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First, on the Laffer Curve, you and I have traded comments on this, and i don't think we have a big disagreement. (I'm not going to comment btw on the appropriateness of giving the credit to Art Laffer, but more on the economic concept.) I believe we agreed that there are areas on the curve where the concept is clearly relevant. At some tax levels, say 50%, 60%, 70%, or whatever,,,,,at some high rates of marginal tax rates, there is clearly a disincentive to allocate one's time to money making activities. Lowering taxes from these high levels is very likely to have the impact implied in Laffer's model. At lower levels of taxation, lowering the marginal tax rate would have less of an impact. There is no data, that we have seen anyway, that allows us to understand the curve,,,,so it's hard to go beyond the intuitive statements made above.
But I would be interested on your view on the changes to tax rates on dividends and capital gains. The WSJ comments on the lowering of the rate on dividends:
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.
Second capital gains taxes have been lowered. If my memory is right, from 28% to 15%. This is another area of unintended consequences, IMO. It certainly seems from a wealth distribution standpoint that taxing people, presumably the wealthier, when they attain profits from capital gains is extremely reasonable. The problem is that these investors have a choice regarding the capital gains tax--pay it, or don't pay it. I mean by that, that they don't have to sell the asset, but can continue to hold it, and let it grow in value. If they need cash, they can borrow against it. Obviously this doesn't stop the sale of capital assets, eventually you don't want to borrow, or you just want to get out of the asset. But at the margin, it reduces the sale of capital assets, and it prevents the flow of investment to the areas of the economy that can most benefit from investment dollars--the growing and profitable areas. Lowering the rate has lowered the "cost" of selling capital assets. Turnover of these assets more frequently, even at lower tax rates, is likely to generate more tax dollars, rather than less. and clearly be a very positive benefit for the overall economy.
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. Not too shabby given that we're waging a war on terrorism and Congress spent $50 billion last year on Hurricane Katrina clean-up.
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