The (Laugher) Curve & National Review | 19 comments (19 topical, editorial, 0 hidden)

Re: The (Laugher) Curve & National Review (none / 1)

The US Budget charts you link to back up your comments on the national debt, and also on Bush II tax cuts, but unless I'm misinterpretting something, they don't back up your comments on the Reagan tax cuts.

These charts from the CBO show government revenues from 1962 to 2004, and, knowing when Reagan and Bush's tax cuts were implemented, we can see very clearly that tax revenue, in fact, fell dramatically in each president's case.

From 1980 through the end of Bush I, revenues climb every year except 1983 when they fell less than 3%, but climbed 10% in the following year, surpassing 1982 and 1983, and climbed in each of the following years. Am I misinterpretting something?

PS: I can't vouch for Laffer's theories, but he was one of the funniest profs I have ever had.

by wchurchill on Fri Jan 6th, 2006 at 01:19:25 PM EST

Re: The (Laugher) Curve amp; National Review (none / 0)

He probably means on a per GDP basis.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Fri Jan 6th, 2006 at 01:36:49 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 1)

Let me be clear: I'm not bashing Laffer, as a person. I don't know him.

I was writing from the standpoint of "as a percentage of GDP," as DoDo noted. Note that revenues did not recover, in percentage terms, until '86-'87 (when Reagan pushed through his payroll tax hike). Revenues increased and decreased with the economy, in raw dollars. They always will. But we have to look at revenues per GDP to see whether the tax cuts "paid for themselves". They clearly did not.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Jan 6th, 2006 at 01:52:06 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 1)

No, I didn't think you were bashing him as a person. Your comments are never impolite.

You may have to help me with my understanding of the Laffer curve, as it seems to be different than yours--I had him in the early '70's as a prof, which is a few years ago now,,,so long ago that I'm not sure if he even taught that as a concept.

But I thought that the concept was that lowering the tax rate would spur stronger economic growth. And a lower tax rate times the higher GDP numbers would provide a higher absolute tax revenue--higher than the absolute tax revenue number provided by the higher tax rate times the lower (his theory) GDP numbers. The concept being, which is of course very open to challenge, that tax cuts spur growth which more than offsets the loss due to the lower rate. If you cut the tax rate, tax revenue as a % of GDP has to be lower, right? It's just theoretically the absolute tax revenue could be higher.

by wchurchill on Fri Jan 6th, 2006 at 02:04:56 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 0)

The above comment should be qualified--the comments are true up to the peak point on the Laffer curve--ie there is some point at which the tax rate is just too low to cover expenditures, represented by the falling portion (to the right of the midpoint on your graph) of the curve.

by wchurchill on Fri Jan 6th, 2006 at 03:24:00 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 1)

I meant to respond to this yesterday, but there was a fire at my neighbor's apartment, and I completely forgot about the discussion. The landlord gave him an empty fucking fire entinguisher when he moved in last year.

Anyway, you're right. We're supposed to be talking about raw numbers -- not per GDP. I'm getting myself a bit mixed up. Laffer Curve proponents essentially argue that revenues (in raw dollars) will be higher at the lower tax rate, due to stronger GDP growth, than they would've been at the previous, higher rate.

The CBO did a study of a hypothetical 10% tax cut, financed with deficits, with players broken down into three categories -- No Foresight, Lifetime Foresight and Unlimited Foresight. Bonddad has summarized it, here.

Long story short: We'll see some change in behavior, largely among top earners (as expected), but the change is not large enough to make up for the lost revenue. The government still ends up losing about 75%, even when the results are very favorable to the Supply-Siders' views.

According to models that account for both supply-side and demand-side effects, those effects might offset somewhat less than 15 percent of the revenue loss over the first five years.

So the CBO model is predicting that the change in behavior will offset a bit less than 15% of the loss. That's probably a fair estimate, depend, of course, on how high the rates were to begin with.

We can all judge for ourselves whether we believe that is worth the cost, or what tax rates we would all support. (I think I'm probably a little more in favor of lower taxes than most people on here, since I don't think income tax rates should ever exceed the 40-45% range.) But I think the data suggests, in all or most cases (the CBO study is, obviously, just one example), that the government would've been better off with the higher rates -- again, depending on how high they were to begin with.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Jan 7th, 2006 at 12:21:11 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 1)

Thank you for your well thought out response, and for the link to the CBO article, which I thought was very good. (BTW, I hope that fire worked out OK--the ole empty fire extinguisher trick again.) It's too bad that we can't, in economics, hold all other variables constant, and analyze an issue.

While supporting the CBO article, I would make two comments. First, I believe that the article uses today's tax structure for its analysis, looking at the Federal Income Tax only--which is appropriate BTW. That means they are starting with a highest marginal tax rate of 35%, where my intuition (no data, just intuition) tells me marginal rates are already pretty low, and I wouldn't expect to get much revenue increase out of it. I would agree with an earlier comment of yours, which if I'm understanding your meaning, said that it seemed logical that there was a significant revenue benefit from the JFK tax cuts--because the marginal tax rates were so much higher, and the benefits so much greater.

You comment:

(I think I'm probably a little more in favor of lower taxes than most people on here, since I don't think income tax rates should ever exceed the 40-45% range.)

I'm in agreement with your feeling on this point. And this is just an observation: for those living in California their total marginal tax rate on income is in the middle of your range--35% + 9.3% +1.2% - 3.3% = 42.2% (federal tax + state tax+ medicare tax - benefit of deduction for state tax). Now of course one does not have to live in CA, NY, or other high state tax states. But just pointing out that a number of high income tax payers are on a higher marginal tax rate, in reality.

But I'm in agreement with the analysis which I interpret as saying at the lower marginal tax rates of today (2000 and forward), you will not increase tax revenues by lowering marginal tax rates. Another of Bush's programs that I would disagree with is eliminating the estate tax--raising the ceilings makes some sense, reflecting the impacts of inflation, and maybe then some--but there are really no benefits to elimination.

by wchurchill on Sat Jan 7th, 2006 at 03:05:30 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 1)

The fire wasn't too terrible. My neighbor burned his hand a bit, but no serious damage. He was more shocked than anything. The outside walls on the back of the buildings have plastic covering, and those were completely burned away in some parts, but the overall structure seems fine.

I would agree with an earlier comment of yours, which if I'm understanding your meaning, said that it seemed logical that there was a significant revenue benefit from the JFK tax cuts--because the marginal tax rates were so much higher, and the benefits so much greater.

I'm not positive about this, but I believe marginal rates, prior to the JFK cuts, were 90%, which is (in my opinion) just absurd. It's the case that Republicans always point to, but 39% marginal rates -- I believe 39% was roughly the Clinton-era rate -- are, of course, not comparable to 90% rates.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Jan 7th, 2006 at 04:47:35 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 1)

I wonder how te absolute figures would look if they would be inflation-corrected, and if above that they would be 'population increase-corrected'.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Fri Jan 6th, 2006 at 02:27:58 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 0)

Yeah, so many legitimate ways to twist the numbers...

But correcting for at least inflation is indispensable in this case.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Jan 6th, 2006 at 04:22:22 PM EST
[ Parent ]

Re: The (Laugher) Curve (none / 0)

I was thinking about the possible supply-sider counter-argument that they want tax income only to maintain the level of government services, i.e. they don't want an increase following GDP growth. But given that the population increases...

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Fri Jan 6th, 2006 at 04:57:32 PM EST
[ Parent ]

The (Laugher) Curve & National Review | 19 comments (19 topical, 0 editorial, 0 hidden)

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