The Continuing Success of the Laffer Curve

[Jack Hays]

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.

Actually, you'll find most are talking about long term revenue growth based on economic growth.

 

[cpwill]

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.

Economists, too, don't forget. That's the problem with the CBO's static scoring methodology. Told to assess the revenues that would be brought in by a 150% flat tax, they would have to dutifully report that everyone will pay 150% of their wages, and only note in the footnotes that this is extremely unlikely, possibly providing an alternate scenario.

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.

Knowledge of a law without good specifics is not useless at all.

The "lower" taxes that produce the highest revenue lie anywhere between 1% and 99%.

This is unlikely if you take a look at relatively likelihood, and historical experience.

An interesting assessment, for example:

...There is this little thing called the Laffer Curve. It states the obvious: If tax rates are zero, government collects zero money. If tax rates are 100%; government collects zero money. (If everything you produce is taken from you, you starve and die, even if you are forced by slavery to work for nothing.) In between, government collects something. The maximum collection point is somewhere between 0% and 100%...

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....

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%).

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."

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.

...unless he is speaking about over time, in which case he could be correct - it depends on the time window. Any tax cut which increases growth (even if it decreases revenues as a % of GDP, which is rather contentious) will eventually result in net gain in revenues.

 

[MTAtech]

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.

I was quoting from the first post. The Laffer Curse is the theory that lowering taxes raises more revenue. That is the main argument of this thread and it is the claim Reagan and others had made but isn't true.


And yes, Mitch McConnell famously said,

"[T]here's no evidence whatsoever is that the Bush tax cuts actually diminished revenue,"

The overwhelming evidence is that these cuts diminished revenue at historic rates.

Sorry, GOP, tax cuts don't pay for themselves - The Week

 

[whysoserious]

I was quoting from the first post. The Laffer Curse is the theory that lowering taxes raises more revenue. That is the main argument of this thread and it is the claim Reagan and others had made but isn't true.


And yes, Mitch McConnell famously said,


The overwhelming evidence that these cuts diminished revenue at historic rates.

Sorry, GOP, tax cuts don't pay for themselves - The Week

That's what everyone seems to think but it's not true. The Laffer Curve is just a bell curve that shows that at some point, raising taxes actually causes a decrease in revenue. At another point (on the other side of the curve), lowering taxes still lowers revenue.

No one should or can deny the Laffer Curve is correct. Of course there is a rate at which taxation would spurn growth and cause losses. The question is, where is that peak and are we anywhere close to it? And the answer is no.

 

[JasperL]

Actually, you'll find most are talking about long term revenue growth based on economic growth.

I'll take McConnell's quote:

There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue

He's making a crystal clear claim - tax cuts ==> more revenue. It's false - after the tax cuts, revenues fell, deficits increased, contrary to the claims of the Laffer Curve proponents. And if tax cuts ===> MORE revenue, then tax rate increases must generate LESS revenue. But when Clinton and Obama raised tax rates, revenues increased.

You're refusing to admit what is obvious to everyone not invested in defending a BS theory used for propaganda to sell pain free tax cuts to the masses.

 

[JohnfrmClevelan]

...unless he is speaking about over time, in which case he could be correct - it depends on the time window. Any tax cut which increases growth (even if it decreases revenues as a % of GDP, which is rather contentious) will eventually result in net gain in revenues.

Sure, he could be correct. But there is no way to know, and that's why I took issue with politicians saying that it will increase revenues. If they want to say that in "might" increase revenues, I have no problem with that. As most congresspeople are attorneys, they should know to choose their words more carefully. But I think they know what they are doing here.

As for your second statement, for any tax cut that increases growth (also hard to pin on tax cuts, but anyway...), we can only say that they will increase growth. Revenues are a whole different calculation. You can't make that leap.

 

[JasperL]

Economists, too, don't forget. That's the problem with the CBO's static scoring methodology. Told to assess the revenues that would be brought in by a 150% flat tax, they would have to dutifully report that everyone will pay 150% of their wages, and only note in the footnotes that this is extremely unlikely, possibly providing an alternate scenario.

That's just not true and displays a wlllful (I assume) ignorance of how the economists in CBO and Treasury make projections. They use dynamic scoring all the time. In fact, the CBO will "score" something based on assumptions on economic growth handed to them by the person requesting the analysis. Besides, the problem with dynamic scoring of tax rate cuts is the "dynamic" effect of a long term offset of the nominal cost of a tax cut (e.g. that a $1 nominal tax cut will only cost 90 cents long term) is premised on the tax cuts being offset with spending cuts - i.e. not financed with higher deficits. Most analyses of tax cuts financed by deficits find that the long term cost will either be close to the nominal cost or that a debt-financed tax rate cut will cost MORE than $1 long term because of the cost of interest, crowding out, etc. And of course in real life, tax cuts have always been financed with higher deficits, not spending cuts, so a dynamic analysis doesn't help the case, and might project HIGHER costs than static analyses.

Knowledge of a law without good specifics is not useless at all.

If you don't know where the rollover rate is, how can the Laffer Curve inform a legislator considering the revenue impact of a decrease in the individual tax rate from 35% to 32%?

...unless he is speaking about over time, in which case he could be correct - it depends on the time window. Any tax cut which increases growth (even if it decreases revenues as a % of GDP, which is rather contentious) will eventually result in net gain in revenues.

Oh please, using the same analysis one could argue that $10 invested at any positive rate of return, sustained over an indefinite period of time, will turn into $1 TRILLION!!! It's true, but useless for decision making today over time periods relevant to those living.

 

[MTAtech]

Actually, you'll find most are talking about long term revenue growth based on economic growth.

The U.S. had long term revenue growth based on economic growth, even when top rates were 90%. There is no evidence that lowering taxes would increase economic growth any more than it would under higher taxes. Below is a graph of GDP growth, based upon where the graph rise more or dips, tell us which years were lower tax-rate years.

....

As one can see, revenue dropped off when taxes were lowered, which should be obvious.

 

[cpwill]

Sure, he could be correct. But there is no way to know, and that's why I took issue with politicians saying that it will increase revenues. If they want to say that in "might" increase revenues, I have no problem with that.

Sure. But if you want to use that measure then it is equally problematic for politicians to say that tax rate increases will increase revenues. But you have to do budgeting, which means you have to make assumptions regarding revenues.

As for your second statement, for any tax cut that increases growth (also hard to pin on tax cuts, but anyway...), we can only say that they will increase growth. Revenues are a whole different calculation. You can't make that leap.

On the contrary - growth seems to be the main driver in revenues.

 

[JohnfrmClevelan]

Sure. But if you want to use that measure then it is equally problematic for politicians to say that tax rate increases will increase revenues. But you have to do budgeting, which means you have to make assumptions regarding revenues.

It is far less of a stretch to claim that an increase in the tax rate will increase tax revenues, because in the short term, it's a near certainty. No fuzzy "at some point in the distant future" assumption is hidden in that statement.

On the contrary - growth seems to be the main driver in revenues.

Just an example to illustrate: if your economy is 100 and your taxes are 20%, your revenues are 20. If you cut taxes in half, and your economy only grows by 1, you aren't going to increase your revenues. Even if your economy grew by 10%/year, revenues still wouldn't hit 20 again for almost 10 years, and I'm not even bothering with the accumulated loss of revenue in the intervening years. Yes, growth is probably the main driver in revenues, but it is yet another leap to claim that your tax cuts are not only going to increase revenues, but increase them so much that growth more than makes up for the difference.

I don't really want to get into this, because it isn't my fight. (You probably know that I don't think taxes are (or should be) for raising revenue.) I just can't let it slide when I see "maybe" casually turned into "definitely." And the Laffer Curve is just another tool for people to make "maybe" claims look like statements of fact with statistics behind them.

 

[JasperL]

Sure. But if you want to use that measure then it is equally problematic for politicians to say that tax rate increases will increase revenues. But you have to do budgeting, which means you have to make assumptions regarding revenues.

That assumes there is some roughly equal likelihood of a given tax rate increase to either increase or decrease revenues. We have a long history of at least 10s of thousands of tax rate changes in the U.S. at various levels and abroad, and the evidence is there is something like a 99.9% or so likelihood that actual changes in tax rates have their common sense effects - lower tax rates ==> lower revenues, and vice versa. So rational decision makers will make that assumption, not hope that THIS time is the outlier, the one in 1,000.

On the contrary - growth seems to be the main driver in revenues.

Sure, but there is little correlation between growth and nominal tax rates on some people doing some things - i.e. the top marginal income tax rate on individuals.

 

[Jack Hays]

I was quoting from the first post. The Laffer Curse is the theory that lowering taxes raises more revenue. That is the main argument of this thread and it is the claim Reagan and others had made but isn't true.


And yes, Mitch McConnell famously said,


The overwhelming evidence is that these cuts diminished revenue at historic rates.

Sorry, GOP, tax cuts don't pay for themselves - The Week

From the OP article:

". . . It’s worth noting that there has been some shift in emphasis among advocates of supply-side economics. The original Laffer Curve illustrated that two tax rates lead to zero revenue: a rate of zero and a rate of 100 percent — because no one will work if all earnings are taken away. Yes, in some cases tax rates can get so high that cutting them will raise more revenue, not less. That was clearly true when capital-gains tax rates were slashed in the 1980s and 1990s, and when in 2004 the federal government enacted a repatriation tax cut on foreign earnings held captive overseas. Revenue rose in all of these instances. But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve.


We do argue, and history is our guide, that lower tax rates are a private-sector stimulus that in many circumstances will rev up growth and lead to more jobs. It’s a happy byproduct that this growth will help generate higher revenue than the government’s “static” estimates always undercount. . . ."

 

[Jack Hays]

I'll take McConnell's quote:



He's making a crystal clear claim - tax cuts ==> more revenue. It's false - after the tax cuts, revenues fell, deficits increased, contrary to the claims of the Laffer Curve proponents. And if tax cuts ===> MORE revenue, then tax rate increases must generate LESS revenue. But when Clinton and Obama raised tax rates, revenues increased.

You're refusing to admit what is obvious to everyone not invested in defending a BS theory used for propaganda to sell pain free tax cuts to the masses.

From the OP article:

". . . It’s worth noting that there has been some shift in emphasis among advocates of supply-side economics. The original Laffer Curve illustrated that two tax rates lead to zero revenue: a rate of zero and a rate of 100 percent — because no one will work if all earnings are taken away. Yes, in some cases tax rates can get so high that cutting them will raise more revenue, not less. That was clearly true when capital-gains tax rates were slashed in the 1980s and 1990s, and when in 2004 the federal government enacted a repatriation tax cut on foreign earnings held captive overseas. Revenue rose in all of these instances. But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve.


We do argue, and history is our guide, that lower tax rates are a private-sector stimulus that in many circumstances will rev up growth and lead to more jobs. It’s a happy byproduct that this growth will help generate higher revenue than the government’s “static” estimates always undercount. . . ."

 

[Jack Hays]

The U.S. had long term revenue growth based on economic growth, even when top rates were 90%. There is no evidence that lowering taxes would increase economic growth any more than it would under higher taxes. Below is a graph of GDP growth, based upon where the graph rise more or dips, tell us which years were lower tax-rate years.

....

As one can see, revenue dropped off when taxes were lowered, which should be obvious.

From the OP article:

". . . . Reagan’s tax policy, and the slaying of double-digit inflation rates, helped launch one of the longest and strongest periods of prosperity in American history. Between 1982 and 2000, the Dow Jones industrial average would surge to 11,000 from less than 800; the nation’s net worth would quadruple, to $44 trillion from $11 trillion; and the United States would produce nearly 40 million new jobs.


Critics such as economist Paul Krugman object that rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by reductions in tax rates. Except that 30 years later, President Obama would run deficits as a share of GDP twice as large as Reagan’s through traditional Keynesian spending programs, and the economy grew under Obama’s recovery only half as fast.


Supply-side economics was never just about slashing tax rates. As Laffer told me in a recent interview: “We also emphasized sound money, free trade and deregulation. It was a package of reforms to clear away the obstacles to increased economic output.”


I asked Laffer about the economy’s surge, while income tax rates rose, during the Clinton presidency — which critics cite as repudiation of supply-side theories. Laffer noted that tax rates on work and investment fell in the ’90s. “Under Clinton we had the biggest reduction in government spending in 30 years, one of the steepest reductions in the capital gains tax, a big cut in the tax on traded goods thanks to NAFTA, and welfare reforms which dramatically increased incentives to work. Of course the economy soared.”. . . ."

 

[JasperL]

From the OP article:

". . . It’s worth noting that there has been some shift in emphasis among advocates of supply-side economics. The original Laffer Curve illustrated that two tax rates lead to zero revenue: a rate of zero and a rate of 100 percent — because no one will work if all earnings are taken away. Yes, in some cases tax rates can get so high that cutting them will raise more revenue, not less. That was clearly true when capital-gains tax rates were slashed in the 1980s and 1990s, and when in 2004 the federal government enacted a repatriation tax cut on foreign earnings held captive overseas. Revenue rose in all of these instances. But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve.


We do argue, and history is our guide, that lower tax rates are a private-sector stimulus that in many circumstances will rev up growth and lead to more jobs. It’s a happy byproduct that this growth will help generate higher revenue than the government’s “static” estimates always undercount. . . ."

I'm not sure what to say except the evidence proves that statement wrong. McConnell, Pence, and Rubio made that very argument, and I could quote many more discussing the Bush II tax cuts. Recent history, guys still in power, still making policy choices. There are two things - how serious people discuss the Laffer curve, and even the most conservative economists still with a reputation intact dismiss it as a useful tool for modern decision making, guys who served Reagan and Bush II, and right wing politicians who use the Laffer Curve as a propaganda tool. You can't cite serious people to dismiss how IT IS USED IN MODERN POLITICS, by people at the highest levels of the GOP.

And the "static" estimates don't always undercount the total cost of the tax cuts, because it's not much of a feat to juice the economy based on borrowed money, which is how we finance tax cuts at the Federal level. There's a reason why you don't hear about GOP demands for "dynamic" analysis as much, because when Treasury did dynamic scoring of the Bush tax cuts, there was little difference from the static analysis because the cuts were borrowed, which increases the net cost of them to, by many analyses, MORE than $1 in cost per $1 in tax cuts. Remember, Laffer's magic portion would predict that a $1 in nominal would cost NEGATIVE amounts.

 

[Jack Hays]

I'm not sure what to say except the evidence proves that statement wrong. McConnell, Pence, and Rubio made that very argument, and I could quote many more discussing the Bush II tax cuts. Recent history, guys still in power, still making policy choices. There are two things - how serious people discuss the Laffer curve, and even the most conservative economists still with a reputation intact dismiss it as a useful tool for modern decision making, guys who served Reagan and Bush II, and right wing politicians who use the Laffer Curve as a propaganda tool. You can't cite serious people to dismiss how IT IS USED IN MODERN POLITICS, by people at the highest levels of the GOP.

And the "static" estimates don't always undercount the total cost of the tax cuts, because it's not much of a feat to juice the economy based on borrowed money, which is how we finance tax cuts at the Federal level. There's a reason why you don't hear about GOP demands for "dynamic" analysis as much, because when Treasury did dynamic scoring of the Bush tax cuts, there was little difference from the static analysis because the cuts were borrowed, which increases the net cost of them to, by many analyses, MORE than $1 in cost per $1 in tax cuts. Remember, Laffer's magic portion would predict that a $1 in nominal would cost NEGATIVE amounts.

The Bush II tax cuts were more than a decade ago; views evolve. And your statement about how the LC is used in modern politics is simply obsolete.

 

[JasperL]

The Bush II tax cuts were more than a decade ago; views evolve. And your statement about how the LC is used in modern politics is simply obsolete.

It's really not obsolete - the quotes were from 2010, and I've seen no GOPers on record that there's been a change of heart from views they held and expressed starting with early Reagan years through Obama - 30 years or so. You're welcome to quote them if you want....

It's odd you're defending GOP hacks on this as you don't claim to be a Republican.

 

[MTAtech]

That's just not true and displays a wlllful (I assume) ignorance of how the economists in CBO and Treasury make projections. They use dynamic scoring all the time. In fact, the CBO will "score" something based on assumptions on economic growth handed to them by the person requesting the analysis. Besides, the problem with dynamic scoring of tax rate cuts is the "dynamic" effect of a long term offset of the nominal cost of a tax cut (e.g. that a $1 nominal tax cut will only cost 90 cents long term) is premised on the tax cuts being offset with spending cuts - i.e. not financed with higher deficits. Most analyses of tax cuts financed by deficits find that the long term cost will either be close to the nominal cost or that a debt-financed tax rate cut will cost MORE than $1 long term because of the cost of interest, crowding out, etc. And of course in real life, tax cuts have always been financed with higher deficits, not spending cuts, so a dynamic analysis doesn't help the case, and might project HIGHER costs than static analyses.



If you don't know where the rollover rate is, how can the Laffer Curve inform a legislator considering the revenue impact of a decrease in the individual tax rate from 35% to 32%?



Oh please, using the same analysis one could argue that $10 invested at any positive rate of return, sustained over an indefinite period of time, will turn into $1 TRILLION!!! It's true, but useless for decision making today over time periods relevant to those living.

How To Read A CBO Report

 

[MTAtech]

From the OP article:

". . . It’s worth noting that there has been some shift in emphasis among advocates of supply-side economics. The original Laffer Curve illustrated that two tax rates lead to zero revenue: a rate of zero and a rate of 100 percent — because no one will work if all earnings are taken away. Yes, in some cases tax rates can get so high that cutting them will raise more revenue, not less. That was clearly true when capital-gains tax rates were slashed in the 1980s and 1990s, and when in 2004 the federal government enacted a repatriation tax cut on foreign earnings held captive overseas. Revenue rose in all of these instances. But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve.


We do argue, and history is our guide, that lower tax rates are a private-sector stimulus that in many circumstances will rev up growth and lead to more jobs. It’s a happy byproduct that this growth will help generate higher revenue than the government’s “static” estimates always undercount. . . ."

So, you start a thread called the "continued success of the Laffer curve," then go one to admit what we liberals said all along, 'cutting tax rates will not increase revenue — except in extreme cases when rates are at the very highest range of the curve (e.g. confiscatory rates.) However, when they are not confiscatory, those incentives have no effect. Take it away Christie:

If you can find a consistent relationship between these [tax-rate] fluctuations and sustained economic performance, you’re more creative than I am. Growth was indeed slower in the 1970s than in the ’60s, and tax rates were higher in the ’70s. But growth was stronger in the 1990s than in the 2000s, despite noticeably higher rates in the ’90s.

 

[Anthony60]

Aside from the Laffer curve, since when is it the goal to reap as much revenue as possible from the people to the government? I didn't see that anywhere in the Constitution. It does seem to be the goal of the left.

The government, in my eyes, is a necessary evil. It sucks at most of what it does. It is about the worst place on Earth to send one of your hard earned dollars. Our goal should be to keep as much money as possible in the hands of those that earn it, and have the absolute minimum going to the government. We have let our government get out of control.

 

[tomkat364]

Aside from the Laffer curve, since when is it the goal to reap as much revenue as possible from the people to the government? I didn't see that anywhere in the Constitution. It does seem to be the goal of the left.

The government, in my eyes, is a necessary evil. It sucks at most of what it does. It is about the worst place on Earth to send one of your hard earned dollars. Our goal should be to keep as much money as possible in the hands of those that earn it, and have the absolute minimum going to the government. We have let our government get out of control.

This is the point I was about to make. When did the government become a for profit business? Liberals are all about equality - equal rights for women, equal rights for minorities, equal rights for LGBT's (even though most of their suggestions to equalize rights involve some form of reverse discrimination to obtain), but DEFINITELY not equal rights for the rich. The very notion that ANYONE should pay tax rates approaching 70% is absolutely absurd. If we truly want equality, that would then mean everyone gets taxed at the same rate.

 

[American]

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.

You have a method though that does tell us all those things, don't you?

 

[whysoserious]

You have a method though that does tell us all those things, don't you?

Theoretically, you could raise and lower taxes until you hit a sweet spot, but that's assuming the economy is static.

 

[American]

Theoretically, you could raise and lower taxes until you hit a sweet spot, but that's assuming the economy is static.

Not according to Deuce, you could never know when it's right. But he has a foolproof method he's getting ready to reveal to us.

 

[Jack Hays]

It's really not obsolete - the quotes were from 2010, and I've seen no GOPers on record that there's been a change of heart from views they held and expressed starting with early Reagan years through Obama - 30 years or so. You're welcome to quote them if you want....

It's odd you're defending GOP hacks on this as you don't claim to be a Republican.

Which GOP hacks am I defending? I'm noting that they no longer espouse a position they once did. I think Dem demagogery is a much more serious problem, that much is true.