The Laffer Curve

[sawdust]

Trickle-down is itself an updating of the "Horse and Sparrow" theory of the 1890's, wherein if you overfeed a horse enough oats, some will inevitably pass through for the sparrow by the roadside to pick out of the steaming pile.

Cute, not smart, but cute. Please explain how a capitalist society works without trickle down.

 

[KLATTU]

One has to keep in mind. Any study by liberal economists ( like Romer and Saez) already has the conclusion in mind. Ie that the ' optimal ' tax rate is extraordinarly high. As they saying goes- iif you torture the data long enough , it will confess to anything.
This is in keeping with the class warfare strategy which is part and parcel of the Dem platform. The rich need to pay more-they aren't paying their fair shars.

 

[jaeger19]

Yes, well, my point was that idea that lower our current effective tax rates will increase revenue is a factually incorrect statement. Our effective tax rates are not high enough, even according to the most stringent placement of the hump on the laffer curve, to be causing a decrease in revenue so in that regard it is a factually incorrect statement whereas the opposite is not true. According to that video, we can raise our effective tax rates quite a bit before actually causing a decrease in revenue. Now, of course, this is all separate from whether or not raising tax rates would "hurt the economy". They just won't hurt it enough to cause a decrease in revenue.

I would love it if we could simply the tax code and establish a progressive tax system that is easy to understand so when we have conversations about raising and lowering the tax rates even the least financially educated people would have a pretty good idea of what the effect would be.

\


Yes.. I would agree that our effective tax rate is too low.. we need to raise the effective tax rate so that we can start paying down the debt that the baby boomers have placed on my generation.

Otherwise my generation and my kids are going to get hammered.

The issue is how we raise those taxes. Raising taxes on the poor and middle class, as Liberals want (getting rid of bush tax cuts) doesn't seem like a good move for the economy right now. Raising taxes on small businessman by increasing marginal rates on earned income doesn't seem the smart thing either. But starting with getting rid of special tax breaks and deductions that benefit only certain companies.. seems a great start. As does raising the capital gains tax.

Quite frankly a flat tax makes the most sense since its progressive (most proposals except the first 30 thousand or more of earnings meaning poor and middle class will pay less a percentage of their income).. and you can determine exactly the revenue and effect on the economy raising and lowering the percentages would cause

 

[Manc Skipper]

Cute, not smart, but cute. Please explain how a capitalist society works without trickle down.

I've never seen J K Galbraith's work described as above before.

 

[sawdust]

I've never seen J K Galbraith's work described as above before.

If you can't answer the question just ignore it but remember it.

 

[imagep]

That's another piece of Tom Foolery that I never understood. Assuming business owners have more money in most cases, than employees, please explain to me how a capitalist society can ever function with anything other than trickle down.

Money rarely "trickles" down as fast as it trickles up. That's why rich people are rich, and the rest of us aren't rich.

You are basically making a good argument for redistribution, because without some of it, eventually the rich would have everything...but customers.

 

[imagep]

Yes, well, my point was that idea that lower our current effective tax rates will increase revenue is a factually incorrect statement. Our effective tax rates are not high enough, even according to the most stringent placement of the hump on the laffer curve, to be causing a decrease in revenue so in that regard it is a factually incorrect statement whereas the opposite is not true. According to that video, we can raise our effective tax rates quite a bit before actually causing a decrease in revenue. Now, of course, this is all separate from whether or not raising tax rates would "hurt the economy". They just won't hurt it enough to cause a decrease in revenue.

I would love it if we could simply the tax code and establish a progressive tax system that is easy to understand so when we have conversations about raising and lowering the tax rates even the least financially educated people would have a pretty good idea of what the effect would be.

Yup. I agee with all of that.

What I advocate for is a flat rate income tax which taxes all sources of income identically, and has a fairly large per income earner standard deduction. That would be simple enough to establish a baseline tax rate which would provide us with a balanced budget, and we could adjust that single income tax rate up or down as we find it neccesary, and it would be fairly easy to monitor the results in our economy and to tax revenues.

 

[imagep]

Cute, not smart, but cute. Please explain how a capitalist society works without trickle down.

Ultimately, it fails. Thus the need for sufficient "trickle down", even if that trickle down is forced by the government.

I'm a huge supporter of capitalism, but I recognize that it isn't a perfect system, thus I desire to moderate it in a manner that will allow it to become infinately sustainable. For the most part, we have already accomplished that goal.

 

[imagep]

One has to keep in mind. Any study by liberal economists ( like Romer and Saez) already has the conclusion in mind...

You can say that about any politically or ideologically motivated person. That's why I take individual studies and surveys with a grain of salt.


Do you honestly believe that applies only to the left? If you do, then you may be a fool.

 

[Buck Ewer]

There is no controversy that the Laffer curve exists. The argument is where the curve peaks. Laffer oversimplified the curve to demonstrate his concept and later admitted that the curve peaked much further up the scale than he first postulated.
In the 1950s and 60s when top tax brackets topped off at 95% millionaires did not sit down and say f*ckit...They continued to make money and pay the taxes.
The lie of the Laffer curve is that they would quit at a much much lower percentile.
It is a fantasy.

 

[MTAtech]

Cute, not smart, but cute. Please explain how a capitalist society works without trickle down.

Trickle down is the theory that if one feeds the horses enough eventually the sparrows get something to eat. What makes anyone think that codling the rich benefits anyone else but the rich?

Economies depend upon demand. When only the wealthy have disposable income, demand falls and the economy falters. It also results in social unrest and crime. That's why in South American countries, where inequality is high, the wealthy live behind walled developments; travel to the store by helicopter and hire an army of private guards.

 

[imagep]

There is no controversy that the Laffer curve exists. The argument is where the curve peaks. Laffer oversimplified the curve to demonstrate his concept and later admitted that the curve peaked much further up the scale than he first postulated.
In the 1950s and 60s when top tax brackets topped off at 95% millionaires did not sit down and say f*ckit...They continued to make money and pay the taxes.
The lie of the Laffer curve is that they would quit at a much much lower percentile.
It is a fantasy.

Exactly.

Rich people make money two different ways:

The first is investment profit. Anytime someone has excess money, they are naturally going to seek a rent or profit on that money. They will do this REGARDLESS of what the tax rate is because being able to keep a percent of one's profit is ALWAYS preferable to keeping all of zero profit.

The other way is from their work, whatever that may be. They enjoy doing what they do, otherwise, since they are rich and thus by definition don't have a financial need to work, they wouldn't do it. Since they don't work soley for income, we can only assume that most of them would continue working, regardless of what the tax rate is. Even for the few that decided to no longer work, they are easily replaceable, and them leaving their jobs would simply allow some other smart/tallented/hard working person the opportunity to "get rich".

There is little downside to increasing the tax rate on the rich, other than the possiblity that these people may flee the country with their wealth inorder to avoid US taxation, but even that is moderated by the fact that basically every country that has a high standard of living has taxes that are comparable or higher than taxation in the US.

But there is a HUGE upside to decreasing taxes on the worker/consumer class, in that doing so would increase demand, resulting in business expansion, more business profits, more jobs, higher wages, less poverty, more wealth creation, and a lower level of dependency on the government.

 

[Phys251]

From an economic standpoint everything he says looks correct.
From a political standpoint He may be off on what left wingers want.
Yes they want bigger government, but they also seem to want to punish success.
Success creates differences in outcome, an in the liberal mind,
that is unfair, and should be punished.

How can you expect an honest debate with people you disagree with when you misrepresent their positions? Maybe you should learn what we really want, not what Fox "News" and the Drudge Report tell you that we want.

 

[sawdust]

Trickle down is the theory that if one feeds the horses enough eventually the sparrows get something to eat. What makes anyone think that codling the rich benefits anyone else but the rich?

Economies depend upon demand. When only the wealthy have disposable income, demand falls and the economy falters. It also results in social unrest and crime. That's why in South American countries, where inequality is high, the wealthy live behind walled developments; travel to the store by helicopter and hire an army of private guards.

Where to start?

Economies depend upon demand.

It's not that simple. Economies require supply and demand. The statement that economies depend on demand presupposes that customers only make an economy thrive. Consider the demand for bread in Venezuela after price controls forced all the bakers out of business. There is a balance that's required for a thriving economy.

When only the wealthy have disposable income, demand falls and the economy falters.

In logic, this is called a false dilemma. In a zero sum economy there is always enough opportunity for everyone to create an income for themselves, in addition, the condition that you describe doesn't exist in capitalist free market societies. It does exist in communist societies, Social democracies promote a lack of economic class mobility.

It also results in social unrest and crime.

This is an appeal to consequences. In addition, the previous sentence would have to be true for this to follow. It's not true.

That's why in South American countries, where inequality is high, the wealthy live behind walled developments; travel to the store by helicopter and hire an army of private guards.

No, South American countries employ crony capitalism which bears little resemblance to free market capitalism. Also, educational levels among the masses limits opportunity and has as much to their social ills as anything.

 

[MTAtech]

One has to keep in mind. Any study by liberal economists ( like Romer and Saez) already has the conclusion in mind...

One really can't dismiss respected and learned economists because you disagree with their personal ideology. Perhaps they hold that ideology because the data suggests that it's correct? Even Greg Mankiw, the Harvard conservative economist said:

I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.

But again, you can't dismiss Romer, Romer or Saez without critiquing their methodology and describe where they made mistakes or errors. None of these economists form their conclusions beforehand.

 

[jaeger19]

Trickle down is the theory that if one feeds the horses enough eventually the sparrows get something to eat. What makes anyone think that codling the rich benefits anyone else but the rich?

Economies depend upon demand. When only the wealthy have disposable income, demand falls and the economy falters. It also results in social unrest and crime. That's why in South American countries, where inequality is high, the wealthy live behind walled developments; travel to the store by helicopter and hire an army of private guards.

Isn't ironic then that liberals tend to promote the more socialist ideas that prevent redistribution from happening?

For example.. the TARP bailout and the GM bailout. Both the banks and GM screwed the pooch. Both were incompetent and brought about their own destruction. That downfall would have created all sorts of opportunities for other folks to expand their business banking, and into building cars.

Instead of letting the natural redistribution happen.. instead the government took money from the taxpayer and gave it to failing companies.. thus continuing the accumulation of wealth to the richest.

That's what socialism does.. it protects the wealthy. That's why its no coincidence that most socialized countries started as feudalistic countries.

 

[sawdust]

Ultimately, it fails. Thus the need for sufficient "trickle down", even if that trickle down is forced by the government.

I'm a huge supporter of capitalism, but I recognize that it isn't a perfect system, thus I desire to moderate it in a manner that will allow it to become infinately sustainable. For the most part, we have already accomplished that goal.

My point is that America, ever since William Bradford abandoned the Mayflower Compact and allowed each Pilgrim the ability to own private property, we've had a trickle down economy in which commodities flowed from suppliers to consumers. Suppliers accumulated wealth, consumers consumed.

You may support capitalism but mankind hasn't invented a better one or there would be one that dominated. China was not successful economically until it employed their version of capitalism with it's private public partnerships.

 

[imagep]

Isn't ironic then that liberals tend to promote the more socialist ideas that prevent redistribution from happening?

For example.. the TARP bailout and the GM bailout. Both the banks and GM screwed the pooch. Both were incompetent and brought about their own destruction. That downfall would have created all sorts of opportunities for other folks to expand their business banking, and into building cars.

Instead of letting the natural redistribution happen.. instead the government took money from the taxpayer and gave it to failing companies.. thus continuing the accumulation of wealth to the richest.

Was it just liberals who supported TARP and the GM bailout?

I seem to remember that 135 republican congressmen voted for TARP, and a republican president signed it into law. I'm also pretty sure that Bush supported the GM bailout.

Myself, I supported neither, yet many conservatives accuse me of being liberal.

 

[MTAtech]

Isn't ironic then that liberals tend to promote the more socialist ideas that prevent redistribution from happening?

For example.. the TARP bailout and the GM bailout. Both the banks and GM screwed the pooch. Both were incompetent and brought about their own destruction. That downfall would have created all sorts of opportunities for other folks to expand their business banking, and into building cars.

Instead of letting the natural redistribution happen.. instead the government took money from the taxpayer and gave it to failing companies.. thus continuing the accumulation of wealth to the richest.

That's what socialism does.. it protects the wealthy. That's why its no coincidence that most socialized countries started as feudalistic countries.

The idea that it would have been beneficial to allow both the banks and GM to go bankrupt is absurd. This was the view of both the Bush Administration and the Obama Administration. It would have ushered in a huge liquidity crises, where business loans, personal loans and credit lines would not exist, causing havoc for the economy. It is likely it would have been a redux of the 1930s depression. Allowing GM to fail, would not only kill GM and put its workers on unemployment but it would have killed the auto parts supply network. This would have also damaged Ford and have ripples throughout the economy.

Bush and Obama had no choice but to save both the banks and GM, as the alternative was far worse. I might have taken a different tactic, putting the banks in receivership, firing management, and running these banks, the way the FDIC currently takes-over insolvent banks, until they can be sold.

 

[imagep]

My point is that America, ever since William Bradford abandoned the Mayflower Compact and allowed each Pilgrim the ability to own private property, we've had a trickle down economy in which commodities flowed from suppliers to consumers. Suppliers accumulated wealth, consumers consumed.

You may support capitalism but mankind hasn't invented a better one or there would be one that dominated. China was not successful economically until it employed their version of capitalism with it's private public partnerships.

My point is that I agree that capitalism is the "cat's meow", but there has to be certain controls on it, or else nearly all income and wealth would eventually pool in the hands of the few, which would eventually destoy the merits of capitalism. So you may ask, "if thats true, then whas hasn't capitalism failed", and that's a great question. It hasn't failed, because we DO have some government forced redistribution. If we didn't have the progressive income tax system, it would likely have already failed in the US.

 

[sawdust]

My point is that I agree that capitalism is the "cat's meow", but there has to be certain controls on it, or else nearly all income and wealth would eventually pool in the hands of the few, which would eventually destoy the merits of capitalism. So you may ask, "if thats true, then whas hasn't capitalism failed", and that's a great question. It hasn't failed, because we DO have some government forced redistribution. If we didn't have the progressive income tax system, it would likely have already failed in the US.

Every government has some degree of socialism We have the post office and socialist security. Our social programs are not our strength. Our strength lies in the people who get up in the morning and work to make their lives better. Redistribution programs will be the death of us, not the savior.

Income inequality is simply class warfare and meaningless in a zero sum economy.

 

[Porchev]

Through the years many liberals have told me how wrong the concept behind the Laffer Curve is. I could never understand why they thought it was wrong.




Please watch the video and tell me what doesn't make sense.

Thanks in advance.

I like that video, thanks for posting it. Here is some more info on the Laffer Curve:

"...The Laffer Curve illustrates the basic idea that changes in tax rates have two effects on tax revenues: the arithmetic effect and the economic effect. The arithmetic effect is simply that if tax rates are lowered, tax revenues (per dollar of tax base) will be lowered by the amount of the decrease in the rate. The reverse is true for an increase in tax rates. The economic effect, however, recognizes the positive impact that lower tax rates have on work, output, and employment--and thereby the tax base--by providing incentives to increase these activities. Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities. The arithmetic effect always works in the opposite direction from the economic effect. Therefore, when the economic and the arithmetic effects of tax-rate changes are combined, the consequences of the change in tax rates on total tax revenues are no longer quite so obvious..."

Executive Summary: The Laffer Curve: Past, Present, and Future

 

[Dezaad]

Through the years many liberals have told me how wrong the concept behind the Laffer Curve is. I could never understand why they thought it was wrong.




Please watch the video and tell me what doesn't make sense.

Thanks in advance.

I am a liberal and I absolutely believe that the Laffer curve is valid and have for a very long time. But, conservatives don't usually fully understand it. Because it is a curve, it reverses at a certain level of taxation, whereupon lowering taxes will indeed lower revenue. We haven't been on the side of the curve for very many decades. Certainly not during Reagan's time, when conservatives took up the meme.

 

[Ikari]

Through the years many liberals have told me how wrong the concept behind the Laffer Curve is. I could never understand why they thought it was wrong.




Please watch the video and tell me what doesn't make sense.

Thanks in advance.

The Laffer curve is mostly useless except for defining the boundary conditions. Yes 0% is 0, 100% is 0, there's some maximum revenue in there somewhere, but we don't know where. It may not even have 1 local maximum or minimum, we don't know. So we can speculate and say it was 70%, someone else may say it's 33%, in the future it may be something different. Less you actually take all the data points to fill out the curve, you don't really know where the global maximum for government revenue lies.

 

[Dezaad]

The Laffer curve is mostly useless except for defining the boundary conditions. Yes 0% is 0, 100% is 0, there's some maximum revenue in there somewhere, but we don't know where. It may not even have 1 local maximum or minimum, we don't know. So we can speculate and say it was 70%, someone else may say it's 33%, in the future it may be something different. Less you actually take all the data points to fill out the curve, you don't really know where the global maximum for government revenue lies.

Perhaps so, but you can get a pretty good idea that you are on one side or the other of a curve if you do one strategy and your revenues go down or up consistently. It is still a useful concept, if it it is not abused.