The Continuing Success of the Laffer Curve

[Jack Hays]

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:

Yes, as an analytical tool in the study of economics, and as a pointer to lower taxes and higher growth, it is successful. The rest is just baggage that you brought to the party.

 

[MTAtech]

Yes, as an analytical tool in the study of economics, and as a pointer to lower taxes and higher growth, it is successful. The rest is just baggage that you brought to the party.

Except that the basis of the theory doesn't work. The rest is just obvious. If tax-rates were so high that you keep only 10 cents out of each dollar you earn, it would discourage work. Duh.

Moreover, what I read is backpedaling. When Bush cut taxes, the top rate was 39% and the capital gains rate was 20%. Yet, his team used Laffer as an argument to lower them further.

 

[Jack Hays]

Except that the basis of the theory doesn't work. The rest is just obvious. If tax-rates were so high that you keep only 10 cents out of each dollar you earn, it would discourage work. Duh.

Moreover, what I read is backpedaling. When Bush cut taxes, the top rate was 39% and the capital gains rate was 20%. Yet, his team used Laffer as an argument to lower them further.

The OP article defines well the current state of LC-related thought. I suggest you deal with that rather than the strawman issues you have created.

 

[imagep]

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.

Actually the consensus of most economists is that the peak is at 70% or even higher. Of course they also agree that our goal shouldn't be to maximize government revenue, but to maximize economic growth.

 

[imagep]

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.

Have you ever seen a sign at a business that says "rich people not allowed"? Have you ever known a church that rejected someone because they are rich? Has any politician ever refused to meet with someone because they are rich?

If you are limiting your argument to just taxation, everyone IS taxed at the same rate. Everyone who has a net taxable income of $X pays the same amount of income taxes, regardless of the color of your skin, your religion, your size, age, or shape. And I've never met a person in my life who didn't desire to have enough additional income to move up into a higher tax bracket. Now if you think that the rich are really somehow being unfairly discriminated against, then all they have to do is to start making less money - it isn't really all that difficult, lot's of people manage to do it. No one FORCES a high amount of income onto anyone.

 

[MTAtech]

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.

The concept of equal rights always was about whether there is a rational basis to discriminate. Certainly, someone who is blind isn't discriminated against if he/she is denied a drivers license. Nothing in equal rights can be stretched to exclude discrimination on the basis of income. During the Progressive Era, it was commonplace and widely accepted to support high taxes on the rich specifically in order to keep the rich from getting richer. Even Adam Smith, in the Wealth of Nations, wrote that the rich should pay more than their proportion.

That 70% tax is a marginal tax rate that only applies to that amount of income above a certain level.

 

[MTAtech]

Actually the consensus of most economists is that the peak is at 70% or even higher. Of course they also agree that our goal shouldn't be to maximize government revenue, but to maximize economic growth.

We have a pretty good idea of peak tax-rates, based on careful statistical studies, of where that optimal top rate lies; 73%, say Diamond and Saez, maybe 80%, say Romer and Romer.

 

[tomkat364]

Have you ever seen a sign at a business that says "rich people not allowed"? Have you ever known a church that rejected someone because they are rich? Has any politician ever refused to meet with someone because they are rich?

If you are limiting your argument to just taxation, everyone IS taxed at the same rate. Everyone who has a net taxable income of $X pays the same amount of income taxes, regardless of the color of your skin, your religion, your size, age, or shape. And I've never met a person in my life who didn't desire to have enough additional income to move up into a higher tax bracket. Now if you think that the rich are really somehow being unfairly discriminated against, then all they have to do is to start making less money - it isn't really all that difficult, lot's of people manage to do it. No one FORCES a high amount of income onto anyone.

I've never seen a sign that said "black people not allowed" in my lifetime either. Nor a church that rejected the handicapped. Nor a politician that refuses to meet with women. Yet I'm told that racism, sexism and other forms of discrimination run rampant. Yet we have a system by which the successful support the unsuccessful through government imposed, graduated taxes. That system does discriminate based on how much money you make. Marshawn Lynch of the Seattle Seahawks currently leads the NFL in touchdowns for this year. Imagine how fans would react if the NFL said "Lynch is too successful in comparison to other runningbacks in the league, so any touchdown scored by Marshawn Lynch will only count for five points instead of six." Doesn't make much sense, does it?

Equality means the same. Not better, not worse, not discriminate against one person so that another person can succeed. The SAME.

 

[Jack Hays]

We have a pretty good idea of peak tax-rates, based on careful statistical studies, of where that optimal top rate lies; 73%, say Diamond and Saez, maybe 80%, say Romer and Romer.

I'm already slightly over 50% in taxes. As an independent contractor I pay both halves of Social Security as well as state income tax on top of federal income tax.

 

[imagep]

I'm already slightly over 50% in taxes. As an independent contractor I pay both halves of Social Security as well as state income tax on top of federal income tax.

On your entire income, or on just your top marginal income?

The first $40k or so that me and my wife make we don't pay a penny of income taxes on (although we do indirectly pay both halves of the withholdings taxes), as we have enough exemptions and deductions. The next few tens of thousands of dollars we make are taxed at the lowest income tax rates.

It's only on the top $20 or $30k that we make which is taxed at anything close to 50%, even including both halves of withholdings taxes and state income tax and sales taxes, and property taxes, etc. I can't imagine anyone paying 50% on their entire income.

 

[Jack Hays]

On your entire income, or on just your top marginal income?

The first $40k or so that me and my wife make we don't pay a penny of income taxes on (although we do indirectly pay both halves of the withholdings taxes), as we have enough exemptions and deductions. The next few tens of thousands of dollars we make are taxed at the lowest income tax rates.

It's only on the top $20 or $30k that we make which is taxed at anything close to 50%, even including both halves of withholdings taxes and state income tax and sales taxes, and property taxes, etc. I can't imagine anyone paying 50% on their entire income.

For years I have paid a pretty smart guy to do my taxes so I would not have to become an expert in that area. All I know is that various percentages I pay add up to more than 50%.

 

[Glen Contrarian]

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

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.

Jack, all one has to do to see the magnitude of Laffer's error is to look at which democracies have a high standard of living, and which democracies don't. Yes, it is true that if taxes are too high on the middle class, it's not good for the economy. But looking at all the first-world democracies on the planet, every single one has high effective taxes, strong regulation, and big government. Every. Single. One.

That single fact in and of itself should be enough to call Laffer's theory into question.

What's more, ask yourself what were the three worst economic times in America since 1900? Of course it will be the Depression, the Great Recession, and the 1982 recession (though it could be argued that the mid-70's were worse than the 1982 recession). Then ask yourself what happened to our tax rates in the years prior to all three...and in each case, the tax rates had been slashed: the postwar tax rate was slashed to 25% (IIRC) in the early '20's, Reagan slashed the top marginal tax rate to 25% when he took office in 1981, and Dubya slashed tax rates too.

Speaking of the Depression, FDR did have somewhat of a stimulus when he took over in March 1933, and by 1936 we were almost out of the Depression. Problem is, the Dixiecrats that he had to deal with in Congress demanded austerity measures to "help grow the economy" (sound familiar?)...and down we went into the second dip of the Depression.

But what happened when we raised taxes? The boom of the 1950's, the Clinton boom (still the biggest boom we've had), and currently, we're still in the midst of the longest streak of positive private-sector job growth in American history...which also speaks volumes about whether Obama's stimulus helped the economy.

Speaking of government stimulus, the biggest government stimulus in American history was our build-up for WWII...and most of us will agree that yes, WWII pulled us out of the Depression. If government stimulus is bad for the economy, then our build-up for WWII should have driven us further into the Depression instead of getting us out of it.

In other words, what Laffer has is a theory...a theory that is proven erroneous by American economic history from the 1920's to the present day.

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.

And that particular quote should have gotten your attention, for when people are poor, they don't have money to spend...and if they don't have money to spend, then demand is DOWN. Yes, the people of poor nations have demand for food, shelter, and clothing...but not so much for the luxuries that we in first-world nations take for granted.

And anyone who claims that poor nations have "plenty of demand" (the obvious implication being that they somehow have more demand relative to rich nations) really needs to pull their heads out of, well, you get my point. What's more, look who Laffer was talking to: Cheney and Rumsfeld, neither of whom were economic geniuses. Laffer told them things that sounded good at the time (verbal voodoo though it certainly was), and now it's conservative dogma.

 

[imagep]

For years I have paid a pretty smart guy to do my taxes so I would not have to become an expert in that area. All I know is that various percentages I pay add up to more than 50%.

He must not be that smart.

 

[Jack Hays]

Jack, all one has to do to see the magnitude of Laffer's error is to look at which democracies have a high standard of living, and which democracies don't. Yes, it is true that if taxes are too high on the middle class, it's not good for the economy. But looking at all the first-world democracies on the planet, every single one has high effective taxes, strong regulation, and big government. Every. Single. One.

That single fact in and of itself should be enough to call Laffer's theory into question.

What's more, ask yourself what were the three worst economic times in America since 1900? Of course it will be the Depression, the Great Recession, and the 1982 recession (though it could be argued that the mid-70's were worse than the 1982 recession). Then ask yourself what happened to our tax rates in the years prior to all three...and in each case, the tax rates had been slashed: the postwar tax rate was slashed to 25% (IIRC) in the early '20's, Reagan slashed the top marginal tax rate to 25% when he took office in 1981, and Dubya slashed tax rates too.

Speaking of the Depression, FDR did have somewhat of a stimulus when he took over in March 1933, and by 1936 we were almost out of the Depression. Problem is, the Dixiecrats that he had to deal with in Congress demanded austerity measures to "help grow the economy" (sound familiar?)...and down we went into the second dip of the Depression.

But what happened when we raised taxes? The boom of the 1950's, the Clinton boom (still the biggest boom we've had), and currently, we're still in the midst of the longest streak of positive private-sector job growth in American history...which also speaks volumes about whether Obama's stimulus helped the economy.

Speaking of government stimulus, the biggest government stimulus in American history was our build-up for WWII...and most of us will agree that yes, WWII pulled us out of the Depression. If government stimulus is bad for the economy, then our build-up for WWII should have driven us further into the Depression instead of getting us out of it.

In other words, what Laffer has is a theory...a theory that is proven erroneous by American economic history from the 1920's to the present day.



And that particular quote should have gotten your attention, for when people are poor, they don't have money to spend...and if they don't have money to spend, then demand is DOWN. Yes, the people of poor nations have demand for food, shelter, and clothing...but not so much for the luxuries that we in first-world nations take for granted.

And anyone who claims that poor nations have "plenty of demand" (the obvious implication being that they somehow have more demand relative to rich nations) really needs to pull their heads out of, well, you get my point. What's more, look who Laffer was talking to: Cheney and Rumsfeld, neither of whom were economic geniuses. Laffer told them things that sounded good at the time (verbal voodoo though it certainly was), and now it's conservative dogma.

Your time sequences are off on several claims, and I would argue that the general prosperity our country enjoyed until 2008 had its roots and foundation in RWR's tax cuts, elimination of inflation and restoration of business confidence.

 

[imagep]

Your time sequences are off on several claims, and I would argue that the general prosperity our country enjoyed until 2008 had its roots and foundation in RWR's tax cuts, elimination of inflation and restoration of business confidence.

Most people would argue that it was the result of running a large budget deficit and/or mortgage bubble. Some even point to the portion of the tax cuts that effected the rich as one of the is one of the reasons we had the excess pooled money that allowed the mortgage bubble to grow.

 

[Jack Hays]

Most people would argue that it was the result of running a large budget deficit and/or mortgage bubble. Some even point to the portion of the tax cuts that effected the rich as one of the is one of the reasons we had the excess pooled money that allowed the mortgage bubble to grow.

Then they would have to explain how the prosperity continued after the budget deficits disappeared.

 

[Kushinator]

For years I have paid a pretty smart guy to do my taxes so I would not have to become an expert in that area. All I know is that various percentages I pay add up to more than 50%.

Not buying your story. It's akin to guys claiming they had to lower their incomes to pay lower effective taxes.

The FIT function is 0.396x - 38729 for all income exceeding $432,001, the higher you go, the closer to 40% it goes, but it is a non-converging Taylor expansion as x approaches infinity. Given that SS is capped, and all other taxes are deducted from your taxable income, the highest possible effective tax rate in the state of Virgina is closer to 48.65. And that begins over $15 million.

If you are earning more than $15 million in pure income and are not a professional athlete or entertainer, you are a moron.

But whatever you say.

 

[imagep]

Not buying your story. It's akin to guys claiming they had to lower their incomes to pay lower effective taxes.

The FIT function is 0.396x - 38729 for all income exceeding $432,001, the higher you go, the closer to 40% it goes, but it is a non-converging Taylor expansion as x approaches infinity. Given that SS is capped, and all other taxes are deducted from your taxable income, the highest possible effective tax rate in the state of Virgina is closer to 48.65. And that begins over $15 million.

If you are earning more than $15 million in pure income and are not a professional athlete or entertainer, you are a moron.

But whatever you say.

I assume that it would be fairly safe to say that most people who earn over $15 million probably have a lot of capital gains tax, which of course no ss or medicare taxes are withheld, and is generally taxed at a lower rate than income.

 

[Jack Hays]

Not buying your story. It's akin to guys claiming they had to lower their incomes to pay lower effective taxes.

The FIT function is 0.396x - 38729 for all income exceeding $432,001, the higher you go, the closer to 40% it goes, but it is a non-converging Taylor expansion as x approaches infinity. Given that SS is capped, and all other taxes are deducted from your taxable income, the highest possible effective tax rate in the state of Virgina is closer to 48.65. And that begins over $15 million.

If you are earning more than $15 million in pure income and are not a professional athlete or entertainer, you are a moron.

But whatever you say.

I claim no expertise, but here goes.

I'm in the 33% federal income tax bracket. I pay both employer and employee Social Security, thus: 12.4% up to the SS ceiling. In Virginia the rate on income above $17K is 5.75%. Thus: 51.15%. I know it's not all applicable at all points, but it seems fair to say that my rate is around 50%.

 

[Kushinator]

I assume that it would be fairly safe to say that most people who earn over $15 million probably have a lot of capital gains tax, which of course no ss or medicare taxes are withheld, and is generally taxed at a lower rate than income.

Correct.

 

[Glen Contrarian]

Your time sequences are off on several claims, and I would argue that the general prosperity our country enjoyed until 2008 had its roots and foundation in RWR's tax cuts, elimination of inflation and restoration of business confidence.

I'll be happy to address all those time sequences - bring them up, please.

And if you'll recall, while Reagan slashed taxes, he didn't cut government spending...which is why the debt tripled on his watch. "Reagan proved deficits don't matter" - that's what Cheney said, and he was the future GOP power broker at that table with Laffer. But what really pulled us out of the 1982 recession was Paul Volcker calling on the Fed to lower interest rates...and you can see the same thing happening today, the stimulative effect on our economy by having low interest rates at the Fed.

What's more, you say we've had general prosperity from Reagan's tax cuts until 2008. The problem with that claim is that when it comes to the wealthy, you're absolutely right...but the income of the middle class has risen but little and the income of the lower class has hardly risen at all. Tax cuts are great for the rich, but not so much for the rest of us.



(And for those who hate Mother Jones, the data source for the above graphs was the CBO)

 

[Kushinator]

I claim no expertise, but here goes.

I'm in the 33% federal income tax bracket. I pay both employer and employee Social Security, thus: 12.4% up to the SS ceiling. In Virginia the rate on income above $17K is 5.75%. Thus: 51.15%. I know it's not all applicable at all points, but it seems fair to say that my rate is around 50%.

Your FICA, Medicare, and SIT are deducted from federal taxable income. Lowering your effective tax rate below your bracket threshold. Furthermore, the effective tax paid on income up to $405,101 is 28.125%, or 48433 + (405100 - 206601) * 0.33 = 123422.6

123422.6 / 405100 = 0.28125 or 28.125%.

Subtract 26255.9 for FICA and medicare, along with state taxes paid of 23035.75 from gross income to get your taxable federal income gets you to 355808.35.

Taxes paid would be 26255.9 + 23035.75 + 48433 + 49238 = 146943 in total taxes paid, or roughly 34% effective taxes. This does not include any IRS deductions.

/tangent

 

[Jack Hays]

I'll be happy to address all those time sequences - bring them up, please.

And if you'll recall, while Reagan slashed taxes, he didn't cut government spending...which is why the debt tripled on his watch. "Reagan proved deficits don't matter" - that's what Cheney said, and he was the future GOP power broker at that table with Laffer. But what really pulled us out of the 1982 recession was Paul Volcker calling on the Fed to lower interest rates...and you can see the same thing happening today, the stimulative effect on our economy by having low interest rates at the Fed.

What's more, you say we've had general prosperity from Reagan's tax cuts until 2008. The problem with that claim is that when it comes to the wealthy, you're absolutely right...but the income of the middle class has risen but little and the income of the lower class has hardly risen at all. Tax cuts are great for the rich, but not so much for the rest of us.

View attachment 67178264

(And for those who hate Mother Jones, the data source for the above graphs was the CBO)

I don't care about income distribution.

 

[Jack Hays]

Your FICA, Medicare, and SIT are deducted from federal taxable income. Lowering your effective tax rate below your bracket threshold. Furthermore, the effective tax paid on income up to $405,101 is 28.125%, or 48433 + (405100 - 206601) * 0.33 = 123422.6

123422.6 / 405100 = 0.28125 or 28.125%.

Subtract 26255.9 for FICA and medicare, along with state taxes paid of 23035.75 from gross income to get your taxable federal income gets you to 355808.35.

Taxes paid would be 26255.9 + 23035.75 + 48433 + 49238 = 146943 in total taxes paid, or roughly 34% effective taxes. This does not include any IRS deductions.

/tangent

Well that's good news.

 

[Glen Contrarian]

I don't care about income distribution.

And that's the classic conservative viewpoint: why should we have to care about what's going on with the people we don't know? (and my ADD forces me to snarkily compare that viewpoint to Neville Chamberlain's infamous quote)

Jack, if you want America as a whole to prosper, then you have to care about the prosperity of everyone - even including those you don't like. The greater the share of the wealth that the rich have, the less that the common people will have available to spend...and that hurts us all.