Laffer Doesn't Know if Bush Tax Cuts Pay for Themselves

[Toro]

...when he was asked directly. However, he implies that they don't.

And he praises Clinton.

If there's one thing that Republican politicians agree on, it's that slashing taxes brings the government more money. "You cut taxes, and the tax revenues increase," President Bush said in a speech last year. Keeping taxes low, Vice President Dick Cheney explained in a recent interview, "does produce more revenue for the Federal Government." Presidential candidate John McCain declared in March that "tax cuts ... as we all know, increase revenues." His rival Rudy Giuliani couldn't agree more. "I know that reducing taxes produces more revenues," he intones in a new TV ad.

If there's one thing that economists agree on, it's that these claims are false. We're not talking just ivory-tower lefties. Virtually every economics Ph.D. who has worked in a prominent role in the Bush Administration acknowledges that the tax cuts enacted during the past six years have not paid for themselves--and were never intended to. Harvard professor Greg Mankiw, chairman of Bush's Council of Economic Advisers from 2003 to 2005, even devotes a section of his best-selling economics textbook to debunking the claim that tax cuts increase revenues.

The yawning chasm between Republican rhetoric on taxes and even informed conservative opinion is maddening to those of wonkish bent. Pointing it out has become an opinion-column staple. But none of these screeds seem to have altered the political debate. So rather than write yet another, I decided to find out what Arthur Laffer thought.

Laffer is a bona fide economist with a doctorate from Stanford. He's also largely responsible for the Republican belief that tax cuts pay for themselves. Now 67, Laffer runs economic-consulting and money-management firms in Nashville. About the best I could get out of him on the question of whether the Bush tax cuts have paid for themselves was "I don't know." But that's only part of the story. ...

Laffer is convinced that the reduction of the top tax rate from 70% to 28% during the Reagan years paid for itself--in part by encouraging the rich to stop finagling--and the evidence mostly backs him up. "You find these enormous responses in the upper brackets," Laffer says. "These guys fire their lawyers and accountants and actually pay their taxes. Yay! Isn't that what we want them to do?"

But Reagan's tax cuts for the nonrich were big money losers, and it took the fiscal discipline of Bill Clinton to mop up the resulting red ink. Laffer gushes with praise for Clinton, but he's also a fan of Clinton's successor. "What Clinton did was, he gave Bush the fiscal flexibility to do what was right," Laffer says. In the face of the recession and terrorist attacks of 2001, Bush "needed to stimulate the economy and spend for defense, and Clinton gave him the ability to do that."

In other words, the Bush tax cuts were meant to create big deficits. But Laffer's O.K. with that. "The Laffer Curve should not be the reason you raise or lower taxes," he says. Perhaps not, but it does make for great campaign promises.

http://www.time.com/time/magazine/article/0,9171,1692027,00.html

For the good of the country, Republicans have to be dissuaded of this ridiculous idea that at current marginal rates, cutting taxes decreases the budget deficit.

 

[☭proletarian☭]

How did this thread get zero replies?

My first question when people bring up the laffer curve is how he determined where to plot his points.

 

[Toro]

He didn't know. It was just a theory.

Since then, there is some empirical evidence that some countries and industries can generate higher tax revenues with lower taxes. For example, in countries where tax evasion is widespread, lowering taxes, granting amnesties and increasing penalties has increased tax revenues. Cutting corporate taxes sometimes leads to higher revenues, especially for industries with a high level of risk, i.e. mining and oil drilling. But Laffer presented his idea as that, an idea. He could not plot the graph.

There is little evidence that, perhaps except on the margin, tax policy in the US effects economic growth. This is GDP per capita from 1870 to 2006. Except for the Great Depression, growth has been pretty constant. Even during this Great Recession, the blip on this graph will be small.

Tell me where great changes in tax policy has made much of a difference?

 

[☭proletarian☭]

How much of the increase in GDP is due to population increase and technological advance?

 

[Paulie]

He didn't know. It was just a theory.

Since then, there is some empirical evidence that some countries and industries can generate higher tax revenues with lower taxes. For example, in countries where tax evasion is widespread, lowering taxes, granting amnesties and increasing penalties has increased tax revenues. Cutting corporate taxes sometimes leads to higher revenues, especially for industries with a high level of risk, i.e. mining and oil drilling. But Laffer presented his idea as that, an idea. He could not plot the graph.

There is little evidence that, perhaps except on the margin, tax policy in the US effects economic growth. This is GDP per capita from 1870 to 2006. Except for the Great Depression, growth has been pretty constant. Even during this Great Recession, the blip on this graph will be small.

Tell me where great changes in tax policy has made much of a difference?

Not that I'm necessarily asking this because I wholeheartedly support the idea of the laffer curve, but do you really think that GDP alone, is a sufficient indicator of whether or not an entire economic theory is viable?

I know you well enough to know that even you question the validity of statistics, which GDP is...just another statistic that can be realized through skewed means.

That would be like concluding whether a monetary policy theory is viable or not based on just CPI.

 

[antagon]

the curve validates the theory that sale pricing works to improve sales volume, as applied to taxes. if ya take other factors of price reduction under consideration, the effect shouldn't be expected to sustain itself. Prole makes the most obvious point about the laffer wand used to plot the curve in the first place.

You can't be a pimp and a prostitute too

sales managers included?

 

[CrusaderFrank]

He didn't know. It was just a theory.

Since then, there is some empirical evidence that some countries and industries can generate higher tax revenues with lower taxes. For example, in countries where tax evasion is widespread, lowering taxes, granting amnesties and increasing penalties has increased tax revenues. Cutting corporate taxes sometimes leads to higher revenues, especially for industries with a high level of risk, i.e. mining and oil drilling. But Laffer presented his idea as that, an idea. He could not plot the graph.

There is little evidence that, perhaps except on the margin, tax policy in the US effects economic growth. This is GDP per capita from 1870 to 2006. Except for the Great Depression, growth has been pretty constant. Even during this Great Recession, the blip on this graph will be small.

Tell me where great changes in tax policy has made much of a difference?

Stupidest chart I've ever seen in my life. It's like taking a a side view of the Earth and saying, "See, Everest and K-2 don't look so bad from 8 million miles away."

 

[editec]

I am entirely convinced that the Laffer curve is exactly right at two points:

1. 100% Taxtion results in zero revenues

2. 0% taxation results in zero revenues.

Everything in between is subject to issues of the economy having little to nothing to do with taxation.

Logically, one must assume that the closer the initial tax rate is to either extreme, the more likely that the laffer curve EFFECT will have some unknowable validity.

But if we cannot even compare historical changes that actually occured to create a Laffer curve that has any predictive value, what good is it, really?

Why not, editec? you ask.​

Good question!​

Because the economy is never the same from one day to the next.​

So while a tax decrease could, in some circumstances, have a wonderfully positive effect on tax revenues in one economy, it might have no effect in another.

This is a theory that DOES make sense, logically.

But it doesn't appear to me to have any practical application in the real world.

Like I said in the other thread about the laffer Curve theory, if it had validity, we would ALWAYS be able to predict with high accuracy what the effect on revenues would be with every change in tax rate.

We cannot do that.

Ergo, while the theory has legs, those legs can't carry us anywhere.

Stick that in your pipes and smoke it, Austrian School of economics diciples.​

 

[eagleseven]

The problem with calculating Laffer's real curve is that it assumes all taxes have a consistent effect upon the economy. How do you judge the impact of a 1% change in taxes, when those changes are focused upon capital gains? Or tarrifs? Or the poor? Or the rich? Or producers? Or consumers? Or on regulated industries? Or on unregulated industries?

His curve is too oversimplified to do anything but explain a principle. The principle is sound, but incredibly challenging to apply, for the above reason.

 

[editec]

The problem with calculating Laffer's real curve is that it assumes all taxes have a consistent effect upon the economy. How do you judge the impact of a 1% change in taxes, when those changes are focused upon capital gains? Or tarrifs? Or the poor? Or the rich? Or producers? Or consumers? Or on regulated industries? Or on unregulated industries?

His curve is too oversimplified to do anything but explain a principle. The principle is sound, but incredibly challenging to apply, for the above reason.

Exactly, Eagle.

Not all taxes are equal and certainly they don't effect every taxpayer in the same way, either.


Add to that problem, the obvious fact that the economy is a constantly changing state of being, and the Laffer curve, (while theoretically right, I think) is worthless as a tool for establishing what the tax rates ought to be.

Now if we could keep the economy exactly the same EXCEPT for the corporate tax rates, we could devise a LAFFER curve that would be something useful.

But today's economy won't be the same as tomorrow's economy.

This is another reason that economics is a DISMAL science.

 

[rdean]

I think if anyone reviews the 50's and 60's, the tax rate on the top 3% was between 75 and 90% and industry and innovation were hardly "stifled".

A country has to protect the "Middle Class", the backbone of the country. Moving money from the Middle Class to the very rich is NOT nation building.

Why are Republicans always so against their own self interests?

 

[Toro]

He didn't know. It was just a theory.

Since then, there is some empirical evidence that some countries and industries can generate higher tax revenues with lower taxes. For example, in countries where tax evasion is widespread, lowering taxes, granting amnesties and increasing penalties has increased tax revenues. Cutting corporate taxes sometimes leads to higher revenues, especially for industries with a high level of risk, i.e. mining and oil drilling. But Laffer presented his idea as that, an idea. He could not plot the graph.

There is little evidence that, perhaps except on the margin, tax policy in the US effects economic growth. This is GDP per capita from 1870 to 2006. Except for the Great Depression, growth has been pretty constant. Even during this Great Recession, the blip on this graph will be small.

Tell me where great changes in tax policy has made much of a difference?

Stupidest chart I've ever seen in my life. It's like taking a a side view of the Earth and saying, "See, Everest and K-2 don't look so bad from 8 million miles away."

To you, I'm sure it is the stupidest chart you've ever seen in your life. It gores sacred cows and other Deeply Held Beliefs on the Right. (And the Left.)

To me, it encapsulates the dynamism, resourcefulness, ingenuity and optimism of the American people that makes this such a great nation.

 

[eagleseven]

To me, it encapsulates the dynamism, resourcefulness, ingenuity and optimism of the American people that makes this such a great nation.

Or, it means:

Immigrants + Shit-ton of Resources + License to do Anything = Kickass

 

[CrusaderFrank]

He didn't know. It was just a theory.

Since then, there is some empirical evidence that some countries and industries can generate higher tax revenues with lower taxes. For example, in countries where tax evasion is widespread, lowering taxes, granting amnesties and increasing penalties has increased tax revenues. Cutting corporate taxes sometimes leads to higher revenues, especially for industries with a high level of risk, i.e. mining and oil drilling. But Laffer presented his idea as that, an idea. He could not plot the graph.

There is little evidence that, perhaps except on the margin, tax policy in the US effects economic growth. This is GDP per capita from 1870 to 2006. Except for the Great Depression, growth has been pretty constant. Even during this Great Recession, the blip on this graph will be small.

Tell me where great changes in tax policy has made much of a difference?

Stupidest chart I've ever seen in my life. It's like taking a a side view of the Earth and saying, "See, Everest and K-2 don't look so bad from 8 million miles away."

To you, I'm sure it is the stupidest chart you've ever seen in your life. It gores sacred cows and other Deeply Held Beliefs on the Right. (And the Left.)

To me, it encapsulates the dynamism, resourcefulness, ingenuity and optimism of the American people that makes this such a great nation.

It's absurd to believe that people are unaffected by tax policy. Economists should first work in the private sector, then teach and write.

It's amazing to me how many seem impervious to the idea that lowering tax rates makes everyone's stuff worth more, but there you go

 

[Toro]

He didn't know. It was just a theory.

Since then, there is some empirical evidence that some countries and industries can generate higher tax revenues with lower taxes. For example, in countries where tax evasion is widespread, lowering taxes, granting amnesties and increasing penalties has increased tax revenues. Cutting corporate taxes sometimes leads to higher revenues, especially for industries with a high level of risk, i.e. mining and oil drilling. But Laffer presented his idea as that, an idea. He could not plot the graph.

There is little evidence that, perhaps except on the margin, tax policy in the US effects economic growth. This is GDP per capita from 1870 to 2006. Except for the Great Depression, growth has been pretty constant. Even during this Great Recession, the blip on this graph will be small.

Tell me where great changes in tax policy has made much of a difference?

Not that I'm necessarily asking this because I wholeheartedly support the idea of the laffer curve, but do you really think that GDP alone, is a sufficient indicator of whether or not an entire economic theory is viable?

I know you well enough to know that even you question the validity of statistics, which GDP is...just another statistic that can be realized through skewed means.

That would be like concluding whether a monetary policy theory is viable or not based on just CPI.

Of course, GDP is effected by much more than tax policy. But that is the point. There are so many things that contribute to economic growth, much of which has nothing to do with taxes. The level of education, the strength of institutions, the culture of the citizens, respect for the law, etc., etc., etc., matter far more than if your tax rate is 35% or if it is 40%.

 

[eagleseven]

It's absurd to believe that people are unaffected by tax policy. Economists should first work in the private sector, then teach and write.

It's amazing to me how many seem impervious to the idea that lowering tax rates makes everyone's stuff worth more, but there you go

It is a matter of scale.

The US Economy may have, historically, been growing so fast that the effects of minor tweaks to the tax policy were invisible. Given the extremely rapid technology boom of the past century, I would say this explanation is very probable.

 

[Toro]

It's absurd to believe that people are unaffected by tax policy. Economists should first work in the private sector, then teach and write.

It's amazing to me how many seem impervious to the idea that lowering tax rates makes everyone's stuff worth more, but there you go

That's not the argument. Of course people are effected by taxes. But the underlying dynamics of the American economy are far less dependent on taxes than you appear to be arguing.

Historically, the US economy has grown at a fairly constant rate, regardless of the rate of taxes. That may not be the case in the future, but it hasn't mattered much in the past.

 

[uscitizen]

But we had to give tax cuts to the hedge fund managers, they were what was holding the economy up, and what brought it down...

 

[Toro]

How much of the increase in GDP is due to population increase and technological advance?

1% of GDP growth is because of population growth, 2% is productivity growth. 3% is the long-term trend of growth in the US.

 

[boedicca]

The problem with the Bush Tax Cuts is that they were not accompanied by cuts in spending.

Just sayin'.