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The Continuing Success of the Laffer Curve

Jack Hays

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The author makes his case for the continuing success of the Laffer Curve. I think it's a strong case.

The Laffer Curve is 40 and still looking good

"It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.


To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)


This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.


In the four decades since, the Laffer Curve and its supply-side message have taken something of a beating. They’ve been ridiculed as “trickle down” and “voodoo economics” (a phrase coined in 1980 by George H.W. Bush), and disparaged in mainstream economics texts as theories of “charlatans and cranks.” Last year, even Pope Francis criticized supply-side theories, writing that they have “never been confirmed by the facts” and rely on “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” And this year, French economist Thomas Piketty penned a best-selling back-to-the-future book arguing for a return to the good old days of 70 percent tax rates on the rich.


But I’d argue — and not just because Laffer has been a longtime friend and mentor — that his theory has actually held up pretty well these past 40 years. Perhaps its critics should be called Laffer Curve deniers. . . . "


 

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Continuing success seems to willingly ignore the decline in revenue as a portion of GDP that followed both Reagan's and Bush II's wave of tax cuts: Historical Source of Revenue as Share of GDP

Further discrediting the idea is the fact that despite the economic success of the Reagan era, the growth experienced during his term was hardly miraculous. Real gdp gains of 3.5 percent per year are similar to that of Carter's 3.2 per year and less than Clinton's 3.9. To call the laffer curve a success story when no credible evidence exists of its success (at least in its recent implementation) is erroneous.
 

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One portion of the OP in particular that falls short:

When Reagan left the White House in 1989, the highest tax rate had been slashed from 70 percent in 1981 to 28 percent. (Even liberal senators such as Ted Kennedy and Howard Metzenbaum voted for those low rates.) And contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation).

While championing a 75 percent increase in gross revenue, the author conveniently ignores a doubling (and then some) of receipts in the eight years prior to the implementation of the tax cuts.

Historical Amount of Revenue by Source
 

Lord Tammerlain

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The issue with the Laffer curve is not the curve it self but on how many people always assume they are on the wrong side of it. It is mantra that the US is on the wrong side of the curve and more taxes and more regulations need to be cut
 

Lord Tammerlain

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This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.

Now I might be wrong but I believe the bolded statement is incorrect when discussing economics. In general demand for a good or service is defined in part by the actual ability to pay for said good or product. As such demand for products in poor countries do not have plenty of demand ( as they do not have the ability to actually buy many goods or services.
 

joG

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The author makes his case for the continuing success of the Laffer Curve. I think it's a strong case.

The Laffer Curve is 40 and still looking good

"It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.


To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)


This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.


In the four decades since, the Laffer Curve and its supply-side message have taken something of a beating. They’ve been ridiculed as “trickle down” and “voodoo economics” (a phrase coined in 1980 by George H.W. Bush), and disparaged in mainstream economics texts as theories of “charlatans and cranks.” Last year, even Pope Francis criticized supply-side theories, writing that they have “never been confirmed by the facts” and rely on “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” And this year, French economist Thomas Piketty penned a best-selling back-to-the-future book arguing for a return to the good old days of 70 percent tax rates on the rich.


But I’d argue — and not just because Laffer has been a longtime friend and mentor — that his theory has actually held up pretty well these past 40 years. Perhaps its critics should be called Laffer Curve deniers. . . . "



It is the supply side of their economy that makes a people wealthy and certainly not demand.
 

JP Hochbaum

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Can anyone point out a data point on the Laffer curve for me? Al it is, is a graph drawn on a bar napkin, calling it reliable is nonsense.
 

Jack Hays

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Now I might be wrong but I believe the bolded statement is incorrect when discussing economics. In general demand for a good or service is defined in part by the actual ability to pay for said good or product. As such demand for products in poor countries do not have plenty of demand ( as they do not have the ability to actually buy many goods or services.

I think in this context the term "potential demand" might solve your problem, although I'm not an economist.
 

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Continuing success seems to willingly ignore the decline in revenue as a portion of GDP that followed both Reagan's and Bush II's wave of tax cuts: Historical Source of Revenue as Share of GDP

Further discrediting the idea is the fact that despite the economic success of the Reagan era, the growth experienced during his term was hardly miraculous. Real gdp gains of 3.5 percent per year are similar to that of Carter's 3.2 per year and less than Clinton's 3.9. To call the laffer curve a success story when no credible evidence exists of its success (at least in its recent implementation) is erroneous.

A common mistake is to think that the Laffer curve means that tax cuts equals increase in revenue...

That's not the Laffer curve.
 

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Can anyone point out a data point on the Laffer curve for me? Al it is, is a graph drawn on a bar napkin, calling it reliable is nonsense.

Can you point to a data point on the second law of thermodynamics?
 

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the point of the curve is to show that rates must have a balance to them.

if you rise rates to high you lose revenue, if rates are to low you lose revenue.

which the whole idea deals with revenue generation
 

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The author makes his case for the continuing success of the Laffer Curve. I think it's a strong case.

LMAO. The article doesn't even attempt to defend the Laffer Curve. And the arguments Stephen Moore does make are just sort of random associations of SOME tax cuts with SOME good economic years, ignoring other good economic years with higher or increasing tax rates, and then pretending he's made a point of some sort beyond "Tax Cuts R Good!!" Pretty lame attempt at a defense even for Stephen Moore.

But I’d argue — and not just because Laffer has been a longtime friend and mentor — that his theory has actually held up pretty well these past 40 years. Perhaps its critics should be called Laffer Curve deniers. . . . "

That's only true if there is some actual intellectual theory behind the Laffer Curve. The article doesn't explain what that might be or why the "deniers" are wrong. What everyone sane recognizes is that tax cuts, except in extraordinary circumstances rarely encountered in actual reality and which certainly don't exist in recent decades, do not pay for themselves, which is the claim that GOP leaders make citing the Laffer Curve as their intellectual underpinning.

Bottom line is the Laffer curve is a useful tool for GOPers to sell tax cuts to rubes and ignoramuses in the right wing base - a tax free lunch, lower taxes and get MORE revenue!! Yes, Virginia, there is a Tax Santa Clause!! To that extent, the Laffer Curve has been a rousing success, one any propagandist would be proud of. Beyond that, I can't see how the Laffer Curve has provided anything of value to anything.
 

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the point of the curve is to show that rates must have a balance to them.

if you rise rates to high you lose revenue, if rates are to low you lose revenue.

Except we don't need the Laffer Curve to explain that trade-off. We are nowhere near the the point at which increasing tax rates lowers revenue, so the Laffer Curve adds really nothing to the economic or political decision making process. The Laffer Curve trivializes the many factors relevant to the tug of war about the size of government to a single decision about really some tax rates of some taxes on some people.
 

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A common mistake is to think that the Laffer curve means that tax cuts equals increase in revenue...

That's not the Laffer curve.

Sure it is - at least that's how it's used in politics. If not, please explain what the "Laffer Curve" means.
 

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Except we don't need the Laffer Curve to explain that trade-off. We are nowhere near the the point at which increasing tax rates lowers revenue, so the Laffer Curve adds really nothing to the economic or political decision making process. The Laffer Curve trivializes the many factors relevant to the tug of war about the size of government to a single decision about really some tax rates of some taxes on some people.

the Laffer Curve is not rocket science, and people read to much into it then there is......

if we raise taxes 100% we will get NO TAXES.

the lower end of the Curve does not even need to be explained.
 

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the Laffer Curve is not rocket science, and people read to much into it then there is......

if we raise taxes 100% we will get NO TAXES.

the lower end of the Curve does not even need to be explained.

Ok, but the concept is completely worthless for any point in between 0% and 100%.

There's no way to tell where you are on the mythical curve, there's no way to tell where the peak is, and there's nothing in particular that would require a single peak as opposed to multiple.
 

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Ok, but the concept is completely worthless for any point in between 0% and 100%.

There's no way to tell where you are on the mythical curve, there's no way to tell where the peak is, and there's nothing in particular that would require a single peak as opposed to multiple.


it is not worthless concept..it is simple it you go to high on taxes, you will lose revenue just like you would if you go to low.

we know that is we have a small tax, we get little revenue.....and for those who think you can have taxes at 70% or more, it shows also you will get little revenue.
 

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it is not worthless concept..it is simple it you go to high on taxes, you will lose revenue just like you would if you go to low.

we know that is we have a small tax, we get little revenue.....and for those who think you can have taxes at 70% or more, it shows also you will get little revenue.

I think the concept is valid... the thing is, we're on the wrong damn side of the curve.
 

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Can you point to a data point on the second law of thermodynamics?

Actually yes. over time disorder increases. And you can't compare a LAffer curve to that of a scientific law.
 

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the Laffer Curve is not rocket science, and people read to much into it then there is......

if we raise taxes 100% we will get NO TAXES.

the lower end of the Curve does not even need to be explained.

OK, if that's all it is, then the Laffer Curve is worthless as a tool to analyze anything we're facing in this reality as we're nowhere near 100% tax rates, which was my point.
 

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OK, if that's all it is, then the Laffer Curve is worthless as a tool to analyze anything we're facing in this reality as we're nowhere near 100% tax rates, which was my point.

the curve though is correct if you tax 100% ..you will get no taxes, the same as if you dont tax.

there is no perfect place to be on the curve. income taxes are a balancing act....the curve is just a simple curve showing taxes relevant to revenue.
 

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the curve though is correct if you tax 100% ..you will get no taxes, the same as if you dont tax.

Actually, we'd probably collect some tax at 100% rates because some people or businesses would plan poorly or be unable to plan income to avoid those rates - e.g. a lottery winner.

there is no perfect place to be on the curve. income taxes are a balancing act....the curve is just a simple curve showing taxes relevant to revenue.

Again, the curve doesn't really show us anything relevant to that balancing act other than at extreme rates (approaching 100%) irrelevant to 2014. If this was 1960, the Laffer Curve would have a small role to play in the analysis - to show that the then rates > 90% were likely counter productive if the goal was to maximize tax revenues. We're a long, long way from those rates.
 

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Actually, we'd probably collect some tax at 100% rates because some people or businesses would plan poorly or be unable to plan income to avoid those rates - e.g. a lottery winner.

Again, the curve doesn't really show us anything relevant to that balancing act other than at extreme rates (approaching 100%) irrelevant to 2014. If this was 1960, the Laffer Curve would have a small role to play in the analysis - to show that the then rates > 90% were likely counter productive if the goal was to maximize tax revenues. We're a long, long way from those rates.

well the reality is no taxes would be collected..why....because no one is going to be working...will tax collectors work, if they dont get paid...the IRS WOULD BE CLOSED

some people want that rate for the upper class, who start businesses, not out of the idea of generating revenue, but just as a punitive action
 

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The author makes his case for the continuing success of the Laffer Curve. I think it's a strong case.

The Laffer Curve is 40 and still looking good

"It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.


To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)


This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.


In the four decades since, the Laffer Curve and its supply-side message have taken something of a beating. They’ve been ridiculed as “trickle down” and “voodoo economics” (a phrase coined in 1980 by George H.W. Bush), and disparaged in mainstream economics texts as theories of “charlatans and cranks.” Last year, even Pope Francis criticized supply-side theories, writing that they have “never been confirmed by the facts” and rely on “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” And this year, French economist Thomas Piketty penned a best-selling back-to-the-future book arguing for a return to the good old days of 70 percent tax rates on the rich.


But I’d argue — and not just because Laffer has been a longtime friend and mentor — that his theory has actually held up pretty well these past 40 years. Perhaps its critics should be called Laffer Curve deniers. . . . "



I don't get your point.
 

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well the reality is no taxes would be collected..why....because no one is going to be working...will tax collectors work, if they dont get paid...the IRS WOULD BE CLOSED

Perhaps, if all income starting at $1 were taxed at 100%. When someone proposes a 100% tax starting at $1, then I'll be sure and pull out my handy Laffer Curve so I can send it to them and let them know they'll likely collect very little in taxes.

BTW, people WILL work - they'll need to to either earn money to buy food or to grow their own, build their houses, etc. - but they won't report much in income if any.

some people want that rate for the upper class, who start businesses, not out of the idea of generating revenue, but just as a punitive action

Well, some people want to round gays up in a fenced in area and let them die out, so there will be no more gays in the world. About as many want 100% tax rates.

BTW, the VAST majority of businesses aren't started by the 'upper class' but by ordinary people.
 
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