But when Mr. Reagan and his supply-side advisers first pushed through a range of tax cuts, they applied their logic to the broad mass of taxpaying workers. They argued that the incentive from lower rates on additional increments of income would prompt people to work that extra day or get more education to qualify for a better job.

Similarly, a spouse might take a new job, encouraged to do so by the promise of more take-home pay. The family’s taxable income, and the nation’s, would grow, the theory suggested, producing more tax revenue even at the lower rate.

That was before so much more of the national income flowed to upper-end households, and before the actual tax collections of the last three decades undercut the supply-side argument. Now the supply-siders single out the wealthiest Americans and argue that because they have so many ways to shelter their money from taxes, the incentive to declare more taxable income is much greater when tax rates are lowered than it is for the less well-to-do.

“The supply-side argument these days really applies to upper-income people,” said Robert M. Solow, a Nobel laureate in economics who served in the Kennedy administration. “They are portrayed as the golden geese, and you don’t want to discourage them from laying their eggs.”

By contrast, Mr. Solow says, “the Democrats are convinced they’ll lay their eggs anyway, without tax cuts as an incentive.”

Senators Hillary Rodham Clinton and Barack Obama, contending for the Democratic presidential nomination, reflect that point of view. They say that they have no intention of undoing the Bush tax cuts on families earning less than $250,000 a year. Married couples with incomes above that level, however, would once again be taxed by either candidate at up to 39.6 percent — the top rate reached during Bill Clinton’s presidency.

President Bush pushed through legislation in 2003 that cut the top rate to 35 percent, but only until 2011. Senator McCain wants to extend the 35 percent rate indefinitely and his camp increasingly cites as justification the supply-side effect on upper-income families.

Having once voted against the Bush cuts, Mr. McCain has reversed position and now has even enlisted Mr. Laffer as a special adviser. “McCain is on the right track,” Mr. Laffer said.

While Mr. Laffer insists that tax revenue will rise when tax rates are cut, other supply-siders are less categorical. Martin Feldstein, a Harvard economist who was the first chairman of President Reagan’s Council of Economic Advisers and now supports Senator McCain, estimates that a 10 percent tax cut would in fact reduce tax revenue — but only by 3 to 5 percent.

“It is not that you get more revenue by lowering tax rates, it is that you don’t lose as much,” he said.

Not since Mr. Reagan ran in 1980 have supply-side tax cuts been so central a campaign issue. George H. W. Bush and Bill Clinton each ended up raising taxes, ignoring the supply-side thesis, which the elder Mr. Bush once called “voodoo economics.”

Now his son argues that his tax cuts strengthened the economy. Growth resumed after Mr. Bush pushed his tax cuts through Congress, but that position, critics say, is harder to maintain now, given that the election campaign is unfolding in the midst of a credit crisis and an incipient recession.

Still, even in hard times, the incentive from a tax cut is particularly strong among the wealthy, supply-siders say. A drop of four or five percentage points in the top tax rate of these households saves them tens of millions of dollars. Above all, the supply-siders say, less money will be wasted on accountants and lawyers hired to find ways to dodge taxes when the rates were higher. These outlays will be put to more productive use.

The supply-siders also argue that at the corporate level, lower tax rates, which Senator McCain favors, prompt companies to hire more workers and to invest in new equipment, generating more output and more taxable income.

The Democrats, and many economists who describe themselves as nonpartisan, have a different perspective. Tax incentives might indeed increase labor supply and output, they acknowledge, but what good is that if there is insufficient demand for the additional labor and for the goods and services that are produced?

The Democrats are quick, as a result, to support the $160 billion stimulus package, with its rebate checks that millions of Americans will be encouraged to spend, supporting demand. They also are prepared to raise taxes to introduce more equity into the tax system and as a means of shrinking or eliminating a large budget deficit.

The excessive borrowing required to finance the deficit, they say, acts as a drag on the economy, pushing interest rates higher than they otherwise would be, adding to the cost of business investment.

Gene Sperling, an economic adviser to Bill Clinton during his administration and now to Mrs. Clinton as a candidate, said that supply-siders vastly exaggerate the incentive effect of relatively small changes in tax rates while ignoring the benefits of bringing government revenue more closely in line with spending.

“The supply-siders predicted in the 1990s that raising rates, even for deficit reduction, would lead us to recession,” Mr. Sperling said. “What followed instead was the longest recovery in history, and the people whose tax rates went up had exceptional income gains.”

The tax issue, for all its importance, does not yet have a prominent place in the campaign. That is mainly because Senators Clinton and Obama are still struggling with each other on issues other than taxes, on which they generally agree. A winner has not emerged to cross swords with Senator McCain.

“When there is finally a candidate,” said Austan D. Goolsbee, chief economic adviser to Senator Obama, “then we’ll debate taxes and the flaws in the supply-side argument.”
"The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations." `Thomas Jefferson

Reply
#13
(09-12-2012, 04:38 PM)Grizzly Wrote: Yeah, I understand the Laffer Curve, John; however, my question still stands: If a rich man can find ways to conceal his money once he is past point B, than what is stopping him from continuing the same process with low tax rates?

My idea? Absolutely nothing!

That question makes no sense to me. Sorry, but you need to explain a bit more fully for my poor pea brain.

Quote:Even if tax rates were 2% for him, he could still make it 0% with no trouble at all.

But why would he? Breaking the law for such a tiny amount is just not worth it in almost all cases. And trying to close all loopholes for those with larcenous hearts is not worth the effort. Eventually things will tend to catch up with those folks who are 'hogs' and want it all regardless.

So your worry about those small numbers of dishonest, and law breaking, business men, is not worth getting worked up about.
___________________________________________________________________________________________________
--- SCHiST Happens! ---
Reply
#14
What Uchtelle misses, rather dramatically, is that revenues did increase. The Keynesians measured deficit, after they subtracted their over-zealous over spending. Of course the increased revenue would be used up if it is spent frivolously and not used to pay down the debt. Also remember that Reagan sent a balanced budget to Congress every year - and it was Congress that ballooned up the budget. It was also Congress and the Senate that negotiated not vetoing the budget as compromised because THEY WOULD ONLY SPEND ONE DOLLAR FOR EVERY TWO DOLLARS RAISED. Go back and check history. It was the legislature that reneged on their economic pledge to control their spending. That promise is what made Reagan accept the enlarged budgets. Don't lay that on Reagan. He acted correctly from the start - and his only failure was expecting the Democrats to honor their word. In hindsight, we can say he should have known better - but past Presidents could count on the media laying blame where it belonged, causing the requisite change in support that would brake the lies and overspending.

Uchtelle used Goolsbee as his final trump card - and Goolsbee is a liar and disinformationist. He is one of Obama's advisers who uses the 4-1/2 million jobs created number, and that has been fact-checked to death - and it was pronounced dead. That makes the Dems zombies, doesn't it?
Reply
#15
Dan Mitchell discusses how Portugal has completely forgotten the lessons of the Laffer Curve, on attempts to solve their debt problems: Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake?.

Quote:Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising taxes.

Needless to say, I was right. Not that this required any special insight. After all, no nation has ever taxed its way to prosperity.

We’re now at the end of 2012 and Portugal is still saddled with a weak economy. And the higher taxes haven’t resulted in less red ink. Indeed, according to the Economist Intelligence Unit, government debt has jumped from 93 percent of GDP in 2010 to 124 percent of GDP this year.

Why did higher taxes backfire in Portugal? For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other nations.

-Higher taxes undermine incentives for productive behavior, thus reducing an economy’s potential for growth. This means less economic output, which also means a smaller tax base. This Laffer Curve effect doesn’t necessarily mean less revenue, but it certainly means that tax increases rarely raise as much money as initially projected.

-Higher taxes usually are a substitute for the real solution of spending restraint (i.e., Mitchell’s Golden Rule). Politicians oftentimes refuse to reduce the burden of government spending because of an expectation of additional tax revenue. Heck, in many cases, higher taxes trigger an increase in the size and scope of the public sector.


[Image: golden-rule.jpg?w=771&h=546]

So did Portugal learn any lessons from this failed experiment in Obamanomics?

Hardly. Indeed, the government plans to double down on this approach – even though it’s increasingly apparent that higher tax burdens won’t translate into much – if any – additional tax revenue. Here are some excerpts from a report in the Financial Times.

Quote:Lisbon plans to lift income tax revenue by more than 30 per cent, raising the effective average rate by more than a third from 9.8 to 13.2 per cent. Anyone receiving more than the minimum wage of €485 a month, including pensioners, will also pay an extraordinary tax of 3.5 per cent on their income. …the steep tax increases facing many families have made the outlook for 2013 – the third consecutive year of austerity, recession and rising unemployment – the grimmest yet. Total tax revenue has fallen considerably below target this year, forcing the government to implement additional austerity measures… The coalition will be relying on increased state revenue to account for about 80 per cent of the fiscal adjustment required in 2013 – a reversal of the original bailout plan, in which consolidation was to be achieved mainly through spending cuts.

Amazing. The government imposes huge tax hikes, which don’t generate any positive results. Yet even though “tax revenue has fallen considerably below target,” confirming that there are significant Laffer Curve issues, the government chooses to repeat the snake-oil fiscal therapy of higher taxes.

Anybody want to guess what’s going to happen? The answer, of course, is that this will further dampen incentives to generate income and comply with the government’s fiscal demands.

Quote:The latest increases have stretched the tax system to the limit, says Carlos Loureiro, a tax partner at Deloitte. “The current model is exhausted. We need to do something different,” he says. “Any further increase in tax rates is unlikely to result in increased revenue.” Income from value added tax, the government’s biggest source of tax revenue representing about 36 per cent of the total, has been falling since 2008, despite a sharp increase in the rate – the main rate is now 23 per cent. Both the government and the European Commission have acknowledged the risks of depending on increased tax revenue, which is more growth sensitive, to meet fiscal targets and contingency spending cuts amounting to 0.5 per cent of national output have prepared in case of another tax shortfall.

I almost want to laugh at the part of the excerpt which notes that tax revenue “has been falling…despite a sharp increase in the rate.”

Maybe it’s time for these fiscal pyromaniacs to realize that revenues might be falling because rates are higher. In other words, Portugal not only isn’t at the ideal point on the Laffer Curve (collecting the amount of revenue needed to finance legitimate activities of government), it may even be past the revenue-maximizing part of the curve.

To be fair, there are lots of factors that determine economic performance, so higher tax burdens are just one possible explanation for why the tax base is shrinking or stagnant.

The one thing we can state with certainty, though, is that Portugal’s fiscal problem is too much government spending. The failure to address this problem then leads to very unpleasant symptoms, such as lots of red ink and self-destructive class-warfare tax policy.*L

If all that sounds familiar, that’s because it’s also a description of what President Obama is proposing for the United States.

[Image: Portugal_Financial_Crisis_073c5.jpg]
Ummm…shouldn’t they be targeting politicians?

P.S. I don’t want to imply that Portugal is a total basket case. True, I’m not optimistic about the country’s future, but at least some lawmakers now acknowledge that Keynesian spending was a big mistake. And there are even signs that Portuguese officials are beginning to realize that lower tax rates should be part of the solution. But good policy may be impossible since so many people now have a moocher mentality.

P.P.S. At the risk of bearing bad news to close the year, research from both the Bank for International Settlements and the Organization for Economic Cooperation and Development shows the United States actually faces a bigger long-run fiscal challenge than Portugal.


*Note- what is so frustrating is that Leftists, such as The Grizz, look at all this from a punishment POV, and not from an incentive POV. Somehow I always thought the main idea was to increase revenue, so as to allow for more spending. But getting the revenue should come first. Punishing achievers is just the opposite way to go about all this.

And too, unlike what The Grizz is saying, if the tax rates are low enough there is really no reason for achievers to hide behind tax codes. The less the taxes, the more incentive to report things and then move full speed ahead. But trying to punish them for over-achievement just brings out the need to seek tax exemptions in order to keep a larger part of their hard earned profits. I mean, this is just human nature. But somehow Leftists, always stuck in Kindergarden mode, never quite see this in their utopian ideal of how the world is supposed to really work. It so.........frustrating.
___________________________________________________________________________________________________
--- SCHiST Happens! ---
Reply
#16
I didn't wish to start a new thread on this, so I decided to place it here.

This was written on a blog by a forum member at another forum I attend and I believe that it describes supply-side really well.

Here are some excerpts:

Quote:Do you see what happens at the most basic micro-economic level? The CEO wanted to meet the demand from customers and so it become necessary to hire help to create the supply to meet that demand. What supply side attempts to do is supply the CEO with more money without having the demand available to purchase that supply, so in essence this money that the CEO receives will just sit there. CEO’s will not hire more people when they have more money, there needs to be demand for their products for them to do this.

So when we supply them with more money, either from tax breaks or some other form of stimulus we get a situation that looks like this:

[Image: CorporateProfits_zpsc5aee09b.jpg]

The graph clearly shows that corporations that are able to sell their products are doing quite well, just look at their profits above. But they aren’t hiring, so what gives? Profits aren’t meant to accumulate or to sit idle, they are there for investing in further growth to obtain more markets share. CEO’s are not going to spend their profits on hiring until they see that there is more demand for their products, and there won’t be more demand for their products with such high unemployment. So in order to release those record profits unemployment has to go down, and customers need more income, not the CEO’s.

And as the article I linked from the graph also shows, is that wages are also declining as a share of GDP, so to lower expenses CEO’s are cutting wages to meet their decreased demand, without laying them off. So CEO’s are nice people, they are going to try their best to keep you and hire you, but they can’t when there is no demand to warrant giving you a raise or hiring you. You would do the same if you were in their shoes, so they are not to blame. What is to blame is the notion that rich people create jobs, that is obviously not the case. Sales create jobs, sales create rich people and sales can only occur if we improve the unemployment rate or add more currency (which increases demand).
Reply
#17
JP Hochbaum's article from HeredicalDruthers at World Press was only Part I, so maybe he'll address the stunning mistake he made in this part later.

The main thing to realize is that in his need to deconstruct Supply Side reasoning, he confuses what it is with what the Left pretends it is. The example he ruminates over is flawed, because he is describing what happens in a mixed economy when bureaucrats get in the way. It wrongly confuses the results of high unemployment with stopping CEO's from hiring - which is just a rather stupid circular argument. High unemployment is not the sole cause of lack of demand, but it does contribute.

It is the profit motive that is supreme, and if government punishes one for selling, then there is no profit to it. Confusing lack of demand for intrusive regulations and taxes ignores the Laffer Curve. If you are on the wrong side of the curve, and too much taxes are levied, then Laffer expects problems with profit - so supply and demand are no longer directly related. There is a reason that there is less revenue produced on the wrong side of the curve - and Hochbaum concentrates on the results of the dysfunction rather than the causes.

Fix the tax burdens and get rid of the punitive regulations - and the CEOs he's so busy pillorying, will reinvest savings into capital. It's not a hard concept to understand.

You can often tell the ignorant demagogues from their use of canned buzzwords and use of tested focus-group emotive clichés. When he's not throwing around the non-descriptive term "One-percenter" he's probably in the park with his fellow Occupy Wall Streeters.
Reply
#18
The 1986 tax bill removed almost a total of 50% of all US citizens from the federal tax rolls. Many had already been, it upped the ante in that respect.

Even though Reagan signed it, it was a bill that pleased the left at that time, including Ralph Nader. I can't recall all the details now except it did up the level of income one had to make to pay any income taxes.

It's still in place today with very minor exceptions, I think rates are up about 4% from the top.

People making $50K in 1986 were pretty well off, I have a darn good job and I was making in the mid 30s then. That's = to probably $150K now. You guys have to account for the debauching of our currency when throwing around numbers from times past.
Reply
#19
Don't forget that during Reagan's tenure, income taxes went down and revenues increased - but Social Security and other taxes were still there. One of the overlooked parts of that era is that perks increased dramatically. Business provided insurance, pensions, and other benefits that once had to come out of paychecks. Even though salaries increased, the entire package increased by a huge amount. Now perks are being taken away, and salaries are getting smaller: a double whammy!
Reply
#20
The laffer curve doesn't have much utility until someone can prove where the peak of it is. If anyone here thinks they can do that, I suggest they come forward and claim their nobel prize in economics. In my lifetime Republicans have ramped up military debt spending to make up for the lack of tax inlays created by massive tax cuts, making any argument that we've found the peak of the Laffer curve as is commonly made about the Reagan era problematic.

In addition Art Laffer doesn't claim to be the source for the Laffer curve. He attributes the Idea to John Maynard Keynes, who was beaten to it by a century by the Tunisian Muslim scholar Ibn Khaldun.
"Fancy meeting you here, friend."
Reply


Possibly Related Threads...
Thread Author Replies Views Last Post
  Brit example of Tax Wedge & Laffer Curve In Action John L 3 1,248 02-13-2010, 02:21 PM
Last Post: WmLambert

Forum Jump:


Users browsing this thread: 1 Guest(s)