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Interesting article about the laffer curve

tacomancer

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Ezra Klein - Where does the Laffer curve bend?

Ezra Klein asks several people all over the political map where they think the optimal point of the laffer curve is. The answers are all over the map it seems, but the interesting thing is that nobody really seems to know.

The average point of those surveyed seems to be 47.9286%
 

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There's absolutely no way to know where that optimal point is. Better to steer on the low side of that point so that at least you'll have growth rather than taxing too much where you stifle it.
 

Manc Skipper

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Being entirely imaginary, the "laffer curve" can bend to suit whatever the user requires of it.
 

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Ezra Klein - Where does the Laffer curve bend?

Ezra Klein asks several people all over the political map where they think the optimal point of the laffer curve is. The answers are all over the map it seems, but the interesting thing is that nobody really seems to know.

The average point of those surveyed seems to be 47.9286%
The way that "Reagan Conservatives" like to believe that the Laffer Curve works was disproven during the Reagan administration. But I still think that there is some merit to it.
 

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Really? It's imaginary? So revenue continues to go up even as the tax rate approaches 100%?
Would revenue continue to go up even as the tax rate approaches 0%?

It's definately not imaginary, but I think there are actually different Laffer Curves for different types of income and different income brackets. Reducing taxes on certain types of income or income brackets may increase revenues very significantly while reducing tax on other types of income or income brackets my actually lower tax revenues.
 

phattonez

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Would revenue continue to go up even as the tax rate approaches 0%?
The Laffer Curve doesn't claim that. Revenue approaches 0 as you go to 0% tax rate and 0 again as you go to 100% tax rate.

It's definately not imaginary, but I think there are actually different Laffer Curves for different types of income and different income brackets. Reducing taxes on certain types of income or income brackets may increase revenues very significantly while reducing tax on other types of income or income brackets my actually lower tax revenues.
It certainly is complex.
 

phattonez

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The way that "Reagan Conservatives" like to believe that the Laffer Curve works was disproven during the Reagan administration. But I still think that there is some merit to it.
How was it disproven?
 

RightinNYC

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God, Ezra Klein and his interns are such ****.

He quotes two purportedly neutral tax experts (including one guy who has made a career out of decrying income inequality) who say 60-70%. He then quotes two liberal economists who, surprise surprise, happen to agree with that number. He then quotes 8 conservative pundits and professors, all of whom declined to respond or offered lower numbers. He then cites 4 Republican politicians, all of whom declined to respond.

Were the phones at Pelosi and Reid's offices broken? Were Olbermann and Al Gore unavailable? Has he given up the pretense of being anything other than a red meat purveyor for the pseudo-intellectual crowd?
 

phattonez

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But surely it has an impact on growth rates, but that would be impossible to determine empirically.
 

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A key problem with the Laffer curve is that it is impossible to know just where you are on the curve at any specific point in time. Are we on the left side, between 0 and the max? Or are we on the right side, between the max and 0? How do you know? The typical presentation by proponents assume that we are currently somewhere on the left side of the curve, between zero and the max, but that assumption is, as economists are fond of saying, rather heroic.

Moreover, a key assumption when considering the Laffer curve is the (in)famous ceteris paribas, or 'all else being equal.' In the non-theory real world, all else is never entirely equal. Key among other influences are expectations and opportunity cost. Expectations about permanence vs temporary nature of change in tax rates would likely modify behavior. Furthermore, if opportunities for investment of any newly-available funds were felt to be non-existent or minimal or unappealing for whatever reasons, there could be less enthusiasm and effectiveness for a proposed reduction. That is, high taxes on returns to capital might reduce the incentives for investment of funds freed up by lower tax rates on incomes, thereby reducing the net result to something less than desired or targeted.

As a tool to illustrate concepts and promote discussion about policy, the Laffer curve is great. But to rely on it for policy decisions is worse than just silly.
 

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i think i've posted this before, but as it pertains to the discussion:


While some have disputed the Laffer Curve concept, what they really disputed was where we are on it. The concept itself is a truism. If we are on the "left" side of the peak, government could raise tax rates and collect more money. But if we are on the "right" side, government just loses more money the more it raises tax rates.

So where are we on the Laffer Curve? A couple of economists (Harold Uhlig and Mathias Trabandt) figured it out and published the results last August.

The chart below shows their curve for taxes on "labor" (i.e., wages). (The multiple curves are for differing technical assumptions, but all results are similar. The two ends do not go down to zero because other, non-labor, taxes would still exist in the assumptions of this chart. The vertical axis is total government revenue, with 100 being what the government collects now, or did in 2006.)



...That graph says that our wages are taxed only at 28%, but the government would maximize its revenue by raising our tax rates to about 60%. If the government did that, it could raise its revenues by 30%. Bad news: We are looking like a hamburger to a starving man.

Taxes on capital (capital gains, dividends, interest) are a slightly different story. If government raised them from the current 36% to about 65%, it could increase its revenues by only about 6%, everything else equal....

...Now, some folks are trying to use these results to make Laffer Curve enthusiasts eat crow and confess that tax increases would really raise revenue. Reagan was wrong!

Not so fast.

Our economists also looked at what would happen if we changed tax rates on both labor and capital together. Their result is summarized by the chart below...



Look at it as a contour map of a hill, with the hill's peak being that little point that says "131." At that point, the government would raise 31% more than it does now. That means that the government would actually make more money by cutting taxes on capital and raising them on labor. The best place to be for a ruthless revenue-maximizer is a tax rate on labor of about 65% (from the current 28%) and a tax rate on capital of about 22% (from the current 36%).

That's not something tax-lovers want to hear. If they want to buy the "good parts" of this Laffer Curve story, they also need to buy the part that says that Warren Buffet and others who don't "earn" their income should get their tax rates cut by over a third, while those who work for a paycheck should have theirs more than doubled. Sell that to the AFL-CIO.

If you read that chart correctly, tax rates on capital make little difference on what the government actually collects. At most points on that "hill," you have to go a long way "north" (higher tax rates on capital) to get much higher up the hill (more money to government). Yet go too far "north" in many places, and you actually go downhill.

In short, taxing "unearned income" buys just about nothing, and could even cost you, even if you are ruthless in maximizing government revenue.... There's a reason you haven't heard of this analysis. The supply-siders don't want to hear that we are on the left side of the Laffer Curve. And the tax-lovers don't want to admit all that stuff about tax cuts for the rich and "still not enough."

Reality just keeps biting. As Maggie Thatcher said, "eventually, you run out of other people's money." "Eventually" will happen within the next ten years.
 

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How was it disproven?
Well, maybe it wasn't disproven. But for the purpose of "Reagan Conservatives" is was. They frequently claim that tax revenues rose due to the Reagan tax cuts. In actuallity it took 6 years for inflation adjusted tax revenues to rise back to pre-tax cut totals. Yes, it was 6 years of economic growth, and certainly "Reagan Conservatives" claim that the growth was due to the tax cuts. But the reality is that we can not prove one way or another about what caused the economic growth. Just common sense would tell us that since the tax cuts happened just 6 months or so AFTER we bottomed out of a terrible recession (and the economy was already growing) that 6 years of growth would be quite normal. Also, it is very likely that the economic growth was fueled by the huge deficit spending that the government did during that time span (mostly for the military). The one thing that is sure is that tax revenues immediately declined after the tax cuts and stayed depressed for most of the remainder of Reagans presidency.

Of course all of that may actually tend to prove the Laffer curve to be true - but in a funky type of way. Maybe we were already close to the "tax revenue maximizing rate" and the Reagan tax cuts reduced tax revenue because it reduced taxes below that "revenue maximizing rate". Hmmm.

Personally, I feel (although I cant prove it) that tax cuts on the middle class helped to expand the economy as it put more purchasing power in the hands of the consumer class, and the tax cuts on the rich was probably the most significant cause of the loss of revenue.

I wish that it was possible to go back and time and keep the Reagan era middle class tax cuts (to promote consumption), and get rid of the Reagan era rich tax cuts (to avoid the deficit spending). Of course we maybe we will be seeing that soon if O' extends the middle class tax cuts and lets the rich tax cuts expire.
 
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Anyone want to prove how we can determine pareto efficiency on the laffer curve?

Yeah. Not going to happen.
Considering that in the best circumstances pareto efficiency rates are, at best, well meaning conjecture and at worst embarrassingly subjective; I don't think that any economic model is the worse for lacking it.
 

obvious Child

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Considering that in the best circumstances pareto efficiency rates are, at best, well meaning conjecture and at worst embarrassingly subjective; I don't think that any economic model is the worse for lacking it.
Hint: that was the point. Even getting close to a Pareto Efficency frontier is hard to do. Thus the notion that the Laffer curve which effectively functions as a Pareto Efficency Frontier is a good policy idea is laughable.
 

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There's absolutely no way to know where that optimal point is. Better to steer on the low side of that point so that at least you'll have growth rather than taxing too much where you stifle it.
It's a bell shaped curve, so even if you "tax too much" you won't stifle growth... According to the Laffer Curve if you tax at 1% or 99% you end up at the same point anyway, which is why the Laffer Theory was problematic from the start..
 

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Would revenue continue to go up even as the tax rate approaches 0%?
Exactly.. according to the Laffer Curve revenue would be at zero if the tax rate is 0%. Revenue would also be 0 if the tax rate is at 100% percent.
 

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A key problem with the Laffer curve is that it is impossible to know just where you are on the curve at any specific point in time. Are we on the left side, between 0 and the max? Or are we on the right side, between the max and 0? How do you know? The typical presentation by proponents assume that we are currently somewhere on the left side of the curve, between zero and the max, but that assumption is, as economists are fond of saying, rather heroic.

Moreover, a key assumption when considering the Laffer curve is the (in)famous ceteris paribas, or 'all else being equal.' In the non-theory real world, all else is never entirely equal. Key among other influences are expectations and opportunity cost. Expectations about permanence vs temporary nature of change in tax rates would likely modify behavior. Furthermore, if opportunities for investment of any newly-available funds were felt to be non-existent or minimal or unappealing for whatever reasons, there could be less enthusiasm and effectiveness for a proposed reduction. That is, high taxes on returns to capital might reduce the incentives for investment of funds freed up by lower tax rates on incomes, thereby reducing the net result to something less than desired or targeted.

As a tool to illustrate concepts and promote discussion about policy, the Laffer curve is great. But to rely on it for policy decisions is worse than just silly.
I think the real problem with the Laffer Curve is the claim that tax cuts pay for themselves. If we can't find evidence or agree, then is it fair to discredit the curve entirely or should we assume that if we cut taxes and they are not paying for themselves (drop in gov. revenue), then were're on the left side of the curve?
 

TurtleDude

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I think the real problem with the Laffer Curve is the claim that tax cuts pay for themselves. If we can't find evidence or agree, then is it fair to discredit the curve entirely or should we assume that if we cut taxes and they are not paying for themselves (drop in gov. revenue), then were're on the left side of the curve?
tax cuts don't have to be paid for

only government spending
 

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I think the real problem with the Laffer Curve is the claim that tax cuts pay for themselves. If we can't find evidence or agree, then is it fair to discredit the curve entirely or should we assume that if we cut taxes and they are not paying for themselves (drop in gov. revenue), then were're on the left side of the curve?
I would say that it is fair to conclude that if tax cuts do not increase revenue that we are on the left side of the curve. But that's not to suggest that we shouldn't be on the left side of the curve.
 

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As a tool of hard economic policy it is functionally imaginary.
It would be foolish to completely ignore its existence though, and pretend that revenue continues to increase as the rate approaches 100%. Just because it is impossible to know what it looks like and where it bends doesn't make the concept itself completely useless.
 

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It would be foolish to completely ignore its existence though, and pretend that revenue continues to increase as the rate approaches 100%. Just because it is impossible to know what it looks like and where it bends doesn't make the concept itself completely useless.
I agree with both of you. Yes, I believe in the concept of the Laffer Cuve, it just makes sense (to a capitalist like myself), but the fact is that it may exist in such a convoluted and dynamically changing form that it may not really br of much value as a tool. It is likely that it is slightly different for every income level, that it may change depending on other economic factors, and it may even change based on the mood of the country and external events.

Another poster made a great point - something to the effect that we shouldn't be worried about "maximizing tax revenues", we should be worried about maximizing economic growth. The more that I think about that the more sense it makes. The more we maximize economic growth the less we "need" government. If we have plenty of jobs then we "need" less welfare and unemployment benefits, the more money that people have to save and invest the less that individuals "need" social security, the more wealth we have the less important that public schools become (as more individuals may choose to educate their kids in private schools), increased private wealth (if well distributed) reduces our need for jails and courts and police and even firemen.

So is their a particular named of the curve the represents economic growth in relationship to different government expenditure and taxation levels?
 
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