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Wall Street Journal: Tax Tidal Wave (Friday 2006/10/06)

Another round of Laffer Curve debunking in the pipeline?

... the government will soon report that the federal budget deficit for the just-completed 2006 fiscal year fell to about $260 billion.

...

The main cause of the deficit decline -- 90% of it, says White House budget director Rob Portman -- is a tidal wave of tax revenue. Tax collections have increased by $521 billion in the last two fiscal years, the largest two-year revenue increase -- even after adjusting for inflation -- in American history.

...

One place it has come from are corporations, whose tax collections have climbed by 76% over the past two years thanks to greater profitability. Personal income tax payments are up by 30.3% since 2004 too, despite the fact that the highest tax rate is down to 35% from 39.6%.

...

More good news is that dividend-tax payments appear to be up as well, even though the tax rate was lowered to 15% from as high as 39.6%. A National Bureau of Economic Research study found that "after a continuous decline in dividend payments over more than two decades, total regular dividends have grown by nearly 20%" and that this reversal happened at "precisely the point at which the lower tax rate was proposed and subsequently applied retroactively." There hasn't been a purer validation of the Laffer Curve since Ronald Reagan rode off into the sunset.

As for the budget deficit, at $260 billion it is now about 2% of our $13 trillion economy, well below the 2.7% average of the last 40 years. Most states and localities are also afloat in tax collections, and including their revenue surpluses brings the total U.S. public sector borrowing down to roughly 1.5% of GDP.



Truth unfolds in time through a communal process.
by marco on Sun Oct 8th, 2006 at 06:42:52 AM EST
[ Parent ]
I refer my supply-side believing friends to Bruce Bartlett's debunking of the Laffer Curve from last March:

The economy has suffered from many recessions in the past and always recovered, usually without benefit of any tax cuts.

    Of course, revenues always fall off when economic conditions are depressed. Economists call this an "automatic stabilizer" that helps recovery. But this is not the same as legislating tax cuts expressly to stimulate growth.

    Anyway, the economic data upon which tax cut supporters rely doesn't really prove their case. If one compares the recovery from the most recent recession to the last one, it is hard to find any effect of tax cuts at all.

I think it still holds up.

Truth unfolds in time through a communal process.

by marco on Sun Oct 8th, 2006 at 07:05:31 AM EST
[ Parent ]
Here is Bruce Bartlett again arguing against the Laffer Curve (again, back in March):


how likely is it that the Laffer curve is causing revenues to rise, as opposed to normal operation of the business cycle? Not much, in my opinion.

First of all, the Laffer curve came to prominence during a period when the top tax rate on dividends was 70 percent, and the rate on long-term capital gains was 40 percent. Economist Arthur Laffer correctly pointed out that a 100 percent tax rate would raise no revenue and that rates close to this would reduce revenue below what a lower rate would bring in. Given the tax rates in existence, it was plausible to argue that a reduction in the top rate and capital gains tax would raise revenue.

However, when President Bush took office, the top rate on dividends was down to 39.6 percent, and the rate on long-term capital gains was just 20 percent -- far below the rates Ronald Reagan inherited. It is very implausible that these rates were in the "prohibitive" range of the Laffer curve, such that a rate reduction would raise revenue.

But even if we grant the theory, how likely is it that the recent rise in revenue owes anything to this effect? Again, not much.

The fact is that it is only in very exceptional circumstances that there would even be the possibility of a tax cut that would so stimulate growth that it would pay for itself. Even the Bush Administration admits this. The 2003 Economic Report of the President  says, "Although the economy grows in response to tax reductions ... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."

...

Revenues as a share of the gross domestic product fell every year from 2000 to 2004, from 20.9 percent to 16.3 percent. The 2005 increase only raised revenues to 17.5 percent -- still well below their historical average of 18.1 percent of GDP. It seems to me that the normal cyclical expansion after the end of the recession in 2001 has done far more to raise revenue than any Laffer curve effect. Revenues are simply returning to trend, nothing more.



Truth unfolds in time through a communal process.
by marco on Sun Oct 8th, 2006 at 07:23:02 AM EST
[ Parent ]
You will probably see it anyway, but just in case - Bonddad
by det on Sun Oct 8th, 2006 at 12:48:21 PM EST
[ Parent ]

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