Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
A few other comments on tax policy, and then I'm hoping you do address the deficit and tax policy.

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.
But specifically to dividend policy.  Dividends are taxed twice.  They are taxed as corporate earnings at the corporate rate, and then they are taxed when distributed to the individual.  When dividends were taxed at ordinary income tax rates, 40% or so,,,,corporations had a choice as to how to distribute earnings to shareholders.  They could pay dividends with the resulting impact on taxes.  Or they could initiate stock buy back programs.  Stock buy backs normally result in a rise in share prices, all other variables held constant, because corporate earnings are divided by a lower number of shares, leading to higher earnings per share, and higher stock prices.  Shareholders could sell these shares, and pay the lower capital gains tax rates.  So naturally corporations made the rational choice, and dividends trended down dramatically over the last 30 years of the last century, and stock buy backs increased.  This is one of those unintended consequences situations, but it obviously happened.  IMHO, this was a very negative development, because paying regular quarterly dividends is a method of holding corporate management accountable, and this tax situation hindered that natural control (but that is another story).  So in my view, the lowering of dividend tax rates was a boon for a better running economy.  I understand it's an area where the "stock ownership class" benefits more than other people.  But my view is the benefit to the economy is more important, and if more tax revenues are wanted from the wealthy, ordinary income taxes should be raised on the highest earners.

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.
It's certainly worthwhile to acknowledge this, and to further note that this 2% compares very favorably to the 3% maximum, sort of maximum I guess, that is the guideline of the EU.
by wchurchill on Sun Oct 8th, 2006 at 02:19:36 PM EST
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