The Continuing Success of the Laffer Curve

[Jack Hays]

You're right in that there is a legitimate economic concept underlying the curve. My point was as it's used outside economics departments or econ blogs is that the "Laffer" curve simply means that taxes are bad, and generally (when any republican politician cites it) that tax cuts are a free lunch. So there's an economic concept, irrelevant to modern day decision making, and the use of the famous curve as a propaganda tool, and they're really at odds with each other - actual economists reject how the "Laffer" curve is used in politics, all of them, including conservative economists who have served under everyone from Reagan to Bush II.

Point is the "Laffer Curve" means what the user wants it to mean, and that's often (and nearly always when used by political figures) totally at odds with the legitimate theory described by the so-called 'curve.'

How about as used in the OP article?

 

[JasperL]

How about as used in the OP article?

That's my point - the way the "Laffer" curve was used by Moore was as a catch-all for "supply side" trickle down economics, or Taxes R Bad. He doesn't even attempt at a defense of the "Laffer" curve as a legitimate economic concept/theory relevant to modern day decision making. Here's him quoting Laffer:

When I asked Laffer if, 40 years later, there is any point of consensus in economics on the Laffer Curve, he replied: “I think today everyone agrees with the premise that when you tax something you get less of it, and when you tax something less, you get more of it.”

Nothing there that is unique to the "Laffer" curve. And if the right wing used the "Laffer" curve in that extremely limited sense, no one would have a problem with the concept - it's self evident that if you lower any cost, and taxes are a cost, that it will have some stimulative effect on business activity, and vice versa. But the Laffer Curve is used by GOPers to claim that tax cuts are a free lunch and that's the problem.

For example, Moore cites the Reagan era as evidence for the Laffer Curve, but the economy grew no faster during those years than at many other times in our history, and revenues as a share of the economy dropped, deficits went way up and the debt tripled, most of that during economic expansion. Interest rates also fell by 2/3 or so, and that process had nothing to do with tax rates but with the Fed. What part of the results was due to interest rates or Keynesian deficit spending versus some tax rates on some people (payroll taxes increased during the Reagan era)? Who knows. The Laffer curve is only concerned with tax rates, presumably the top marginal rate, which is what affected Reagan personally as an actor.

 

[Jack Hays]

That's my point - the way the "Laffer" curve was used by Moore was as a catch-all for "supply side" trickle down economics, or Taxes R Bad. He doesn't even attempt at a defense of the "Laffer" curve as a legitimate economic concept/theory relevant to modern day decision making. Here's him quoting Laffer:



Nothing there that is unique to the "Laffer" curve. And if the right wing used the "Laffer" curve in that extremely limited sense, no one would have a problem with the concept - it's self evident that if you lower any cost, and taxes are a cost, that it will have some stimulative effect on business activity, and vice versa. But the Laffer Curve is used by GOPers to claim that tax cuts are a free lunch and that's the problem.

For example, Moore cites the Reagan era as evidence for the Laffer Curve, but the economy grew no faster during those years than at many other times in our history, and revenues as a share of the economy dropped, deficits went way up and the debt tripled, most of that during economic expansion. Interest rates also fell by 2/3 or so, and that process had nothing to do with tax rates but with the Fed. What part of the results was due to interest rates or Keynesian deficit spending versus some tax rates on some people (payroll taxes increased during the Reagan era)? Who knows. The Laffer curve is only concerned with tax rates, presumably the top marginal rate, which is what affected Reagan personally as an actor.

Actually, the Laffer Curve is concerned with all taxes, not just income tax rates, and whether any tax cut is "free" would depend on where it falls on the curve.

 

[jaeger19]

OK, so a person who wrote a book with Art Laffer doesn't understand the "laffer' curve? Beautiful argument!!! :lamo

And I agree about facts - so where in the OP's article does Moore present hard facts that somehow prove the "Laffer" curve? Where is your evidence supporting the Laffer curve - a cite would be nice. Etc..............

Very possible..

I don't give a rip about Moores article. I have already given the evidence supporting the Laffer curve... on at least two other threads...

But how about we start with this guy and what he thinks about evidence supporting the Laffer curve..

You're right in that there is a legitimate economic concept underlying the curve

.

:lamo

 

[jaeger19]

What's different between the Laffer Curve and a supply/demand curve for a "sin" tax?

Easy... the laffer curve describes behavior based on taxes... a supply demand curve is based on supply. Laffer describes behavior irrespective of supply.

I

didn't assume anything except that the Laffer Curve at best tells us something at an extreme - $1,000 was obviously an EXAMPLE of an extreme, and $2-3 was an EXAMPLE of the kind of real world decisions governments actually make.

That's the problem.... you make the assumption that the Laffer curve best tells you something at an extreme.... that's not a good assumption.... as I pointed out in my example... the excise tax had a large effect.. but was not an "extreme" tax as you would call it.

You'll need to know the slope of the "Laffer" curve at some point to know that, which is an empirical question about the price elasticity of that particular good in that particular market, and the theoretical "Laffer" curve tells us nothing about the slope of the line at any point. You're guessing about the effect of some tax, and if your conjecture is accurate, it is based on what's empirically observed for that tax on that good in that locality. But even if accurate, the Laffer Curve didn't get you there - seeing/measuring/recording the change in demand of a good with changes in price of that good are what will inform that conclusion.

Without the understanding of the Laffer curve... one doesn't know to even look for that sweet spot. Your right.. its a guess about the effect... but its an educated guess rather than your method of lets tax and then see what happens...."ooopps we lost so much revenue that we can't afford school books this year"

Your hung up that the laffer curve is not valuable because it can't predict a data point on behavior..

that's like saying that the Theory of Evolution isn't a valuable scientific theory because it can't predict what will evolve tomorrow or 1,000 years from now..:2razz:

We've been through the excise tax on ships example before. Don't feel like doing it again except to say the example isn't a very good one for several reasons. Besides, that's an example of one tax on some goods in a very niche, extremely discretionary, luxury market that has little relevance to, say, Federal corporate income taxes.

Yes... we have been over it and you don't like it because it blows your premise out of the water. Its a good example.. you don't like it because it doesn't fit your narrative.

And the example has relevance to exactly to something like federal corporate income taxes.. in fact... you picked a very relevant issue with federal corporate taxes.

 

[JasperL]

Actually, the Laffer Curve is concerned with all taxes, not just income tax rates, and whether any tax cut is "free" would depend on where it falls on the curve.

I never said the Laffer curve was only concerned with income tax rates.

And where does the curve turn over for, e.g. income tax rates so we know when we're on the "free" portion?

 

[JasperL]

Very possible..

It's also possible you don't understand the Laffer Curve.

I don't give a rip about Moores article. I have already given the evidence supporting the Laffer curve... on at least two other threads...

I am sure the Moore article was the subject of this thread.... Should we be talking about some other article? If so, please cite it so I can read that one and comment on it.

 

[JasperL]

Easy... the laffer curve describes behavior based on taxes... a supply demand curve is based on supply. Laffer describes behavior irrespective of supply.

You brought up a "sin tax" which is a straight up increase in the cost of every good of that type sold, which will necessarily affect prices. The effect on quantity sold, which is there supply and demand meet at some price, is the economic behavioral effect. Of course as is frequent, I'm not sure what we're debating here.

That's the problem.... you make the assumption that the Laffer curve best tells you something at an extreme.... that's not a good assumption.... as I pointed out in my example... the excise tax had a large effect.. but was not an "extreme" tax as you would call it.

In real life, for all but the most extraordinary cases, an increase in the tax rate increases revenue and decreases in the tax rate decrease revenue. So of course it's a good assumption that the Laffer curve is totally irrelevant for the VAST majority of tax rate decisions. You citing an exception in a tiny luxury goods market, even if true, doesn't provide any evidence against the rule for the other 99.99% of the economy.

Without the understanding of the Laffer curve... one doesn't know to even look for that sweet spot. Your right.. its a guess about the effect... but its an educated guess rather than your method of lets tax and then see what happens...."ooopps we lost so much revenue that we can't afford school books this year"

That's just ridiculous. You haven't made any prediction at all where the rollover happens, so you haven't made a guess, educated or otherwise. The ONLY way to know anything about that number is empirically. We actually have lots and lots of data, from lots of tax rate changes, and it's just fact that in virtually every case, tax rate increases have the predicted effect of increasing revenue and vice versa. If you want to cite all the exceptions, go for it. Let's see the study, let's see the numbers.

The oops is happening right now in Kansas. You can read about the tax rate cuts that have left a gaping hole in their budget, and they can't afford books because their idiot GOP Governor and idiot republican legislators either believed the Laffer Curve BS or just wanted to cut taxes and didn't care that they'd cause their budget to gush red ink.

So which assumption should we go with? That tax rate cuts decrease or increase revenue?

Your hung up that the laffer curve is not valuable because it can't predict a data point on behavior..

What good is an economic theory that has no predictive value for real world decisions? If I'm a legislator and I'm considering voting for a tax rate cut of 25%, what does the Laffer Curve tell me about what is most likely to happen with revenues? Will revenues increase or decrease and by how much? If the Laffer Curve can't help me make that decision, and it cannot unless somehow I know where we are on that curve, then it's as useful as a coin flip or consulting my horoscope.

that's like saying that the Theory of Evolution isn't a valuable scientific theory because it can't predict what will evolve tomorrow or 1,000 years from now..:2razz:

Apples and giraffes. :doh

Yes... we have been over it and you don't like it because it blows your premise out of the water. Its a good example.. you don't like it because it doesn't fit your narrative.

And the example has relevance to exactly to something like federal corporate income taxes.. in fact... you picked a very relevant issue with federal corporate taxes.

Explain the relevance. I'm missing it. One is an excise tax on a very narrow sliver of the luxury goods market coming out of recession, and one is an income tax that applies to the other 99.9% of the economy. Will a 10% drop in the top corporate rate (the excise tax was 10%), increase or decrease corporate tax revenues in total?

 

[Jack Hays]

I never said the Laffer curve was only concerned with income tax rates.

And where does the curve turn over for, e.g. income tax rates so we know when we're on the "free" portion?

That is of course the important judgment question.

 

[JasperL]

That is of course the important judgment question.

It's an empirical question. There is no objective way I've seen, not even any theory, to predict when tax rate changes won't follow normal patterns. So when economists at CBO and elsewhere project the dynamic effect of all kinds of changes in the tax code, they're not making subjective judgments - sitting around arguing about the theory - they're using massive amounts of data, evidence from past changes. It's how multipliers of all kinds are determined, on spending and taxes.

And the only "judgment" required by legislators or others in 2014 considering the revenue effect of changes in the tax rate is they'll have the normal effect - if rates are cut, revenues will be lower than they would have been had rates been left unchanged, and vice versa.

 

[Jack Hays]

It's an empirical question. There is no objective way I've seen, not even any theory, to predict when tax rate changes won't follow normal patterns.

And the only "judgment" required by legislators or others in 2014 considering the revenue effect of changes in the tax rate is they'll have the normal effect - if rates are cut, revenues will be lower than they would have been had rates been left unchanged, and vice versa. This conclusion is supported by the empirical evidence of perhaps millions of changes in tax rates, and examples of rate changes having opposite effects truly outliers.

I'm not an economist and I'm not going to try to play one on TV. It is nonetheless apparent that there is a point on the Laffer Curve where lower taxes produce higher revenue. If that were not the case there would be no curve.

 

[JohnfrmClevelan]

I'm not an economist and I'm not going to try to play one on TV. It is nonetheless apparent that there is a point on the Laffer Curve where lower taxes produce higher revenue. If that were not the case there would be no curve.

The curve is a completely theoretical construct based on the fact that you get zero tax revenue at two data points - a 0% tax rate and a 100% tax rate. The big revelation here is that tax revenue won't be zero between those two points. Only politicians could make that into a point of contention.

Sure, there is going to be a maximum point somewhere between 0 and 100, but the curve tells you nothing more. It has no predictive features. It's useless. The "lower" taxes that produce the highest revenue lie anywhere between 1% and 99%. When a politician tells you that lowering taxes from wherever they happen to be today will generate higher tax revenue, he is talking straight out of his ass.

 

[JasperL]

I'm not an economist and I'm not going to try to play one on TV. It is nonetheless apparent that there is a point on the Laffer Curve where lower taxes produce higher revenue. If that were not the case there would be no curve.

First of all, the Laffer Curve isn't evidence of the Laffer Curve - if such a point exists, it won't be proven by pointing to the curve but by empirical data that show the curve demonstrates economic behavior observed in the real world.

Second, the argument really isn't whether there is a theoretical point at which further tax rate increases cause revenue drops. It's where that point is and whether the Laffer curve has any relevance to tax rate decisions in the modern world, and there is no evidence it does. When Kansas cut their income tax rates, revenues collapsed. When Clinton raised rates, revenues increased. When Bush II cut rates, revenues dropped. When we let some of those tax cuts expire, revenues increased. Etc.

 

[Jack Hays]

The curve is a completely theoretical construct based on the fact that you get zero tax revenue at two data points - a 0% tax rate and a 100% tax rate. The big revelation here is that tax revenue won't be zero between those two points. Only politicians could make that into a point of contention.

Sure, there is going to be a maximum point somewhere between 0 and 100, but the curve tells you nothing more. It has no predictive features. It's useless. The "lower" taxes that produce the highest revenue lie anywhere between 1% and 99%. When a politician tells you that lowering taxes from wherever they happen to be today will generate higher tax revenue, he is talking straight out of his ass.

Fair enough, but that does not change the fact that at some point lower taxes will produce more revenue. Where to find that point is the judgment call I mentioned.

 

[Jack Hays]

First of all, the Laffer Curve isn't evidence of the Laffer Curve - if such a point exists, it won't be proven by pointing to the curve but by empirical data that show the curve demonstrates economic behavior observed in the real world.

Second, the argument really isn't whether there is a theoretical point at which further tax rate increases cause revenue drops. It's where that point is and whether the Laffer curve has any relevance to tax rate decisions in the modern world, and there is no evidence it does. When Kansas cut their income tax rates, revenues collapsed. When Clinton raised rates, revenues increased. When Bush II cut rates, revenues dropped. When we let some of those tax cuts expire, revenues increased. Etc.

All fair, but the conceptual point stands. There is a point beyond which higher taxes reduce revenue.

 

[JohnfrmClevelan]

Fair enough, but that does not change the fact that at some point lower taxes will produce more revenue. Where to find that point is the judgment call I mentioned.

All fair, but the conceptual point stands. There is a point beyond which higher taxes reduce revenue.

But the whole point of the thread, and the article behind it, is that there is some kind legitimate value to the Laffer Curve, when there clearly is not. It is no more enlightening than saying "pain hurts," or "water is wet."

 

[Jack Hays]

But the whole point of the thread, and the article behind it, is that there is some kind legitimate value to the Laffer Curve, when there clearly is not. It is no more enlightening than saying "pain hurts," or "water is wet."

On the contrary, the fact that such a point exists makes it important to try to learn where it falls on the graph.

 

[JohnfrmClevelan]

On the contrary, the fact that such a point exists makes it important to try to learn where it falls on the graph.

But there is no single graph. It would be different for every country, every culture, and probably every situation. For instance, many other countries are happy (or at least accustomed to) paying higher tax rates, so they might continue working harder at higher tax rate levels than Americans would.

Plus, under our current progressive system, the people paying the highest rates aren't breaking their backs to make that money, so the idea that at higher tax rates there will be less of an incentive to "work" is probably not all that legit. If you only brought home 20% of your pay for breaking rocks, the incentive to do as little rock-breaking as possible would be very real. But if you are still bringing home 20% of your pay for some passive activity, so what? It's still better than nothing.

And the biggest negative of all, you have political misuse of the whole concept. Conservative politicians have been using the Laffer Curve to fool people into lowering taxes for years, with the (incorrect) interpretation that the Laffer Curve means "lower taxes = higher revenue."

So legitimizing the Laffer Curve by saying that yes, water is indeed wet, is giving the thing far more credibility than it deserves, and only perpetuates the political problem. You just know that tomorrow, some politician, somewhere, will be using the same Laffer Curve mantra for their own benefit. Instead, it should be ridiculed and discarded immediately.

 

[Jack Hays]

But there is no single graph. It would be different for every country, every culture, and probably every situation. For instance, many other countries are happy (or at least accustomed to) paying higher tax rates, so they might continue working harder at higher tax rate levels than Americans would.

Plus, under our current progressive system, the people paying the highest rates aren't breaking their backs to make that money, so the idea that at higher tax rates there will be less of an incentive to "work" is probably not all that legit. If you only brought home 20% of your pay for breaking rocks, the incentive to do as little rock-breaking as possible would be very real. But if you are still bringing home 20% of your pay for some passive activity, so what? It's still better than nothing.

And the biggest negative of all, you have political misuse of the whole concept. Conservative politicians have been using the Laffer Curve to fool people into lowering taxes for years, with the (incorrect) interpretation that the Laffer Curve means "lower taxes = higher revenue."

So legitimizing the Laffer Curve by saying that yes, water is indeed wet, is giving the thing far more credibility than it deserves, and only perpetuates the political problem. You just know that tomorrow, some politician, somewhere, will be using the same Laffer Curve mantra for their own benefit. Instead, it should be ridiculed and discarded immediately.

I don't think anyone makes the argument that in general lower taxes mean higher revenues. The argument is that lower taxes mean a higher growth rate. The revenue vs taxes argument clearly only applies to a specific point on the Laffer Curve which, as you point out, is likely different from country to country.

Conservatives have not misused the concept any more than liberals have demagogued "trickle down" economics.

 

[JasperL]

I don't think anyone makes the argument that in general lower taxes mean higher revenues. The argument is that lower taxes mean a higher growth rate. The revenue vs taxes argument clearly only applies to a specific point on the Laffer Curve which, as you point out, is likely different from country to country.

Not sure about 'in general' but many GOPers claim(ed) the Reagan and Bush II tax cuts paid for themselves. I've quoted them on other threads on this subject. And that claim (there is a tax free lunch) is in fact the only notable thing about the "Laffer" curve.

Conservatives have not misused the concept any more than liberals have demagogued "trickle down" economics.

OK, here's the rising Senate Majority leader, McConnell:

There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy.

Pence:

“When President Bush imposed those tax cuts, they actually generated economic growth, they expand the economy, they expand tax revenue"

Rubio:

TODD: Okay, but I’m confused, would you support [tax cuts] if they were not paid for, if they were not balanced out by spending cuts?

RUBIO: Well, the question is they will be paid for because they create economic growth, especially in the long-term.

I could find and quote many more GOPers making similar claims, but I think you can see the point. You guys are saying that the Laffer Curve isn't used in the way that top republicans use the Laffer Curve.

 

[Jack Hays]

Not sure about 'in general' but many GOPers claim(ed) the Reagan and Bush II tax cuts paid for themselves. I've quoted them on other threads on this subject. And that claim (there is a tax free lunch) is in fact the only notable thing about the "Laffer" curve.



OK, here's the rising Senate Majority leader, McConnell:



Pence:



Rubio:



I could find and quote many more GOPers making similar claims, but I think you can see the point. You guys are saying that the Laffer Curve isn't used in the way that top republicans use the Laffer Curve.

Your examples seem to make my point, not yours. They're talking about economic growth with a long term effect on the tax base, not necessarily immediate revenue growth. And I note that you sidestepped the matter of Dems demagoguing "trickle down."

 

[MTAtech]

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. . . . "

Actually, the theory, such as it is, that lowering taxes increases government revenue has been COMPLETELY discredited. Adjusting for inflation and population increases, government revenue did not increase after taxes were raised. I was around during the Reagan years. His "economic plan" was essentially lowering top tax rates and believing in the now discredited theory that tax cuts pay for themselves. To Reagan's credit, when he saw that those tax cuts resulted in unprecedented deficits, he raised taxes. But in any case, the economy didn't recover for years after Reagan lowered taxes, thus there was no causal connection. What did spur the economy? -- when the Fed relaxed money and brought down interest rates.

This is why it is important to adjust for inflation and population grow, which inflate revenue numbers regardless of policy. Federal revenues rose 80% in dollar terms from 1980 to 1988. But real revenues per capita grew only 19% over the same period -- far better than the Bush II performance, but still nothing exciting. In fact, it’s less than revenue growth in the period 1972-1980 (+24%) and much less than the amazing 41% gain from 1992 to 2000. As I said, the theory that lowering taxes increases government revenue has been discredited by even the most casual (but honest) review of the data.

 

[Jack Hays]

Actually, the theory, such as it is, that lowering taxes increases government revenue has been COMPLETELY discredited. Adjusting for inflation and population increases, government revenue did not increase after taxes were raised. I was around during the Reagan years. His "economic plan" was essentially lowering top tax rates and believing in the now discredited theory that tax cuts pay for themselves. To Reagan's credit, when he saw that those tax cuts resulted in unprecedented deficits, he raised taxes. But in any case, the economy didn't recover for years after Reagan lowered taxes, thus there was no causal connection. What did spur the economy? -- when the Fed relaxed money and brought down interest rates.

This is why it is important to adjust for inflation and population grow, which inflate revenue numbers regardless of policy. Federal revenues rose 80% in dollar terms from 1980 to 1988. But real revenues per capita grew only 19% over the same period -- far better than the Bush II performance, but still nothing exciting. In fact, it’s less than revenue growth in the period 1972-1980 (+24%) and much less than the amazing 41% gain from 1992 to 2000. As I said, the theory that lowering taxes increases government revenue has been discredited but even the most casual (but honest) review of the data.

Please review the thread; I'm not going to repeat what has already been posted several times. Short version is that you are arguing against a claim no one is making.

 

[JasperL]

Your examples seem to make my point, not yours. They're talking about economic growth with a long term effect on the tax base, not necessarily immediate revenue growth.

They're claiming tax cuts paid for themselves, and that there is no reason to offset the 'cost' of tax cuts with spending cuts, that there is a Tax Santa Clause.

And I note that you sidestepped the matter of Dems demagoguing "trickle down."

I didn't sidestep the issue, I just don't know how to address a vague claim like "Conservatives have not misused the concept any more than liberals have demagogued "trickle down" economics."

Am I supposed to make an objective measurement of the various misuses by both parties and then decide which party has 'misused' some concept the most? And which dems, which statements, on what specific issue or issues? It's too vague a statement to respond to with something on the order of "Nuh uh!!! GOPers is worsest!!!"

 

[JasperL]

Please review the thread; I'm not going to repeat what has already been posted several times. Short version is that you are arguing against a claim no one is making.

True enough, no posters are making the claim, just the top GOP Senator, soon to be Senate Majority Leader and other GOP leaders, right wing/conservative opinion writers, etc.