"On it, the economist Arthur Laffer in 1974 sketched a curve meant to illustrate his theory that cutting taxes would spur enough economic growth to generate new tax revenue. More than 40 years after those scribblings, President Trump is reviving the so-called Laffer curve as he announces the broad outlines of a tax overhaul on Wednesday. What the first President George Bush once called 'voodoo economics' is back, as Mr. Trump’s advisers argue that deep cuts in corporate taxes will ultimately pay for themselves with an explosion of new business and job creation. The exact contours of the plan remained murky and Mr. Trump will not produce a fully realized proposal on Wednesday. But what the president has called a tax reform plan is looking more like a tax cut plan, showering taxpayers with rate reductions without offsetting the full cost by closing loopholes or raising taxes elsewhere. In the short run, such a plan would add many billions of dollars to the national deficit. Mr. Trump contends that it will be worth it in the long run. 'The tax plan will pay for itself with economic growth,' Steven Mnuchin, the Treasury secretary and main architect of the plan, told reporters this week."
From
"Arthur Laffer’s Theory on Tax Cuts Comes to Life Once More," by Peter Baker (in the NYT).
Here's the famous napkin:
From the museum website:
Displeased with President Gerald Ford’s decision to raise taxes to control inflation, four men got together at a Washington, DC restaurant to think about alternatives. Laffer was joined by journalist Jude Wanniski and politicians Dick Cheney and Don Rumsfeld. Laffer argued that lowering taxes would increase economic activity. Wanniski popularized the theory, and politicians Don Rumsfeld and Dick Cheney carried it out.
And by "it" the museum means the theory. The "it" that is the napkin was carried out by Jude Wanniski.
By the way, who draws on a
cloth napkin?
पोस्ट्स
१३३ टिप्पण्या:
"By the way, who draws on a cloth napkin?"
Arthur Laffer.
That's not a napkin. That's a fig leaf.
Every political administration in the last 50 years has attempted to grow itself out of debt. The Laffer curve is the internet bubble is the housing bubble is the stimulus package is green jobs is the wall that pays for itself.
Criticism of this necessity only shows up in the press when the stimulus involves tax cuts. When it involves easy money (Clintonomics), or subsidies (housing/green energy) or outright spending (stiumulus), the press falls all over itself in admiration.
"This is very controversial. Does anyone know what Vice President George Bush called this in 1980? Class? Anyone?
"Something - dee-oh-oh economics. VOO-doo economics."
Ben Stein in Ferris Bueller's Day Off
I'm a fan and admirer of Laffer's insight, and I think we needed it in the early Reagan era. I'm not convinced we're still on a part of the curve where cutting taxes will yield more revenue. And I'm long past taking any politician's word for it that any initiative will "pay for itself."
We want lots and lots of government; the left says let the rich pay for it, too many on the right say, Put it on our tab, we'll grow our way out of it
"By the way, who draws on a cloth napkin? "
Very, very confident people, that's who...
How can we NOT be on the "good" part of the curve? We've had:
1) Tax increases
2) stagnant economy
3) Defecit spent like drunk sailors
for the last how many years? Those conditions should also have disproved the theory that you can spend your way out of stagflation, no?
JPS at 8:42 has made a very rare appeal to the authority of George H.W. Bush on economics.
The Laffer Curve frustrates me because people don't understand it. It isn't saying "At this specific % is the optimal tax %." Rather, it is saying that there IS an optimal tax percent, and you can figure that out because 100% and 0% taxation are both terrible.
So, there is a curve. It may not be a perfect bell curve (it probably isn't). But, it exists. It isn't simply, more taxation=more money, or less taxation=less money. Very smart people make that mistake about taxes.
Whether we have any wiggle room to cut taxes and make more money, I don't know. I feel like even if we do, the right thing to do first is to cut expenditures BEFORE cutting taxes.
JPS said...
"We want lots and lots of government; the left says let the rich pay for it, too many on the right say, Put it on our tab, we'll grow our way out of it."
Once you have accepted the idea that "the government" is going to deploy vast resources in economically dubious pursuits, the only remaining question is who will be deprived of those resources. And the answer is, "the economy". The government is a parasite, and it feeds upon its host. It can feed by taxation, or it can feed by the inflation induced by deficit spending. But either way, it feeds upon the blood of the host, and necessarily weakens the host in the process. Or kills it.
The 35% corporate tax rate (with another 4+ percent in average state corporate taxes) places us somewhere on the curve. We do not know where.
Nobody, and I mean nobody with any credibility, argues that increasing the current corporate tax rate will increase corporate tax revenue. It would stand to reason that lowering corporate tax rates is the only option to increasing corporate tax revenue.
By the way, who draws on a cloth napkin?
The real question is, who draws the independent variable on the y axis, and the dependent variable on the x? I mean really, who does that?
"The real question is, who draws the independent variable on the y axis, and the dependent variable on the x? I mean really, who does that?"
-- Were they at a bar? Maybe they'd been drinking.
"But what the president has called a tax reform plan is looking more like a tax cut plan, showering taxpayers with rate reductions without offsetting the full cost by closing loopholes or raising taxes elsewhere.
Opinion - injected. (D)
No mention that Obama's tax hikes and wasteful spending helped increase our deficit, by orders of magnitude.
"By the way, who draws on a cloth napkin?"
A guy who doesn't have a paper napkin?
I hate cloth napkins.
I know this probably establishes my redneck chops, but giving someone a cloth to wipe their hands and lips with that is so water resistant that a spilled drop of water will bead up and take several seconds to absorb (if ever)is nuts.
I've had more luck wiping my hands with a brown paper bag in some instances.
I once thought about sewing a number of these napkins together to make a tent for the rainy season.
Cut spending and cut taxes.
Not slow the growth of spending. Cut spending.
"By the way, who draws on a cloth napkin?"
Obviously someone who believes in the ingenuity of free enterprise, thus his use of what was available to him at the time.
Blogger JPS said...
I'm not convinced we're still on a part of the curve where cutting taxes will yield more revenue.
I don't know if you are right or not. I suspect that cutting tax rates will yield more revenue but neither I nor anyone else can know that. What I find really amazing is that so many people on both sides deny that the Laffer curve exists. (Not you, JPS)
A lot of people seem to think that increasing tax rates, even to 100%, will increase tax revenues. That is stupidity on stilts. At some point increasing rates will decrease revenues.
the left says let the rich pay for it
With very few exceptions, like property taxes, the "rich" pay no taxes. We are taxed on income not wealth or riches.
That is why Jeff Bezos, worth $80bn or so, pays less than $3mm/yr in income taxes. Increase his tax rate to 100% and he will still pay less than $5mm or so.
A wealth tax, in addition to or instead of, an income tax may or may not be a good thing. But we do not have one and until we do, the "rich" will never pay any taxes. Only people with income will pay taxes.
John Henry
Who draws on cloth napkins? People who don't own them.
I would rather the government cut spending first, then cut taxes. As long as it does both.
"Every political administration in the last 50 years has attempted to grow itself out of debt."
The Obama administration sure didn't.
Over time the empirical evidence has proved Laffer correct: tax revenues increase dramatically after rate cuts. It worked for Kennedy, fueling the 1960s expansion (and leading greedy politicians to spend like crazy of course on LBJ's Great Society). It worked when Reagan made the deal with House Democrats, leading to the longest peacetime expansion of the economy in history, pulling us out of the 1981 recession and taming the runaway inflation that had dogged Carter's term. Of course, it was part of a dastardly Grand Bargain whereby Congress (with Reagan's signature) spent faster than the revenues increased and deficits went up. It worked for Clinton when he cut capital gains taxes and investments enjoyed a huge increase, fueling the dot-com boom of the 1990s and keeping the Reagan expansion going pretty much up to 9/11.
Because we had a D president and R Congress during Clinton's second term the government actually held the line on spending somewhat, just enough so that the expansion was finally paying down the deficit at the end of Clinton's term.
We are due for another expansion if these cuts are large enough. Expansion means more tax revenue. Congress and Trump probably will not keep spending level (not with the projects we hear them talking about) so this probably will not reduce the deficit but:
- Meaningful rate cuts lead to investment and job creation
- Making the USA the low-tax option among advanced economies means more production will shift here for skilled assembly and manufacturing (cars, trucks, machinery, medical devices)
- People will go back to work and/or increase their take-home pay by changing jobs
- More pay means the consumer economy will expand, and if GDP surpasses 3% then we will be in good economic shape
- Economic success will be bad news for Democrats who are even more invested in the Blue Model that is destroying Europe's economies
As Bush knew in his heart, this isn't Voodoo but simple economics. As Kennedy said, "A rising tide lifts all boats." Taxes are a drag on things (fewer cigarette sales when taxes go up, for example). If you want less of something tax it.
I am reserving judgement until I hear market savant Once Written's opinion.
The left will fight this tooth and nail.
"Tax cuts for the rich!" they will regurgitate.
The left worship punitive taxation. Taxation for global climate change is the next great frontier in their quest for feudalism.
The Laffer Curve is a truism. Tax at 0% or 100% and the government will get nothing. Between those points is a curve, and that curve will have a tax rate that returns a maximum amount of revenue.
The shape of the curve, whether it changes due to other influences than just the tax rate number, whether it can actually be calculated are conjecture.
Reagan's "voodoo economics" was getting a Democratic-run Congress to change the 70% top tax rate down to 50% then down to 38.5% and finally to 28%. At the same time, Congress started cleaning up allowed deductions and removing various tax shelters. Some people like to point at the lowering of that arbitrary top tax number and claim that Reagan was giving tax breaks to the rich. Smart people understand that such a high top bracket tax led to economically inefficient activity in order to avoid taxes. Lowering the tax rate and removing the most obnoxious of legal tax dodges was the right thing to do.
Matthew Sablan said...
the right thing to do first is to cut expenditures BEFORE cutting taxes.
Exactly, when there is a persistent surplus and most if not all of the existing debt is paid off, then we should consider reducing revenues. But that requires reducing entitlement expenditures and the Donald assured his people that he wouldn't do that.
The tax system is so progressive now that 45% of households pay no income tax. Got that? Nearly half of us do not pay anything into the kitty. Many more pay far less than their portion of costs, leaving most (far over half) of Americans not paying their fair share, not paying dues for the club's operation, and expecting others to foot the bill. A very small percentage of the evil greedy rich pay for nearly everything. You can't have tax cuts without them going primarily to the rich and highly productive now. It's the same problem with reform of everything else. We gave away so much for so long, and now any reform takes away freebies and goodies from too many to fix it back to fair and smart. The same problem with illegal immigration, healthcare, and all the entitlement programs where the problems live, and the whole national finance in general. We spoiled too many for too long and they vote. All of this was done to get politicians elected, many long dead and gone. It was done for no good or sustainable reason. If you want reform or fairness, you must call for pain and responsibility. Very out of fashion in a snowflake nation.
Government is parasitic on the economy.
but it is soporific on the polity.
politicians pusillanimity
and lack of veracity
will in the end create a tragedy
That's about all the big words I have for today.
tcrosse,
"JPS at 8:42 has made a very rare appeal to the authority of George H.W. Bush on economics."
Ha! No, between 1980 Reagan and 1980 Bush I'm heart and soul for Reagan.* I just love that scene - and the fact that the quietly conservative John Hughes cast Ben Stein as a soporific econ teacher and let him subversively introduce supply-side economics into a lighthearted romp of a movie.
Jupiter, well put; John Henry, thanks for your good points, probably better than my shorthand deserved.
* One of my professors in college, on the other hand, had been a GHWB supporter. It was he who asked the planted question that led to the scripted answer about Voodoo Economics, or so he proudly claimed.
"Every political administration in the last 50 years has attempted to grow itself out of debt."
Anyone who has ever bought a house or other property and owned it for a few years should personally know the power of growing out of your debt.
I never did like Bush the elder. After I heard about him flying to the Soviet Union on that SR71 Blackbird before the election I knew we couldn't trust him.
Remember, in 1974 the top federal income tax rate was 70%. I believe that the top federal estate tax rate was also 70%.
Reaganomics proved decisively that confiscatory taxation does not work. The top income tax rate after the 1986 tax reform was 28%.
Instead of blathering on about tax cuts, the responsible thing for Congress to do is re-enact the 1986 Tax Reform Act word for word. That was by far the best tax code we ever had.
"By the way, who draws on a cloth napkin? "
I'd say people who don't respect property.
In some cases it seems indisputable that we are on the far side of the Laffer curve. For example, overseas profits.
Apple has $102bn in profits sitting in Ireland that were earned overseas and are thus untaxable. If they bring them back to the US, they would have to pay $35% off the top so they sit in Ireland.
President Trump is going to propose, so rumor has it, a 10-15% tax on those repatriated profits.
So will the govt get more tax revenue on a paid 15% or an unpaid 35%?
Not to mention the benefits to the economy of pumping an additional $100bn into it.
Apple is only one company, too. There are plenty of others and we may be talking about trillions of dollars coming home.
But I fully expect some people to scream about tax breaks for the rich is this proposal is made. Probably some people here, even.
John Henry
Bagoh
If you want reform or fairness, you must call for pain and responsibility. Very out of fashion in a snowflake nation.
yep.
I was a part owner of a small chain of computer stores in the eighties. It was a time of explosive growth in the industry. For several years our sales were growing 15% per month.
So every month we needed more capital to cover the costs of inventory and receivables. We were always starved for cash. But to the government, the boxes on the shelves and the IOU's from corporations looked like profits. And the government wanted their 25% cut in cold hard cash.
This is a giant brake on exactly the fast growing small businesses you would think they want to encourage.
So Laffer had a point.
Blogger Ann Althouse said...
"By the way, who draws on a cloth napkin? "
I'd say people who don't respect property.
4/26/17, 9:12 AM
I'd say Jude Wanniski is an admitted thief. If we carry this to it's inevitable extreme, Arthur Laffer is a vandal and probably accessory as well. Cheney, well We All Know what Cheney is...
"The tax system is so progressive now that 45% of households pay no income tax."
The U.S. tax code is already the most progressive in the industrialized world. Remember that when people scream about tax cuts for the rich.
C-rap! I was just in D. C. for a week and didn't know about this npjin's existsnce. I knew the story, I just didn't know the napkin lives on. So I missed it.
Now I must schedule another trip to D C. just to see this artifact. Because it's my favorite artifact ever.
Xmas comment above is pretty much on track. The relationship between the marginal tax rate and the amount of revenue generated is a curve and thus it must have an inflection point, i.e., an optimum. I wish I could find the report, but I believe some time in the late 90's at the Karolinska Institute in Sweden did a very detailed study looking at the tax systems of countries in the OECD and determined that for most an optimal rate would be about 20%.
I look at a tax rate as simply the price the government charges for earning a unit of income. Like setting prices on a product, if you set it too high you will depress sales; if set too low, you pass up the opportunity for revenue. I certainly think our corporate tax rate is much too high; all other major countries have corporate rates much lower than ours. That is why you have seen so many US companies move their HQ offshore or have allowed themselves to be acquired by foreign companies. We need to bring our corporate and foreign income tax policies in line with the other countries we compete with. I don't know why we just don't go ahead and do that and work on major tax reform later. This could be done very quickly and easily and would have a huge impact on domestic economic activity. In capital intensive businesses where I have worked major projects are evaluated on the after tax cash flow rate of return. Reducing the rate from 34 to 15 per cent would result in an explosion of capital spending in new plant and equipment as many projects which are currently marginal become very worthwhile as they generate a higher after-tax return.
I have long favored a "most favored nation" approach to corporate tax rates. We should take a baseline group, like the 35 nations in the OECD, and direct the IRS to set the corporate tax rate to be no higher than the lowest corporate tax rate in the OECD.
"By the way, who draws on a cloth napkin?"
"I'd say people who don't respect property."
It's possible he left a tip that would compensate the restaurant for the loss of a cloth napkin and it's likely he did. Also, that cloth napkin has increased in value over the years, much more than it's intrinsic value.
What is wrong with drawing on a cloth napkin?
Assuming that one pays the restaurant for it, of course.
Did these folks?
As for the horizontal shape of the curve, that someone pointed out: I have seen that in quality charts.
John Henry
Progressive = progress on the road to socialism.
(we too can be Venezuela. Hope!)
"By the way, who draws on a cloth napkin? "
I'd say people who don't respect property.
Or people who respect property just enough not to draw on the tablecloth.
Maybe its, I guess.
"The Obama administration sure didn't."
-- To be fair, they THOUGHT that their policies would yield growth (even if they had to sacrifice some clunkers for cash.) They were just wrong.
But to the government, the boxes on the shelves and the IOU's from corporations looked like profits. And the government wanted their 25% cut in cold hard cash.
Kinda like Goodfellas, no?
"Now every month he had to pay Paulie.
Business bad? Fuck you, pay me. Had a fire? Fuck you pay me."
https://www.youtube.com/watch?v=3XGAmPRxV48
John Henry
MountainMan said...
The relationship between the marginal tax rate and the amount of revenue generated is a curve and thus it must have an inflection point.
No guarantee that there is a single inflection point for such a complex function. To base tax policy on such a simplistic idea results in the debt blowout that Bush Jr bequeathed us. He was given a small surplus and he blew it like a drunken sailor.
"The Obama administration sure didn't."
"-- To be fair, they THOUGHT that their policies would yield growth (even if they had to sacrifice some clunkers for cash.) They were just wrong."
Obama wouldn't even approve the Keystone pipeline so he didn't really try.
dreams wrote : Anyone who has ever bought a house or other property and owned it for a few years should personally know the power of growing out of your debt.
Zero money down! Flip that house!
Blogger MountainMan said...
I look at a tax rate as simply the price the government charges for earning a unit of income. Like setting prices on a product, if you set it too high you will depress sales; if set too low, you pass up the opportunity for revenue.
Bingo! Nailed it.
Tax rates are the "price" we pay for government. Just as there is a price for Big Macs that maximizes revenue for McDonalds, there is a "price" for government that maximizes revenues.
Would a McDonalds make more money selling big 2 Macs a day at $15 over cost or 100 at $1 over cost?
Product pricing to maximize revenue and/or profit is a whole economics discipline. Generally called Managerial Economics.
John Henry
"To be fair, they THOUGHT that their policies would yield growth..."
The only evidence that this true is that they SAID their policies would yield growth. As far as I'm concerned, their word was not worth a warm bucket of spit.
To base tax policy on such a simplistic idea results in the debt blowout that Bush Jr bequeathed us. He was given a small surplus and he blew it like a drunken sailor.
Simplistic you say. Simple I say. And tax policy is simple. What complicates it are all the exceptions that Congress creates to tax policy, which allows them to raise money by promising favors. Where do you think those favors come from?
If you cared about the modest increase in the deficit that came under Bush 43 while gearing up to fight a war and dealing with the costs imposed by 9/11 and the bursting of the dot-com bubble then you must REALLY be mad at Obama for DOUBLING the deficit! Obama spent more than all 43 presidents that came before him and had a shitty economy to show for it.
Right?
Mike said...
What complicates it are all the exceptions
Don't disagree with this. A complex tax code with endless carve outs for special interests is intrinsically corrupt.
Mike said...
increase in the deficit that came under Bush 43 while gearing up to fight a war
Bush could have, and should have, found the revenues necessary to fight a war of choice before starting that war. He didn't because he was an arrogant fool. To bring up the minor recession he had to deal without mentioning the economic melt-down that he bequeathed Obama seems more than just a little odd.
Laffer argued that lowering taxes would increase economic activity. Wanniski popularized the theory, and politicians Don Rumsfeld and Dick Cheney carried it out.
Lowering tax rates does increase economic activity, this is well established and understood by every economist. The claim lowering rates increases total tax collected is sometimes made and usually wrong, and critics claim this is the only relevance of the Laffer curve. This is patently false as is understood by every economist especially those like Krugman who are lying about it. There are two other applications, one in particular the left is desperate to keep from public discussion:
1. If lowering rates lowers taxes but increases economic activity the need for taxes should drop (because more people find better employment and welfare spend decreases) and thus an equilibrium can be reached even in that case. While possible this is not the normal case.
2. When government increases taxes it must do so by a larger amount than is necessary to reach static equilibrium because the increase will reduce economic activity as a side effect. Thus we should have a strong preference against government activity because this deadweight loss increases the total cost of government action relative to other actions. This effects essentially every government policy.
When someone mocks the Laffer curve based on disputing that lowering rates necessarily increases taxes you should understand they're either ignorant of these other applications (because left wing indoctrination prevents them from understanding these elements) or lying.
Matthew Sablan said...
"the right thing to do first is to cut expenditures BEFORE cutting taxes."
Which is what the democrat congress under Reagun promised to do AFTER the tax cuts passed and then changed their minds.
The left cannot do with less revenue. It offers little room for corruption.
The ACA for example. after "cash for clunkers" the single worst piece of legislation in the past 60 years. Economically unsustainable.
@ARM, Bush's presidency represents a whole series of missed chances, but the 2008 financial crisis had almost nothing to do with war, dept, or financial policy. It was years in the making. Michael Lewis described mortgage tranches and investment bank folly in Liar's Poker published in 1989. Nothing that happened in the next 20 years changed the path set then.
Look at this from another perspective:
Federal tax collections, based on historic data, are banded between (working from memory) 18.5 and 21% of GDP. If government wishes to spend more than that in relative terms, it must borrow. If government wishes to spend more than that in nominal terms, there must be a larger GDP.
No other course of action is possible.
"Anyone who has ever bought a house or other property and owned it for a few years should personally know the power of growing out of your debt."
I own my house and I don't understand this. I do understand that we paid off a 30-year mortgage after 15 years and saved tens of thousands of dollars that went to more important purposes than bank interest.
That the house is supposedly worth another 25K (accd to Zillow) is superfluous. We can't claim it. The idea, once promoted by so-called financial experts, of taking out a second mortgage -- excuse me, "line of credit" -- and try to do something to get a bigger return than the interest we'd have to pay on the loan is insane. You have to live somewhere, and as Rita Mae Brown observed, the best gift a parent could give their child is a paid-off house.
Oh, and I had a boss who drew on the cloth tablecloth during lunch with me at a Chinese restaurant. He was psychotic, a bitter, raging old bastard who installed his son in a position he wasn't fit to hold, and eventually gambled his company's future one too many times and lost it all.
Make of that what you will.
Speaking of Michael Lewis, Henry, I also recommend "The Big Short"
It is sort of a look at the Liar's Poker 25 years later.
Terrific book, as is anything by Michael Lewis. (Ann's portal)
Amazingly, the movie, available on Netflix, is terrific too. Who would have thought a book on economics could be made into an interesting movie?
John Henry
"-- To be fair, they THOUGHT that their policies would yield growth (even if they had to sacrifice some clunkers for cash.) They were just wrong."
Pretty sure they thought that their policies would maximize dependency (and consequently, Democrat power). Nothing in those eight years that suggests otherwise.
Curious George said...
"By the way, who draws on a cloth napkin?"
Arthur Laffer.
Apparently not.
My[Laffer] only question about Wanniski's version of the story is that the restaurant used cloth napkins and my mother had raised me not to desecrate nice things.
Laffer continues:
"The Laffer Curve, by the way, was not invented by me."
The article is just some fake news + fluff from the grey old queen of fake news.
Bill Peschel,
I own my house and I don't understand this. I do understand that we paid off a 30-year mortgage after 15 years and saved tens of thousands of dollars that went to more important purposes than bank interest.
It doesn't work as well in these days of 3% mortgages but when I bought my house int he 80's I paid 10.5%. Someone suggested that I get a mortgage payment table. That showed how much of each payment went to principal and how much to interest. In the early days of the mortgage only about $60-70 went to principle each month.
As I mentioned earlier, my income was lumpy so when I would get a big check, I would send $1000-$2,000 to principle. That would whack a year or more off the end of my mortgage. I paid off in 13 years.
I did take a new mortgage refinance a few years back but that was to buy the vacant lot next door. I'm paying 4% so there is no point paying off early. The two lots and house together are probably worth 2-3 times what they are worth separately, though fat lot of good it does me as I am not planning to sell.
Though if someone offered me enough, I would consider it. Half-acre, 100' up and a quarter mile from the ocean. 160 degree ocean view. Rain forest view in the back. Make me an offer.
John Henry
Original Mike said...
"I am reserving judgement until I hear market savant Once Written's opinion."
LOL. She's once... twice... three times a market savant.
2008 crash had more to do with Barney Frank.
As others have noted above, the Laffer curve is a truism. The concept is only controversial because progressives have a visceral objection to tax rate cuts. Kennedy's tax cut in the early sixties was opposed by Republican deficit hawks because they approached the issue from a static frame of mind and insisted that Kennedy explain how he would pay for the tax cut. His reply was that the increased economic growth spurred by the rate cuts would generate additional tax revenue -- so the concept is not original to Laffer.
In fact, I have a collection of Congressional Globes, and in the mid sixties, the 1860's, Salmon Chase articulated the same idea when discussing legislation concerning tariff rates. He pointed out, as a good 19th century Republican protectionist, that tariff protection is good for their Yankee constituents, but that setting rates too high compromises the government's ability to collect adequate revenue, because those too high rates depress taxable activity.
Beach Brutus said...
so the concept is not original to Laffer.
Laffer refers to a guy in the 14th century using the idea, which is really that you can get the same amount of tax income via high taxes on a small base, or low taxes on a large base. It's not rocket science.
Supply side economics worked spectacularly well for Reagan in the 1980's; he drastically lowered taxes early, the economy roared, and there was massive tax receipt growth by 1986.
Sorry Henry, but the housing bubble had nothing to do with supply side economics. Neither green jobs nor the stimulus package.
The internet bubble ? Good question. I saw it more like a classic speculative bubble as was the Dutch Tulip Mania in the 1600's. BTW, the Tech industry grew its way out of that crash.
My memory was that Cheney, who was Rumsfeld's assistant at the time, went to the dinner with Laffer because his boss (Rumsfeld) had to cancel at the last minute.
I remember news reports from the 1980s as the Reagan tax rate reductions were about to take effect. Virtually no one paid those 70% (or earlier 90%) tax rates. Instead, they used all sorts of legal shelters to avoid paying taxes. The point was made at the time that people were having to shift their tax strategy to increasing income instead of avoiding taxes. They ended up paying more in taxes than before but still having more money left over.
When Reagan's rate reductions went into effect, many previous tax deductions were eliminated. One in particular I remember was the phase out of the deduction on personal debt interest payments. Before that was eliminated, people were able to deduct all forms of interest payments to include car loans, credit cards, etc. That deduction was phased out over a few years.
The Reagan tax rate reductions resulted in increased revenue collections. Unfortunately, government spending increased by about $1.40 for every dollar of increased revenue. Our government in action, folks. Too many in government have all the fiscal responsibility of a spoiled teenaged girl who is allowed unlimited use of her daddy's credit card.
And Bush did more to try and address the housing bubble that Fannie and Freddy were inflating, but was consistently thwarted by Schumer and Frank. You can trace the bubble back to the 1989 but Clinton exacerbated it with the CRA and the crash of 2008 happened with plenty of warning. As usual, the Left pilloried Bush for wanting to reform Fannie & Freddy before the bubble popped, warning that non-gov't agencies that acted like they were backed by the Fed Gov't were a dangerous mix of private and public money that worked to shield the market from the downside of risky investment.
Among the DNC-Media complex Bush did not and does not get credit for his foresight or attempts to reform the system. Instead Obama took the opportunity to absorb F&F into government, the opposite of what Bush proposed.
Mellon, during the Coolidge administration, advocated "scientific taxation". Mellon claimed that lower taxes would increase economic activity and consequently increase tax revenues. It's easier to sell something called "scientific taxation" as opposed to something based on "the Laffer Curve". The Laffer Curve has an image problem.
Bill Nye would support scientific taxation but make fun of the Laffer Curve.
My best work was on paper napkins.
Wanniski was a great explainer in the WSJ but then went round the bend on gold.
Supply side economics is capital buying heavy equipment for workers who then get paid more.
You have to induce capital to invest in heavy equipment with the prospect of returns.
As a general principle, the Laffer Curve is accurate. It's hard to know where you are on the curve though.Also, because the US economy is so large and diffuse, it's easy to obscure any cause and effect relationships you seek to obscure. (See, e.g., Krugman, Paul, anything he writes).
The Left wants more government spending and more taxing of your hard-earned dollars. Why? Because they think it makes the world a better place -- particularly if they are in charge of said tax dollars.
Normal people -- who work -- would rather they keep more of their hard-earned money, and spend it how they see fit, rather than having the government spend it. Those folks, myself included, also have no problems with streets, bridges, libraries, fire departments. But, as we all know, that's not where the billions of govt dollars are spent.
The Laffer Curve, by the way, was not invented by me. For example, Ibn Khaldun, a 14th century Muslim philosopher, wrote in his work The Muqaddimah: "It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments."
Ladies and Gentlemen, I think I've discovered a way to get our lefty friends on board with this whole Laffer curve thing: sell it as a product of the Religion of Peace (TM)!
Where do we see that Donald Trump is basing anything on the Laffer curve? He may be assuming more growth but not from tax cuts.
And everyone agrees something less tahn 100% of the tax reduction is lost to the government.
Sorry Henry, but the housing bubble had nothing to do with supply side economics. Neither green jobs nor the stimulus package.
You mistake the target of my list.
I recently read the biography of Walter Winchell. Winchell's years of greatest success occurred during the years of highest tax rates. He turned down some gigs because the added work wasn't worth the money he would receive after taxes. You can say that the world didn't miss much when a gossip columnist slacked off, but I think this lack of effort was probably happening in other fields like, say, aeronautics or pharma research. When tax rates are north of 70%, it alters the career goals and ambitions of people.........I think one of the basic prejudices of human beings is resentment of the rich. Who among us doesn't want to confiscate the wealth of those greedy bastards. Sadly, as other above have pointed out, higher taxes ncome taxes serves more as a brake on the ambitious than as a redistribution of the riches of those greedy bastards.
Henry
;
"The Laffer curve is the internet bubble is the housing bubble is the stimulus package is green jobs is the wall that pays for itself."
It sounds like you are equating them to me. Very confusing.
Speaking of the Reagan Administration, here is his former Assistant Secretary of the Treasury explaining how capitalism is a giant looting machine.
Henry VIII and the Lutheran Princes substantially augmented government revenues by seizing properties owned by the Catholic Church. Hitler pad for the autobahn by nationalizing department stores owned by Jews. That's the way to redistribute wealth. Instead of raising taxes on working men, the government should seize the endowment funds of Yale, Harvard, and the other Ivies. The money could be used to build water rides at the Obama Library or whatever. The important thing is that the wealth would be redistributed away from rich bastards.
"Where do we see that Donald Trump is basing anything on the Laffer curve? He may be assuming more growth but not from tax cuts."
You should listen to Steve Mnuchin.
http://video.cnbc.com/gallery/?video=3000613380
Too bad that Laffer did not like to give credit for his ideas. Laffer was hired by the Business School at Chicago from his graduate program at Stanford in the early 70's. At a conference a few years later, Paul Samuelson stunned everyone present when he was disagreeing with something Laffer said by saying, "according to Dr. Laffer, or maybe I should say MISTER Laffer..." and that is how Chicago found out that Laffer did not finish his PhD. He was sent back to Stanford to finish.
As for the "Laffer Curve", it was invented by Milton Friedman, if not earlier. In "Capitalism and Freedom" (1962), Friedman lays out the case for higher government revenue by lowering marginal tax rates. And Friedman preached this sermon regularly at Chicago. That is where Laffer got it. The senior economics faculty at Chicago did not like Laffer. Years later I heard from Laffer's former secretary that they starved him out of his position--he couldn't even get pencils.
It was a good thing Laffer did by advising Reagan to lower tax rates. But the gossip about where it came from is just too much fun to leave out.
"My[Laffer] only question about Wanniski's version of the story is that the restaurant used cloth napkins and my mother had raised me not to desecrate nice things."
I think Laffer, when he made that comment was anticipating Althouse and others' disapproving reaction to his having written on a cloth napkin.
"As for the "Laffer Curve", it was invented by Milton Friedman, if not earlier. In "Capitalism and Freedom" (1962), Friedman lays out the case for higher government revenue by lowering marginal tax rates. And Friedman preached this sermon regularly at Chicago. That is where Laffer got it. The senior economics faculty at Chicago did not like Laffer. Years later I heard from Laffer's former secretary that they starved him out of his position--he couldn't even get pencils.
It was a good thing Laffer did by advising Reagan to lower tax rates. But the gossip about where it came from is just too much fun to leave out."
Arthur Laffer never claimed to have invented the Laffer curve and it wasn't invented by Milton Friedman.
"Although economist Arthur Laffer does not claim to have invented the Laffer curve concept,[8] it was popularized in the United States with policymakers following an afternoon meeting with Ford Administration officials Dick Cheney and Donald Rumsfeld in 1974 in which he reportedly sketched the curve on a napkin to illustrate his argument.[9] The term "Laffer curve" was coined by Jude Wanniski, who was also present at the meeting. The basic concept was not new; Laffer himself notes antecedents in the writings of the 14th-century social philosopher Ibn Khaldun."
https://en.wikipedia.org/wiki/Laffer_curve
@rightguy2 -- I am equating them, but in a political way. Economically there's a world of difference between all of them, and I make no judgments on that score.
The point is two-fold, first, that the attempt of our federal government to achieve a balanced budget through growth rather than cuts is systematic. Second, that the press treats a tax-cut approach to stimulus very differently than a spending approach to stimulus.
Why even bring up the Laffer curve except to play that game?
Lowering marginal rates and simplification are both good things and may provide stimulus, whether it is revenue neutral or not is another story entirely. Some loss of preferences have to be expected or our deficits and debt will balloon even faster.
IIRC only about a third of loss in revenues due to rate reductions alone can be recovered by increased activity.
On the news this AM they were talking about increasing the standard deduction, but also mentioned possible loss of 401k contribution deductions et al.. Too many lawmakers are owned by lobbyists to ever see something like that, or the mortgage interest deduction, killed.
"Among the DNC-Media complex Bush did not and does not get credit for his foresight or attempts to reform the system. Instead Obama took the opportunity to absorb F&F into government, the opposite of what Bush proposed."
And don't forget who ran Fannie and Freddied during the Bush years - a bunch of Clintonites, embedded before Clinton left office. Latest though on those two is that the Obama Administration was using them to help fund Obamacare after the dastardly Republicans in Congress shut down some of the funding. Apparently there are some lawsuits by (former?) stockholders because they thought that they were supposed to be getting some of their money back, or some such.
I met Laffer. Funny guy, good speaker, shorter fella. Not a fan of Bill Clinton. Put lots of blame for the great depression on trade restrictions.
He signed a piece of paper I had and drew a curve.
That's all.
"The real question is, who draws the independent variable on the y axis, and the dependent variable on the x? I mean really, who does that?"
Someone drawing sideways while talking to the person he is showing his chart to.
If the Congress is not careful to stop him, this Orange Headed Clown will kick off another 20 years of Reagan financial Boom by using the Laffer Curve.
The Laffer curve is sort of like Calvinist Christianity. Everybody hates it until they use it and see the amazing results it gets.
Blogger Ignorance is Bliss said...
By the way, who draws on a cloth napkin?
The real question is, who draws the independent variable on the y axis, and the dependent variable on the x? I mean really, who does that?
LOL, that was my first response to the image.
No one has actually demonstrated that we can know the shape of the curve. We can only make a judgement on where we are at the given moment. The repatriation of overseas profits are not about the Laffer curve. It is a separate, but equally important issue. Repatriating profits would do more for the US economy and jobs than any change in corporate tax rates.
Corporate taxes are really the issue. We have a family company that has a higher marginal rate than GM, Google, etc, - almost 40%. One of the highest corporate rates in the world. And that is before state taxes (luckily, we are in CO, which is, currently, locked by its constitution to a rate that is below 5% - it would be much worse in "business friendly" NY or NJ). The real estate market has been hot recently in CO, but I have to tell the brokers calling me every couple weeks that we can't afford to sell. Corporations don't get capital gains treatment, which means that we would pay almost 45% of whatever we make on selling anything (before individual federal and state income taxes if we were to pay the proceeds out). There are bunches of companies around the country that can't do what they want because of our excessive and absurd corporate tax system. If the CBO could use dynamic scoring, tax revenues would probably rise, overall, if we could get the corporate rate down to 5-10%, making up for any loss through increased individual income taxes, and increased economic growth. Even 15% would be good - giving us a combined rate of < 20%. Much better than almost half.
Some of the leftists here might argue that we need to support the work that the govt does (but, then, why do half the people get free rides?). But from an economic (and not "fairness") point of view, my point above is that there is an awful lot of locked out potential economic activity. Bad tax policy (esp, but not exclusively, tax rates much too high) make a lot of business decisions uneconomical. A lot of investments non-viable.
Betting the farm on where we are on the curve. Fortunately Reagan later raised taxes when he saw the deficit growing, as did Bush I and Clinton, who for the first time in memory actually balanced the budget. Bush II fixed that but good (tax cuts plus two trillion dollar wars!) and then the crash of 08 got us up past where we were post WWII (debt to GDP ratio) and now Trump is proposing another humongous tax cut even though the annual deficits are running hundreds of billions of dollars a year. Is this how empires decline?
then prof laffer blew his nose on the napkin and trickle down economics was was born...and they ordered more funyuns... the end.
and they laughed and laughed ... that something as complex as economics can be explained on a napkin... nobel prize worthy? how about donating the napkin to the smithsonian or better auction it off... with ayn rand's signed SS check...
What does THIS Napkin tell us about Economics?
I am Laslo.
Trickle down economics
It's not the Laffer Curve. It's the Extreme Value Theorem of calculus.
Tax revenue is a continuous function of tax rate. Tax revenue is 0 at 0% rate, and it is 0 at 100% rate (because people stop doing the thing that is taxed). Consequently, a maximum value exists somewhere between 0% and 100%. It follows then that at some tax rate between 0% and 100%, lowering the rate will increase the revenue. QED.
It's one thing to say that taxes in the US are nowhere as high as that tax rate predicted by the Extreme Value Theorem. It is another thing to deride the idea as fallacious, and anyone who does is the math equivalent of a creationist.
It's almost certain that we're on the "good" (meaning that cutting rates will generate more revenue) side of the curve for corporate taxes. They are very avoidable, and there's a big mismatch of rates in the US vs other countries.
It's less obvious for income taxes. The problem is that when you get the stronger growth from lower tax rates, you also get more spending.
@A Reasonable Man:No guarantee that there is a single inflection point for such a complex function.
There is a mathematical guarantee of at least one. And if there is more than one, even better, then there are many rates for which you can cut rates and increase revenue. I can't believe you think you are UNDERMINING the idea--you are actually lending it much more support.
Proposal has only 2 deductions remain, mortgage interest and charitable contributions.
No state income tax?
Bye bye WI...
Someone drawing sideways while talking to the person he is showing his chart to.
No. You draw it normally, while it's facing you, then turn it to show your dinner partners.
Speaking of the Reagan Administration, here is his former Assistant Secretary of the Treasury explaining how capitalism is a giant looting machine.
Paul Craig Roberts is a nutbag, and was one even back then. That said - leave it to Counterpunch to paint a wide brush on capitalism as a whole, as opposed to the government's getting involved in capitalism and controlling it.
We can all think what we want, but it's hilarious that you'd cherry-pick something by a former Reagan cabinet pick without not only giving the whole context, but acknowledging that the guy is crazier than a shithouse rat.
Robert Cook:
Communism, and Socialism (it's little brother), are failures every single time they're ever tried. And yes, that includes European nations, who are now changing their policies quietly because they're starting to realize that.
Humans are individuals, and capitalism, despite its flaws, is the only economic system that acknowledges that. Communism and socialism are too steeped in trying to change human nature, which is the main reason it fails.
The sooner you get out of the People's Republic of NYC and visit the rest of the country, the sooner you'll come to that realization. Even an old dog like yourself is capable of learning new tricks.
Bernie Sanders likes to write his economic theories on toilet paper. Which is fitting.
Gabriel said...
I can't believe you think you are UNDERMINING the idea--you are actually lending it much more support.
Not attempting to do either, just pointing out the self-evident and the fact that little or nothing is known about the behavior of this putative function. I can't BELIEVE that you didn't get that.
I think one of the issues that the Laffer curve faces is that some on the left reject the notion that a 100% tax rate results in zero tax revenue. For many on the left, "from each according to his ability, to each according to his needs" is Holy Writ and fundamentally means everyone should be taxed 100% of their income and then the money will be redistributed as the government sees fit. Or in practice, everyone works for the government for free and the government then gives you a stipend.
It is understandably difficult to argue with someone who rejects one of the principles (100% tax rate = 0 tax revenue) you view as axiomatic.
The other issue is that the Laffer curve is a long term effect. In the short term (<6-12 months) economic activity is unlikely to change much in response to a change in tax rate; inertia keeps things going as people adapt. It is only in the longer term that activity shrinks or increases in response to a change in tax rates and therefore post-tax investor return.
So unfortunately Trump may be setting himself up for failure, because the benefits of the tax reduction (assuming we're on the correct part of the Laffer curve) will only be seen in the longer term. The media will play gotcha on the basis of the short term and ignore anything longer term that supports Trump as "old news."
Which doesn't mean he shouldn't do it.
Delayna said...
Someone drawing sideways while talking to the person he is showing his chart to.
Nope. Check out the picture at the top of the linked NYT article.
@AReasonableMAn: just pointing out the self-evident and the fact that little or nothing is known about the behavior of this putative function. I can't BELIEVE that you didn't get that.
Not sure what kind of calculus denier would use "putative" to describe the Extreme Value Theorem.
That one thing that Laffer described and was concerned with, is one thing that is guaranteed to be absolutely true, regardless of anything else we may end learning about it. It is as true as saying that however high a number you think of there is always a bigger one. It is as true as saying no matter what integer you put in the numerator or the denominator, you will never produce a fraction equal to pi or square root of two.
It will be great to reduce c corp taxes to rates more in line with the rest of the world. But, will this plan reduce tax rates on s corps and other pass through entities( those who own the businesses) to 15%? I don't see the need for the top 1% of payers to have their taxes reduced by 50% while wage and salary earners continue to pay 25% or 35%.
Love to see the Amt tax gone, but no deduction for state income tax and property tax?
That is going to crush a lot of people.
By the way, who draws on a cloth napkin?
Entitled college professors...
No, it didn't "change the course of economics."
"That said - leave it to Counterpunch to paint a wide brush on capitalism as a whole, as opposed to the government's getting involved in capitalism and controlling it."
Hahaha!
You have it exactly backwards. It is capitalism's control of government that has destroyed democracy here and abroad and will eventually destroy the world.
"Communism, and Socialism...are failures...blah, blah, etc."
Who mentioned Communism and Socialism? Like capitalism, they work perfectly in theory, but in reality, the corruption of profit- and power-seeking individuals--an ineradicable outcome of basic human nature--grossly distort and pervert their stated methods and goals and produce societies where the many are controlled by the few, at the expense of (paid for by) the many.
In whatever system may be in place, the people can only be served when the people are in control. We, the people, are not in control of Washington. We have not been for many years, and there is no present prospect that we will be again for many years...if ever. So, unrestrained capitalism is raping us and raping the world. We don't need to worry about communism or socialism destroying us as our own system is succeeding smashingly well in that inevitability.
unrestrained capitalism is raping us and raping the world. We don't need to worry about communism or socialism destroying us as our own system is succeeding smashingly well in that inevitability.
GDP Per Capita
Sure, disaster ahead.
You have it exactly backwards. It is capitalism's control of government that has destroyed democracy here and abroad and will eventually destroy the world.
No, I don't have it exactly backwards. Capitalism, and companies, are NOT running countries - governments are. Governments don't bow down to business; business bows down to government. Name a time where a corporation ever came in and took over a government, as opposed to a government coming in and taking over a corporation, or stealing a company's property, like what happened in Venezuela this week.
You're going to call that view naive - it's not. It just isn't an angry, jaded view of world history, like the left always seems to use to bolster what they think they already know.
There are only two systems that even exist, Bob - Communism and Capitalism. All governments are hybrids of these. There is nowhere in the world - nowhere - where "unrestrained capitalism" even exists. I've mentioned this to you before, and you didn't respond then either.
So please, you're way smarter than this ridiculous hyperbole. Because "unrestrained capitalism has destroyed democracy..." is just that.
The people DO have the power. But alas, we are all individuals, with competing needs and wants, so anyone who can vote or petition their government does in his/her own way, or doesn't, because they don't care. Either way, they've made a choice.
People have the power they need to be in control. The fact that they don't utilize it doesn't mean the system is wrong.
By the way, who draws on a cloth napkin?
It's not like it's the Shroud of Turin.
Rene' Saunce said...
"2008 crash had more to do with Barney Frank."
Yes!!
Whenever a market is acting not in the best interests of the players you have to ask yourself, "what changed?"
What causes banks-not by their nature risk takers- to become gamblers? The answer almost always is a third party gaming the system.
"By the way, who draws on a cloth napkin?"
Doesn't relly matter, does it?
Humans are individuals, and capitalism, despite its flaws, is the only economic system that acknowledges that. Communism and socialism are too steeped in trying to change human nature, which is the main reason it fails.
Good. So there's no need for nations, or borders - for that matter. No need to treat things according to their associations and the boundaries around them.
Capitalism, and companies, are NOT running countries - governments are. Governments don't bow down to business; business bows down to government. Name a time where a corporation ever came in and took over a government, as opposed to a government coming in and taking over a corporation, or stealing a company's property, like what happened in Venezuela this week.
Interesting. So laws and executive action are incentivizing, but money, campaign donations and lobbying are not. I'll keep that in mind the next time you're bribed, or simply offered payment in exchange for doing what the person providing payment asks of you.
Just because you lack the talent and human touch to be a lawmaker, doesn't mean the people paying them to win their campaigns and keep their jobs aren't getting their money's worth.
"By the way, who draws on a cloth napkin? "
I'd say people who don't respect property.
Completely agree.
Please. How much does a cloth napkin even cost? A dollar? 2?
It's the disrespect, dude. Like putting your feet up on someone else's coffee table. Without asking.
Ridiculous. No man ever asks to put his feet up on someone's coffee table. He either just does it or he doesn't do it.
He doesn't do it. Unless he was "raised" by Genghis Khan.
Ann was right. No one does it.
I suppose someone might be invited to do it. But that's the party that initiates the entreaty: The owner.
It's like asking to have sex. You're either invited, or the offer's not on the table.
You're funny. You remind me of a version of me, with how much you argue. Just about sillier things. ;-)
@320 - never fear. The revenues from a Sub-C are double taxed. Let take my original assumption of a 39% marginal rate (yes - that is the marginal rate for income from maybe $200k to maybe $3.3 million - it goes back down after that). Add in a stiff maybe 10% state tax, and you are up to almost half, which leaves the other half to pay out as dividends, at maybe 20% federal and maybe 5% state, result in a combined 25%, which is applied to the remaining 50% after Corp taxes, leaving 3/8, or 37.5% in your pocket, and 5/8, or 62.5% in taxes to the federal and state governments. Contrast this with a Sub-S, where the federal income tax may be 35%, combined with a 5% state income tax, ends up with an effective rate of 40%, leaving 60% in the pockets of the stockholders. No matter what they do, it is very likely that the Sub-S business owner will be that far ahead of a comparable Sub-S business owner.
Blogger The Toothless Revolutionary said...
"Humans are individuals, and capitalism, despite its flaws, is the only economic system that acknowledges that. Communism and socialism are too steeped in trying to change human nature, which is the main reason it fails.
Good. So there's no need for nations, or borders - for that matter. No need to treat things according to their associations and the boundaries around them."
Only in as much as those nations promote the peaceful interaction between people.
Capitalism-a Marxist term- is organic. It is behavior people engage in naturally. Socialism, Communism , Progressixism are things people are forced to do.
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