Curvewise, Gainswise

The so-called “Laffer Curve” — the graphic representation of the varying relationship between tax rates and tax revenues — really bugs people left of center.

The curve maps an economic reality, showing that not all increases in tax rates can increase tax revenues. Why object to reality?

Perhaps because, on the left, taxes are seen less as a practical means to raise government revenue than as an expression of one’s values. The more “leftist” one is, the more equality matters, which too often boils down to: the more one wants to punish the rich. Higher rates stifle the economy and garner less revenue? Big deal. Consequences be damned. One’s values must be expressed.

This came out in Barack Obama’s first presidential campaign. He famously didn’t care whether a capital gains tax rate increase would decrease revenues, as has happened in the past. For him, “fairness” was more important.

Interestingly, it appears that capital gains tax rates tend to top out Laffer-Curve-wise much lower than income taxes. The reason? One seeks a return on capital from invested savings, but one also fears the possibility of loss. Risk. Pile higher tax rates onto the already palpable negative of uncertainty, and the investor will be tempted to consume his capital rather than engage further in risking his wealth for less reward.

But I confess: I sort of sympathize with the left’s attitude towards taxation. I don’t really want the government to maximize revenue, either. Government misspends most everything it takes in, so I’d prefer lower rates for reasons maximizing quality, not equality.

I bet that the poor, though, would be far better off were the rich not targeted for extra penalties. But that’s not an egalitarian concern, for me. It’s a humanitarian concern.

This is Common Sense. I’m Paul Jacob.

Tags barack obama, capital gains, Laffer Curve

22 replies on “Curvewise, Gainswise”

As my electrician father used to say:

“No poor man ever gave me a job.”

We have had 12 years of lower tax rates and we are now deeper in debt than ever. There was a surplus – or nearly so – before the Bush tax cuts and there is now a tremendous deficit with the tax cuts.

Keep believing the KOOKAID that is tax cuts.

JATR4,

Keep believing the KOOLAID that we don’t have a tremendous spending and printing fiat money problem.

Bailouts
Unfunded, unending wars
Increasing social spending- Medicare prescription drugs, unemployment, food stamps
Homeland Security

The REAL problem is there is NO accountability. Congress has NO budget, yet spends 43% more than revenues.

How do they do this?

The Federal Reserve keeps adding electronic play money to Wall Street bank accounts and buys back mortgage backed securities and Treasury notes that China is no longer willing to buy.

The whole tax rate conversation is one huge red herring that keeps us from squarely and honestly addressing the 15 trillion pound gorilla in the room.

WaltGoshert

Your comments provide a nice summary to Jacob’s commentary. Each one being worthy of extensive explanation if one cannot easily grasp the importance.
Thanks!

Walt

You are an IDIOT or you can’t read! Where did I say that we don’t have a debt problem?

I sais that lowering taxes won’t cure that problem since we have had lower taxes for the last 12 years.

Read, you IDIOT.

When Slick Willie took office, the national debt was $4.41 trillion. When he left, it was $5.8 trillion. During that time, he added an addditional $248 million to the national debt by transfering it out of the Social Security trust fund and rolling it into the White House expenditures. This is then called a “surplus’ by folks that are easily swayed, but the actual debt that the taxpayers were liable for increased by 37% under Slick Willie. This is then called a “surplus”. Not rocket science. Not a surplus either.

Is it time to bring up Hauser’s Rule again?
The economist Kurt Hauser, who showed that for the last 60 years, that he studied, that the income to the government is independent of tax rates. That it hovers around a little over 19% of GDP, totally independent of whether taxes are up or down. The ONLY way that the govenrment has been able to consistantly grow revenue has been to grow GDP. The tax rates only affect misery rates, being directly proportional.

Name calling does not buttress one’s arguement.

Well DRIP, that is your STUPID opinion.

JATR4 certainly makes a compelling argument. There’s no sense in addressing an opinion once we realize it is “stupid.”

I suppose I’m naive to think the message matters more than the messenger.

Mark, where did I state that there was no debt or spending problem? I certainly made no statements with respect to fiat money.

The IDIOT Walt seems to think I did. He can’t read or is an IDIOT.

Can you read?

Two wars started by REPUBLIKOOKS that weren’t paid for along with a medicare drug benefit not paid for while lowering taxes for the FIRST time EVER during a war. That is a major reason we are where we are.

Throw in the refusal to regulate derivatives (Bush, Cheney, McCain, Phil Gramm and Greenspan) and you get a financial meltdown. All REPUBLIKOOK ideas.

JATR4:

It’s been my experience that insulting people isn’t particularly effective at getting them to share one’s point of view.

The Laffer Curve applies to many things; tax policy is where it’s most obvious. Clearly, there is a point on the curve that extracts maximum revenue. I hope that’s not in dispute.

If the tax rate is at the high side of the curve, reducing that rate would increase revenue. That is Paul’s point and I don’t see you addressing it.

Regarding deregulation of derivatives, as long as people are not playing with other people’s (taxpayers) money without their consent, why should there be any regulation?

As long as the people losing money are those who voluntarily risk it, what’s the problem? Regulation should not protect people from bad choices.

They should be allowed to make those choices, lose money, and be examples to the rest of us.

Regarding the wars in Iraq and Afghanistan, I recall Democratic Party cooperation.

Mark,

i agree with you, but two minor points.

It was Clinton who was President when Glass — -etc was repealed; and Dems INCLUDING HILLORY CLINTON AND EL G‑D, I MEAN PRESIDENTE, votyed for the wars.

“The Laffer Curve applies to many things; tax policy is where it’s most obvious. Clearly, there is a point on the curve that extracts maximum revenue. I hope that’s not in dispute.

If the tax rate is at the high side of the curve, reducing that rate would increase revenue. That is Paul’s point and I don’t see you addressing it.”

The Laffer curve may increase revenues at the same time it is increasing debt. Laffer was Reagan’s boy and the debt tripled during Reagan. There may have been increased revenues but there was skyrocketing debt. The Laffer curve is a graph of revenues vs tax rates. The most important variable – debt resulting from the decreased tax rates– is not addressed.

Reaganomics tripled the national debt. Fact.

With respect to derivatives:

The banks were gambling using 40 to 1 leverage and when their bet failed we bailed them out.

It was unfortunately necessary and we bailed them out without putting proper restrictions on them and they are still doing the same thing.

Read “All the Devils Are Here” and you may understand the problem with derivatives.

Arthur Laffer testifies before the Kansas House Tax committee at the statehouse, Jan. 19, 2012 in Topeka, Kan.

Economist Arthur Laffer, patron saint of tax cuts, is back, with an op-ed in the Wall Street Journal that he hopes will put the kibosh on future plans for government stimulus. Laffer, who had his heyday back in the Reagan years, is best known as the popularizer of the notion that raising tax rates beyond a certain level can actually reduce tax revenues by, among other things, discouraging entrepreneurship. The graphic representation of this idea, though not original to Laffer, came to be known as the Laffer Curve.

While he’s always had detractors, Laffer also had a lot of fervent fans back in the day. But his latest excursion into the public debate has drawn harsh criticism not only from liberal economists like Berkeley’s Brad DeLong but also from stimulus-hating, anti-Keynesian economists you might expect to agree with the Laffer line. The consensus? Laffer seems to have forgotten, or ignored, some pretty basic concepts in economics. In other words, Laffer is getting laughed off the economic stage.

In his WSJ piece, Laffer sets out a simple enough argument: In the current troubled world economy, he claims, the countries that have relied the most on fiscal stimulus — Estonia, Ireland, the Slovak Republic, and Finland — have done the worst. Why? Because, Laffer argues, the money for the stimulus has to come from somewhere, and therefore “every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP.”

A rather elementary fact about fiscal stimulus, however, is that it doesn’t “wipe out” private spending in the present. Rather, it borrows money from the future. By relying on deficit spending, stimulus programs are designed to pump more money into the economy during downturns, when private spending and tax revenues are soft. The temporary deficits can be reduced, at least in theory, once the economy is back on its feet and tax revenues perk up.

But you don’t have to be a raging Keynesian to have trouble with Laffer’s argument. On his blog The Market Monetarist, Danske Bank Chief Analyst and self-described “right-wing economist” Lars Christensen suggests that Laffer has joined a number of other right-wing economists in the U.S. who “seem to have forgotten everything about economics — mostly as a result of an apparent hatred of President Obama.” Laffer, he argues, “is embarrassing himself” with his WSJ op-ed by pretending that Estonia, Ireland, the Slovak Republic, and Finland have been ruined by an excess of Keynesian zeal.

In fact, as Christiansen points out, Estonia, the Slovak Republic, and Finland are among “the most fiscally conservative countries in the EU,” while Ireland’s been spending its money on banking bailouts, not stimulus.

How did Laffer get things so backwards? Christensen suggests the following:

…maybe he never heard about cyclically adjusted government spending. It should be no surprise to anybody who just spent one hour reading an intermediate textbook on public finances that government spending tends to increase in cyclical downturns and tax revenues drop when the economy slumps.

On TheAtlantic.com, Matthew O’Brien takes this argument a step further, suggesting that Laffer may well have given us the “worst ever argument against government stimulus.” He writes:

It is trivially true that when GDP goes down, government spending as a share of GDP will go up. That’s how fractions work.

Laffer … wants to show that the most devastated countries were also the most profligate, but instead he’s simply showing that the most devastated countries were also the most devastated.

O’Brien adds several more years of data, and crunches the numbers in a more sensible way. By looking at the“percent change in public spending itself, rather than the change in public spending as a percent of GDP” he comes up with results that reveal the exact opposite of what Laffer is arguing. That is, O’Brien writes, “[t]he three countries that spent the least — Ireland, Greece, and Latvia — did the worst.” He adds, for good measure: “A silver bullet into the heart of Keynesianism, this is not.”

Need I say that other economists think that Laffer is an IDIOT?

It is far too cumbersome to post here.

I wouldn’t mind continuing the discussion, but it would be more effective “offline.”

Anyone interested in doing so, please feel free to contact me directly: MarkPickens@hotmail.com

when do we get to the cyclical parts were spending decreases ?

what if spending is not a glorious rescuing variable but instead the cause of the downturn ? that would explain why all of roosevelt’s spending was unable to break the Great Depression . it would also explain why abandoning Woodrow Wilson’s policies kicked off the Roaring Twenties . but it means that were doing the exactly wrong things now . that also explains why business starts are now half what they had Ben averaging for the past 50 years and why economic growth has been declining for the past 3 years .

the fallacy of attacking Laffer is that he studies what happens ‚not why . raise taxes or lower taxes , the bottom line is less revenue . continue to increase taxing and spending and eventually the government becomes the economy .