The Laffer Curve

[Porchev]

I am shocked that Obama's first Chair of his Council of Economic Advisers (CEA) indicated the President's proposed tax increases would kill the economic recovery and throw nearly 1 million Americans out of work.

“In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.” --Christina Romer

Christina Romer Knows Tax Hikes Will Kill the Recovery - Forbes

 

[sawdust]

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.

I think it's a tool and the graph's shape changes depending on changes in the condition of the economy. It's usefulness depends on the economists ability to analyze data in an ernest attempt to maximize tax revenue. It's also a good teaching tool for those who can think about it's use without a political agenda. Economists use other data to determine the optimal tax rate. The laffer curve just provides a visual representation of the data.

 

[imagep]

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.

I agree.

And there are different curves for different forms of taxes, and for different income brackets, each with it's own revenue optimizing amount.

Of course optimizing tax revenue shouldn't be our goal. Optimizing production should be.

 

[jaeger19]

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.

Actually yes.. it was liberals that supported the bailout... Republicans can be liberals too. Bush in many ways was very liberal toward the end.

Regardless, what I said still stands.

 

[jaeger19]

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.

No.. its not an absurd idea at all. It actually makes a lot of sense.

What should have happened with the banks is this.. the smaller banks that were NOT responsible for the crash..THEY should have been supported with direct loans from the Fed, or the Government .. and not had to rely on the Big Banks that were in trouble. THAT would have saved the liquidity problem... It would have been cheaper and much much more effective,... AND the banks that were smaller and had NOT caused the crisis.. would have been able to expand as the Big Banks that were in trouble.. lost marketshare.

Thus.. we would have not only had less cost to the taxpayer.. the taxpayer would have likely made a profit, AND we would have ended up with a more diverse and stronger banking system.

Instead.. we turned around and bailed out the same dang people that caused the crisis in the first place. And what did they do?... they paid themselves bonuses, they took the money and bought smaller banks that were in trouble not from their fault but because of the big banks, and they took the money which they got from us at zero interest.. and then they bought Treasury bonds with that money.. and earned interest.

So after all that..we end up with a banking system headed by the same banks that were instrumental in the crisis in the first place.. they are even BIGGER now, they now know that they ARE too big to fail so they can act irresponsibly, and we spent a boat load of taxpayer money that we then had to pay them interest on.

The GM bailout was not necessary either.. certainly that 20% of marketshare that GM represented wasn't going to suddenly say.. I ain't buying a car. At the most we might have had to loan money to the parts suppliers to help keep them running as other companies increased production to take over GM's marketshare.

 

[shrubnose]

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.

Whatever.

Take a look at your income tax return instructions.

You won't see anything in there about the 'Laffer Curve'.

What does that tell you?

 

[sawdust]

Whatever.

Take a look at your income tax return instructions.

You won't see anything in there about the 'Laffer Curve'.

What does that tell you?

It tells me that the Laffer Curve isn't pertinent to your tax filing. Do you have a point?

 

[shrubnose]

it tells me that the laffer curve isn't pertinent to your tax filing.

Correct. And it's not likely to be pertinent to your tax filing anytime soon.

That is my point.

This is another time-wasting thread.

 

[sawdust]

[/color][/b]

It's a tool for economists, which I assume you are not. Are you a teenager?

 

[shrubnose]

It's a tool for economists, which I assume you are not.

Are you a teenager?

I'm 70-years old.

 

[MTAtech]

I am shocked that Obama's first Chair of his Council of Economic Advisers (CEA) indicated the President's proposed tax increases would kill the economic recovery and throw nearly 1 million Americans out of work.

“In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.” --Christina Romer

Christina Romer Knows Tax Hikes Will Kill the Recovery - Forbes

We know that. According to their paper, raising taxes by 1% of GDP lowers GDP by up to 3% over 10 quarters. Basic economic accounting and academic research suggest that cutting spending will also have a contractionary effect on GDP for about 4-5 quarters. But if you cut 1% a year for 5 years, then you have reduced potential GDP by 1% per year for those 5 years, which does not help job growth.

 

[johndylan1]

The theory that lower taxes yields higher revenue has been discredited by history.

These two graphs illustrate the problem with the Bush tax-cuts. Even though GDP rose federal revenue dropped:

It should be obvious to anyone. After each Bush tax-cut, even though GDP rose, revenue dropped. However, some will deny reality because it's more soothing to deny the facts than challenge the validity of their ideology.

"Lowering taxes increases revenues:" There is no empirical evidence that the claim is true and plenty of evidence that the claim is false.

Not even Mitch McConnell makes that claim. McConnell said, there is "No evidence whatsoever that the Bush tax cuts actually diminished revenue." He wasn't saying it increased it; he said it didn't diminish it. But even that's wrong.

When the tax-cuts were passed, the CBO estimated that the 2001 tax-cut:
"would decrease governmental receipts by $70 billion in 2001, by $512 billion over the 2001-2006 period, and by $1.26 trillion over the 2001-2011 period";

AND:

"The Joint Committee on Taxation (JCT) and CBO estimate that H.R. 2 [the Jobs and Growth Tax Relief Reconciliation Act of 2003] would increase budget deficits by $60.8 billion in 2003, by $342.9 billion over the 2003-2008 period, and by $349.7 billion over the 2003-2013 period. "

The Congressional Budget Office said:



How about the Committee for a Responsible Federal Budget? Their budget calculator shows that the tax cuts will cost $3.28 trillion between 2011 and 2018.

How about George W. Bush's CEA chair, Greg Mankiw, who used the term "charlatans and cranks" for people who believed that "broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue." He continued: "I did not find such a claim credible, based on the available evidence. I never have, and I still don't."

The bottom-line is that the Bush tax-cuts cut revenue: In 2000, federal tax revenues were $2,025.46 billion, nominal GDP was $9,951.5 billion. In 2003, these amounts were $1,782.53 billion and $11,142.1 billion. In other words, GDP rose 12% and federal revenues fell 12%.

Federal revenues eventually rose, to take out the 2000 peak in 2005 (2007 in real terms,) but this doesn't mean much. Revenues eventually catch up due to GDP growth and population growth regardless of policy. The economy grows 4-6% most years, unadjusted for inflation, so naturally the general trend of taxes is to rise about 4-6% each year. Being unable to return to a previous peak for five years, despite this built in trend strongly suggests tax cuts reduced revenue, ceteris parabus.

The rise in GDP is not the way to correlate revenues to tax rates, gdp includes government expenditures which erode revenues. If the rise in gdp was higher on the governmental side that would explain less revenues, apart from the benefit of the lower rate. Also the drop in revenue in the immediate aftermath of the cut is predictable as it takes some time for the additional supply to start contributing and multiplying. The chart you posted clearly shows this, steep rises in revenue after an initial decline.

 

[MTAtech]

The rise in GDP is not the way to correlate revenues to tax rates, gdp includes government expenditures which erode revenues. If the rise in gdp was higher on the governmental side that would explain less revenues, apart from the benefit of the lower rate. Also the drop in revenue in the immediate aftermath of the cut is predictable as it takes some time for the additional supply to start contributing and multiplying. The chart you posted clearly shows this, steep rises in revenue after an initial decline.

Saying that government spending erodes revenues is economic illiteracy. What does the government spend money on? People and purchases. If it spends it on people, they spend it in the private economy. If the government spends it on purchases, it directly enters the private economy. So where is this loss in revenue?

 

[imagep]

Saying that government spending erodes revenues is economic illiteracy. What does the government spend money on? People and purchases. If it spends it on people, they spend it in the private economy. If the government spends it on purchases, it directly enters the private economy. So where is this loss in revenue?

Exactly.

If government spending eroded revenues, we would never have seen the type of increases in revenues that we saw during the Reagan administration as he was know as "The Great Spender" and set a number of spending records.

When the government spends, it broadens the tax base because the entities that it spends money with have more income.

 

[jaeger19]

Saying that government spending erodes revenues is economic illiteracy. What does the government spend money on? People and purchases. If it spends it on people, they spend it in the private economy. If the government spends it on purchases, it directly enters the private economy. So where is this loss in revenue?

That's assuming that the money spent is being spent domestically. If the money is being spent on foreign wars, foreign support etc.. then that money doesn't enter the economy.

Secondly.. it assumes that all money spent has equal growth potential.. which it does not.

Certainly expenditures on better elementary education across the nation has better growth potential...

Than the same amount given to one company.

 

[MTAtech]

That's assuming that the money spent is being spent domestically. If the money is being spent on foreign wars, foreign support etc.. then that money doesn't enter the economy.

Secondly.. it assumes that all money spent has equal growth potential.. which it does not.

Certainly expenditures on better elementary education across the nation has better growth potential...

Than the same amount given to one company.

Economics is not a moral play. Money spent on strippers creates as much economic activity as money spent on teachers. Also, money spent on foreign wars IS spent domestically. Most of the cost is salaries (soldiers and contractors) and equipment is also domestically produced.

 

[imagep]

Economics is not a moral play. Money spent on strippers creates as much economic activity as money spent on teachers. Also, money spent on foreign wars IS spent domestically. Most of the cost is salaries (soldiers and contractors) and equipment is also domestically produced.

Short term, yes, you are correct, there is no difference.

But stripper money and money spent fighting unwinable wars isn't exactly an investment in long term growth, while money spent on education or infrastructure can benefit our economy for decades to come.

 

[MTAtech]

Short term, yes, you are correct, there is no difference.

But stripper money and money spent fighting unwinable wars isn't exactly an investment in long term growth, while money spent on education or infrastructure can benefit our economy for decades to come.

Obviously, money well spent is better than money wasted. But that isn't macroeconomics. The point that I was making is that a million dollars spent building a building has exactly the same effect upon GDP than a million dollars spent digging holes and then filling them up.

 

[imagep]

Obviously, money well spent is better than money wasted. But that isn't macroeconomics. The point that I was making is that a million dollars spent building a building has exactly the same effect upon GDP than a million dollars spent digging holes and then filling them up.

Short term yes. But one creates wealth and the other doesn't.

I think that when we talk about keynesian economics, a lot of conservatives imagine government workers digging holes and filling them back in, instead of building things of lasting value. If they would admit that much of what the government does IS of lasting value, such as education, infrastructure, and research, they would be much less likely to reject keynesian economics. But admitting that government has any value is against the rules for extremist, so they just pretend that the government only digs holes and fills them back in.