Laffer: How To Fix The Economy

[Brutus]

Somewhere in this debate lies the post ergo hoc propter hoc fallacy.

somewhere lies a liberal who will say that tax increases increase the economy and increase tax revenue.

It goes like this: Tax GM more, the price of cars go up, they sell "more", GM revenue increases, they pay more taxes!! Its perfect liberalism!!

 

[Toro]

so the position you're refuting it that it ALWAYS increases revenue.

No. At some point, it is true. It is also "truer" for different types of taxes. For example, tax cuts on capital gains, corporations and royalties have different profiles than tax cuts on income, i.e. you can get greater revenues by cutting corporate income taxes (to a point).

My objection is that American conservatives take this as the de facto truth no matter what the level of taxes. Not because it has been shown to be empirically true but because the argument reinforces their confirmation bias that government is always bad.

 

[Trajan]

how do we know the increase wouldn't have been greater without the tax increase?

In one of those links I posted above, Greg Mankiw - who was Bush's chair of the Council of Economic Advisors - estimated through econometric modeling that for every $1 in income tax cuts, the federal government lost 83 cents in revenues.

It is important to note that conservative economists are generally correct about the efficacy of government in that the marginal rate of a unit of economic growth is affected by changes in tax rates, i.e. you get more GDP out of tax cuts (to a point). But the absolute levels of income tax cuts causes declines in revenues to the government than there otherwise would be. IOW, lower taxes and you get higher GDP but lower government revenues than otherwise there would have been.

but we cannot prove that....

 

[elvis]

Somewhere in this debate lies the post ergo hoc propter hoc fallacy.

somwhere lies a liberal who will say that tax increases increase the economy and increase tax revenue.

You're being silly, now.

 

[Brutus]

My objection is that American conservatives take this as the de facto truth no matter what the level of taxes.

of course that is a goofy lie. Not even Laffer believes that

Not because it has been shown to be empirically true but because the argument reinforces their confirmation bias that government is always bad.

of course it is empirically true and a general principle. The USA has the biggest economy and so the biggest tax revenue. It is not a bias that government is bad, it is the principle of our founding.

 

[Toro]

how do we know the increase wouldn't have been greater without the tax increase?

In one of those links I posted above, Greg Mankiw - who was Bush's chair of the Council of Economic Advisors - estimated through econometric modeling that for every $1 in income tax cuts, the federal government lost 83 cents in revenues.

It is important to note that conservative economists are generally correct about the efficacy of government in that the marginal rate of a unit of economic growth is affected by changes in tax rates, i.e. you get more GDP out of tax cuts (to a point). But the absolute levels of income tax cuts causes declines in revenues to the government than there otherwise would be. IOW, lower taxes and you get higher GDP but lower government revenues than otherwise there would have been.

but we cannot prove that....

We have a very good idea about what happens.

 

[PoliticalChic]

so the position you're refuting it that it ALWAYS increases revenue.

No. At some point, it is true. It is also "truer" for different types of taxes. For example, tax cuts on capital gains, corporations and royalties have different profiles than tax cuts on income, i.e. you can get greater revenues by cutting corporate income taxes (to a point).

My objection is that American conservatives take this as the de facto truth no matter what the level of taxes. Not because it has been shown to be empirically true but because the argument reinforces their confirmation bias that government is always bad.

It certainly isn't true once you insert 'all American conservatives...'

One study of the United States between 1959 and 1991 placed the revenue-maximizing tax rate (the point at which another marginal tax rate increase would decrease tax revenue) between 32.67% and 35.21% Hsing, Y. (1996), "Estimating the Laffer curve and policy implications", Journal of Socio-Economics 25 (3): 395–401, doi:10.1016/S1053-5357(96)90013-X, ScienceDirect - Journal of Socio-Economics : Estimating the laffer curve and policy implications*1

ScienceDirect - Journal of Socio-Economics : Estimating the laffer curve and policy implications*1

 

[Trajan]

so, laffer curve out. keynes in?

or?

 

[Toro]

so, laffer curve out. keynes in?

or?

Choose "or."

 

[elvis]

so, laffer curve out. keynes in?

or?

Choose "or."

who's the or?

 

[Toro]

so, laffer curve out. keynes in?

or?

Choose "or."

who's the or?

There are many ors.

 

[Brutus]

so, laffer curve out. keynes in?

or?

actually with a debt of $14.2 trillion we've had $14.2 trillion in stimulus, but it didn't work. We're in the middle of the great recession.

 

[Wiseacre]

In one of those links I posted above, Greg Mankiw - who was Bush's chair of the Council of Economic Advisors - estimated through econometric modeling that for every $1 in income tax cuts, the federal government lost 83 cents in revenues.

It is important to note that conservative economists are generally correct about the efficacy of government in that the marginal rate of a unit of economic growth is affected by changes in tax rates, i.e. you get more GDP out of tax cuts (to a point). But the absolute levels of income tax cuts causes declines in revenues to the government than there otherwise would be. IOW, lower taxes and you get higher GDP but lower government revenues than otherwise there would have been.

but we cannot prove that....

We have a very good idea about what happens.

Maybe the unasked question is, how effectively would the gov't have spent that 83 cents in improving the economy and creating jobs that the private sector would with the extra dollar in taxes it didn't have to pay? And BTW, the cost of income (labor) taxes may be 83 cents, but it's closer to 50 cents for capital taxes, or so I hear.

There are instances where a tax cut did pay for itself. From a column in Slate:

Let's look at three. First, back in the 1920s, Treasury Secretary Andrew Mellon pushed Congress to enact a series of tax cuts. The U.S. dropped the top marginal income-tax rate from 73 percent to 25 percent. Tax receipts from the wealthiest Americans rose. According to Treasury data, income taxes paid by Americans making more than $100,000 per year increased from $302 million to $714 million between 1922 and 1928, with the rich's share of income taxes paid rising from 35 to 61 percent.
Second, Kennedy-era income tax cuts brought the top marginal rate from an eye-watering 91 percent down to a still-eye-watering 70 percent in 1964. The wealthiest earners paid more tax after the tax cut, some say, even though the rate dropped 21 percentage points. An analysis by Laffer showed, for instance, that in 1965 people making more than $100,000 a year paid $3.76 billion in taxes, versus the $2.1 billion forecast under the higher rate. A few economists say that Ronald Reagan's income-tax cuts, which dropped the top bracket's rate to 50 percent, had a similar effect. Berkeley economist Brad DeLong, for instance, writes, "Arthur Laffer is probably right at the top end: reducing the top tax rate from 70 percent to 50 percent is probably a revenue gainer and surely not much of a loser."
Third, we look abroad. In the 1990s, Ireland's parliament enacted legislation that took certain corporate income tax rates down to 12.5 percent, one of the lowest rates on earth. Receipts climbed. The country, in its "Celtic Tiger" boom period, rapidly became richer. Corporate tax revenues jumped from less than 2 percent of GDP to more than 3 percent of GDP.

Do tax cuts ever "pay for themselves"? Rarely. - By Annie Lowrey - Slate Magazine

So - here we have 3 cases where tax cuts did pay for themselves, yet others say you only get 17cents on the dollar? One wonders how these 2 things can both be right.


AND - what about tax hikes? If the gov't raises taxes by a dollar, how much more revenue do they really get? Remember, the higher the rate, the more people find ways not to pay more taxes, by legal or other means. AND - what does gov't do with that money that is better for the economy than if they had left taxes the way they are? AND - how much money in foreign investments coming into the US do we not get because we raised the rates? AND - how much money in domestic investments go offshore where it can get a better return than if he rates were not hiked?

I have no idea how the economists figured out the true costs of tax hikes or cuts. Not sure if they take into account the changes in investment behavior that a tax rate change brings with it, or how much expenditures may change. Some of this stuff may be unknowable until after the fact, but at least it oughta be considered for whatever it's worth. And there are so many other factors involved, who can say for sure how much benefit you get or give from a change in tax rates.

 

[ShackledNation]

The general concept that taxes beyhond a certain point will reduce revenue definitely holds some truth. But trying to precisely measure such an affect is no better than Keynes attempts to aggregate labor services. The Laffer curve is another attempt at economic statistics that simply does not work. Incentives and reasons to act change every second. Even if the "correct" rate of taxation could be perfectly determined at one point, seconds later it could be different. People constantly change what they value.

Laffer also assumes the "correct" rate is the rate that takes the most money out of the private sector. I think the correct rate is the lowest rate, not the one that sucks out the most money.

 

[Toro]

The general concept that taxes beyhond a certain point will reduce revenue definitely holds some truth. But trying to precisely measure such an affect is no better than Keynes attempts to aggregate labor services. The Laffer curve is another attempt at economic statistics that simply does not work. Incentives and reasons to act change every second. Even if the "correct" rate of taxation could be perfectly determined at one point, seconds later it could be different. People constantly change what they value.

Laffer also assumes the "correct" rate is the rate that takes the most money out of the private sector. I think the correct rate is the lowest rate, not the one that sucks out the most money.

At "some" rate, it is true. It is also "truer" for different types of taxes. For example, that rate is much lower for taxes on corporate profits, capital gains and resource royalties. It is also truer in some emerging countries when lower tax rates are accompanied by tax amnesties and stricter enforcement policies.