A Conservative Misinterpretation Of The Laffer Curve

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A Conservative Misinterpretation Of The Laffer Curve

Written By : John Hawkins

If you’re reading a blog like Right Wing News, you’ve probably heard of the Laffer Curve. If you haven’t, here’s the self-explanatory graph:

Long story short, what Arthur Laffer is trying to get across is that contrary to what some people believe, tax increases DON’T ALWAYS increase revenue to the government and tax decreases DON’T ALWAYS decrease revenue.

This is because people’s behavior changes. As tax rates go higher, people are incentivized to work less, cheat on their taxes, and find ways to protect their income from the tax man. Once the tax rate gets up to 100%, the question becomes: Why work at all since every dime will be handed over to the government?

So, what Laffer is saying is that there is some optimal point, where the government can maximize its revenue, and raising taxes beyond that point will be counterproductive.

Makes sense, right?

Okay, now here’s where I’ve noticed some conservatives misinterpreting this theory lately: They’ve come to believe that tax cuts will inevitably produce more revenue and tax increases will inevitably decrease revenue.

This certainly can happen and it often has happened. But, and pay close attention to this, either a tax increase OR a tax cut may increase revenue to the treasury. Moreover, it’s entirely possible that even though the revenue going to the government may increase after a tax cut, it may have increased EVEN MORE had taxes been raised.

If you don’t understand how this can be, then you don’t quite get the Laffer Curve.

Here’s what you have to understand: The Laffer Curve measures MAXIMUM revenue. If you cut taxes, it may stimulate economic activity, increase the income earned by the population, and lead to more money coming into the treasury. On the other hand, raising taxes may slow economic activity, but the increased amount of tax revenue paid per person may more than make up for it.

Here’s a SUPER SIMPLISTIC example to show you what I’m talking about.

Let’s say the tax base consists of 10 people paying $2 a year in taxes. That means the government receives $20 per year in tax revenue. Suddenly, taxes are raised to $3 a year. Because of that, 2 people decide to stop work entirely because it’s not worth their time to work so hard at that level of taxation.

So, how much money will the government take in? 8×3=$24. In other words, the level of economic activity dropped, but the government still took in more revenue.

This is something that Arthur Laffer has noted,

The Laffer Curve itself does not say whether a tax cut will raise or lower revenues. Revenue responses to a tax rate change will depend upon the tax system in place, the time period being considered, the ease of movement into underground activities, the level of tax rates already in place, the prevalence of legal and accounting-driven tax loopholes, and the proclivities of the productive factors.

Long story short: A society with a low tax rate is going to be much more prosperous than a society with a high tax rate. Moreover, can tax cuts increase the amount of revenue coming into the government? Absolutely. Can tax increases reduce the amount of revenue coming into the government? Absolutely. However, that’s not a given. Raising taxes can also increase revenue coming into the government. In fact, if our primary goal was to maximize revenue coming into the government, which in my opinion, shouldn’t be something we should necessarily strive for anyway, it’s entirely possible that raising taxes would be the best way to do that.

Don_cos

it’s entirely possible that raising taxes would be the best way to do that

But not during a recession with high unemployment.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

It depends on who you raise taxes on and what rates you put them at.

There is no proof that raising the top marginal personal income tax rate will impact job creation. Especially at the rate that are being proposed.

Anonymous

There is no proof that raising the top marginal personal income tax rate will impact job creation. Especially at the rate that are being proposed.

Dropped on your head as a child I see.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

So then show me proof that raising top marginal personal income rates will affect job creation.

Anonymous

After you show us how raising income taxes in a recession is a good thing.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Great Depression Tax Rates.

Or you can realize that raising top marginal tax rates has a more beneficial effect due to our current fiscal situation, than any beneficial effect they were supposed to generate in the first place.

If they were 70%, I wouldn’t advocate raising them. However, they’ve been at their lowest levels for 10 years, and we’ve had the worst jobs creation ever. If they were going to be beneficial, they would have been beneficial by now.
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

You are completely misinformed about the Great Depression and the tax affect of tax rates on it.

By the end of the 1920s 80% of the population paid no income tax to the Federal Government (sound familiar.) All of the nation’s tax burden was being paid by the upper middle and upper classes.

In 1932 the top tax rate was raised from 25% to 63%. Unemployment skyrockets and the economy collapses. 1932 and 1933 are the worst two years of the depression from an economic growth (shrinkage) standpoint. When only the very top are paying taxes, and you rape them with extremely high tax rates, the result is going to be a huge shrinking of the tax base, as happened in the Depression.

The Smoot-Hawley tariff (1930), which did very little to directly protect American jobs since the U.S. was the world’s largest exporter at the time, but directly caused retaliation by our trading partners. The result was a massive decline in exports and resulting layoffs.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

http://www.economics-charts.com/gdp/gdp-1929-2004.html

GDP growth was already plumetting, and was abated by raising the top tax rates to create public works projects that put people back to work.

Additionally, the change in exports from 1929 to 1930 was the same as from 1930 to 1931.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

http://www.economics-charts.com/gdp/gdp-1929-2004.html

GDP growth was already plumetting, and was abated by raising the top tax rates to create public works projects that put people back to work.

Additionally, the change in exports from 1929 to 1930 was the same as from 1930 to 1931.
http://www.patriotpost.com bthewolf

The tax rates were changed in 2003, not 2000, so that’s seven years, not 10.

If letting the rich keep their money doesn’t create jobs how does taking more of it of create jobs? You’ve been telling us that lowering taxes on the rich won’t create jobs, but how does raising their tax rate create jobs. Unless personal tax rates have no or at best minimal effects on unemployment/new jobs, and we shouldn’t be trying to correlate the two??!! No one has as yet to prove/disprove that tax rates effect job creation. You keep telling us to prove that lowering the tax rate will create jobs, but it’s obverse can’t also be true without proof.
http://www.patriotpost.com bthewolf

You haven’t proven raising taxes is the only way to raise tax revenues, hell you haven’t even proven that raising taxes won’t kill the economy more, but you’re willing to steal more of their money to keep the inefficient non-producers on the dole???

Most non-military govt employees are little more than high end welfare recipients. The Govt doesn’t produce anything it consumes, even those so called jobs aren’t really producing anything. What does the USPS do that Fed Ex a doesn’t? How about Medicare? Doesn’t a 401K have the same effect as SS?
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

bthewolf, if you can’t prove that tax rates affect job creation, then why are people fighting so hard to let them expire on the top 2%, when we’re currently running a deficit, and they were designed to expire?

I’d much rather have the rates go up, and 10% of government workers keep their jobs, then let 2% of the population have a lower rate, and 10% of government workers lose their jobs.
http://www.patriotpost.com bthewolf

You haven’t proven raising taxes is the only way to raise tax revenues, hell you haven’t even proven that raising taxes won’t kill the economy more, but you’re willing to steal more of their money to keep the inefficient non-producers on the dole???

Most non-military govt employees are little more than high end welfare recipients. The Govt doesn’t produce anything it consumes, even those so called jobs aren’t really producing anything. What does the USPS do that Fed Ex a doesn’t? How about Medicare? Doesn’t a 401K have the same effect as SS?
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

bthewolf, that’s the whole point of the above article. Raising taxes isn’t the only way to raise tax revenues. It all depends where the economy currently stands. If taxes are suppressing production, then lowering taxes is the better way to raise tax revenues. If production is not being suppressed, then lowering taxes won’t raise tax revenues.

The USPS produces flat rate postage at cheap rates. Medicare produces insured citizens that otherwise would not be insured. Social Security provides a guaranteed income after your 401k loses half of its value.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

bthewolf, that’s the whole point of the above article. Raising taxes isn’t the only way to raise tax revenues. It all depends where the economy currently stands. If taxes are suppressing production, then lowering taxes is the better way to raise tax revenues. If production is not being suppressed, then lowering taxes won’t raise tax revenues.

The USPS produces flat rate postage at cheap rates. Medicare produces insured citizens that otherwise would not be insured. Social Security provides a guaranteed income after your 401k loses half of its value.
http://www.patriotpost.com bthewolf

“The USPS produces flat rate postage at cheap rates. Medicare produces insured citizens that otherwise would not be insured. Social Security provides a guaranteed income after your 401k loses half of its value.”

The USPS doesn’t do that, it may look it, but it’s operating at a loss, requiring constant bailouts. That’s not a good/service since it’s being replaced and losing business.

Medicare/SS aren’t services/products that the consumer buys, the premium are taken at gun point from your paycheck, you cannot choose any aspects of the investment/care.

And SS was created before 401Ks, 401ks were created to help make up the SHORTFALL of SS benefits.

But keep on believing govt produces it goes to show your limited and naive worldview.
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

How can a small business expand production when half of their profit is going to the government? Expanding production requires investment in equipment and real estate(either lease or own). It requires training with no immediate return (meaning an expense with no associated revenue.) It requires cash, and when the government is taking larger and larger percentages of that cash, increasing employment becomes impossible.

An increase in the highest personal income tax rates directly affect blue collar employment. The wealthy, and the new-rich, buy big ticket items (luxury cars, big houses, private planes, etc), and many of those items are still built here in the United States (we dominate the general aviation industry, at least for now.) When you raise the highest tax rates, the purchases of those items plummet, and layoffs of the very people you pretend to care about the most results.

I would also argue that raising the highest tax rates hurts the middle class far more than the wealthy. Warren Buffet’s net worth isn’t affected one penny when you raise tax rates on income. His purchases might fall, but his worth isn’t affected because you are taxing income, not wealth. A small business owner trying to build wealth is devastated though. The accumulation of wealth becomes impossible, but the maintenance of wealth isn’t affected. You end up protecting the people you pretend to despise, the most wealthy.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

4% of small business are subject to higher personal income tax rates. That means 96% of small businesses won’t be affected. Additionally, if someone is making $250k a year of income from their business with a pass through taxation structure, the increase in taxes proposed amounts to about $450. That’s not enough to hire or expand.

Secondly, the increase proposed is so minimal to not affect big ticket purchases. To have a $50,000 increase in personal income taxes, someone must be making nearly $2 million in income a year. The car they would buy is most likely not produced in America, or produced by an American company. That $2million jet? They would have to be making $67 million in income a year. If they’re making that much money a year, they’ve probably already bought the jet through their company.
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

And where did you invent the 4% number? Most small businesses are individually owned or in a partnership, so they are all affected by higher tax rates on individuals. From personal knowledge, even if your solely owned business is in an LLC (limited liability company) the IRS will try to classify it for tax purposes as a sole proprietorship, meaning it’s taxed at a personal level. They do the same for partnerships.The difference in personal income tax paid for a person making $250,000 per year is: $4,129.25 ($67,616.75 vs $71,746.00,) but since we are talking about the top marginal tax rate, we aren’t just talking about people making $250K per year. We are talking about those people who buy private jets and make considerably more, aren’t we…$2 million jets are not the only type of general aviation aircraft built in the united states either. A $500,000 Cirrus SR22 will be affected also (debt service on $500K equals about $16,000 per year in payments, and an equal amount in annual ownership costs, something affordable by an upper middle class pilot. When the government takes an additional $5K-$10K away, it could make a difference between buying that plane and not.A $2 million jet does not require a $67 million income. Where in the world do you get these numbers?Regardless, higher taxes have shown repeatedly to have a detrimental affect on the economy. You requested specific examples of how, I presented some, and now you are trying to move the goalposts. When you increase taxes, at any level, it affects purchasing. On the wealthy it affects big ticket items first. In the 1980′s when the Democrats in Congress passed the first luxury tax on big ticket items it decimated the private aircraft and yacht building industries so badly that the Dems repealed the taxes. They learned the hard way back then that taxes on the wealthy do have a negative impact. Unfortunately, Liberals are incapable of learning from even their own history.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

The 4% number isn’t invented. Lowest I’ve seen is 2%, highest is 7%, with most sites using 4%. Republican ways and means puts it at 3%.

It is that low because of two factors:
1) Not all small businesses use a pass through tax structure. You can be a C Corp and still be a small business. Small business is defined by revenue, income, and/or number of employees.
2) When using a pass through structure, you are taxed on the income of your business, not the revenue. That means employees, expenses, and investment are taken out prior to it passing to you.

Second, the difference in personal income taxes assumes that only the rate on the top bracket increases, and the cutoff also moves up. At that point, you’re seeing an increase of 3% over the cutoff ($229k I think).

Finally, where did you come up with $16,000 per year in payments? Are you talking some type of leasing structure, where you’re looking at close to $10,000 down to begin with, still have a buyout at the end of the lease, and have payments that have to include interest and depreciation? Because a $500,000 loan isn’t going to be $16,000 a year in payments. It’s going to be closer to $36,000 a year.

But let me know where you’re buying $500,000 worth of product for $16,000 a year. I’d love to get in on that.
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

And where did you invent the 4% number? Most small businesses are individually owned or in a partnership, so they are all affected by higher tax rates on individuals. From personal knowledge, even if your solely owned business is in an LLC (limited liability company) the IRS will try to classify it for tax purposes as a sole proprietorship, meaning it’s taxed at a personal level. They do the same for partnerships.The difference in personal income tax paid for a person making $250,000 per year is: $4,129.25 ($67,616.75 vs $71,746.00,) but since we are talking about the top marginal tax rate, we aren’t just talking about people making $250K per year. We are talking about those people who buy private jets and make considerably more, aren’t we…$2 million jets are not the only type of general aviation aircraft built in the united states either. A $500,000 Cirrus SR22 will be affected also (debt service on $500K equals about $16,000 per year in payments, and an equal amount in annual ownership costs, something affordable by an upper middle class pilot. When the government takes an additional $5K-$10K away, it could make a difference between buying that plane and not.A $2 million jet does not require a $67 million income. Where in the world do you get these numbers?Regardless, higher taxes have shown repeatedly to have a detrimental affect on the economy. You requested specific examples of how, I presented some, and now you are trying to move the goalposts. When you increase taxes, at any level, it affects purchasing. On the wealthy it affects big ticket items first. In the 1980′s when the Democrats in Congress passed the first luxury tax on big ticket items it decimated the private aircraft and yacht building industries so badly that the Dems repealed the taxes. They learned the hard way back then that taxes on the wealthy do have a negative impact. Unfortunately, Liberals are incapable of learning from even their own history.
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

The system won’t let me reply to your msg below, so I’ll reply here:

1. Most small business is not owned as a C-corp anymore. Most is within a different type of structure.

You’ll need to provide a link regarding your percentage. My companies would be affected. The only way it doesn’t is to keep all the money within a C-corp structure meaning no movement of profits to start a new company or invest elsewhere. For larger or mid-cap companies this isn’t a problem. For small businesses it can be extremely painful. If your net income is $250K, and you keep it all in the business, then you’ll have to pay 35% corporate income tax. If you later need to remove that money for personal use or to invest in another company then you’ll have to pay personal income tax on top of it.

2. Ummm, yeah, I know it’s taxed on net income, that’s what we are talking about. If a company is doing $250K in gross revenue, and isn’t a service company, they are probably losing money anyway. Again, since we are talking about top tax rates, so we aren’t just talking about people making $250K.

3. Yes, I quickly used an online business calculator that automatically inserted a number. The payments would be closer to $2600 per month. It’s still doable for an upper middle class individual, though obviously tougher.

Anonymous

The user who has posted above under the name “Danny Browning” has been identified by the majority of this community as a troll. That is to say he is not a legitimate member of this community and instead seeks to disrupt it by posting inflamitory material, insulting the regulars of the site, and otherwise attempting to harm the forum. This link sums up what a “troll” is quite nicely:
http://i1199.photobucket.com/albums/aa474/rwn_troll_patrol/untitled.jpg

“Danny Browning” has been indentified as a troll for the following reasons:
-He never adds anything to the discussions here. Instead he posts agressive attacks on the other members, is rude, and often says things that are designed to offend and inflame the majority.
-He has been caught in numerous lies.

RWN and Disqus have been kind enough to provide us with a way to combat this sort of troll. At the lower left corner of each post you will find a “flag” button that apears when you move your mouse over it If a post receives enough of these flag alert, the system will remove the offensive post from view. Please take the time to flag any posts, regardless of content, you see by the user “Danny Browning” in this thread. It only takes a second and two mouse clicks to do so. Robbed of seeing their filth posted, most of these trolls will eventually get bored of their childish game and move on. Your help in this matter is appreciated and will go a long way toward making our little community a better place. Thank you.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Flagging for stalking, spamming, derailing, and mass flagging of posts.

gfchicago

Talk about derailing Danny, you do that to every thread that you jump in on.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Discussing a topic with an opposing viewpoint is not derailing.
gfchicago

Yes it is. You’ve been spanked on economics every single time that you sit there and pontificate on the subject.

By all means continue on Dr. Watson… Pontificate away. With every word you just show the rest of us how stupid you really are on the subject of economics.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Having my posts flagged into oblivion doesn’t mean I’ve been spanked on economics.
http://www.patriotpost.com bthewolf

No but proving your theories don’t hold water does.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Discussing a topic with an opposing viewpoint is not derailing.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Flagging for stalking, spamming, derailing, and mass flagging of posts.
President Friedman

Come on, Trench. I think everybody can see after John’s post on Friday that you are on your way to being banned from this site again. I enjoy your contributions here when they aren’t focused on trying to be troll-monitor. I’d like to see you stick around and add to the discussions. I hope you will reconsider what you are doing here.

Anonymous

Friday I got very busy and was not on the site very long. I must have missed that post. Can you link it for me?

TR
President Friedman

It is in the comments thread here: http://rightwingnews.com/2010/11/the-12-traits-that-made-the-most-exceptional-people-ive-ever-known-stand-out/

Here is the direct quote, from Hawkins:

“I’ve been trying to let the comments go a little more and allow the flagging to help get rid of objectionable posts.

That’s why I really don’t like this “flagging every post” stuff regardless of content because I am finding a lot of posts flagged that shouldn’t be.

If it keeps up, I am going to ban the people doing the flagging. Now, if you know what you’re doing, it’s easy enough to get around the block and come back — but that’s where the flagging can easily turn on you. Because if people know you’ve been banned and you’re not supposed to be here, you won’t even need to be moderated, because everything you post will be quickly flagged into oblivion.

Don’t worry about who’s a troll and who’s not, who has multiple IDs and who doesn’t, etc. Just enjoy the commenting or if that’s too hard, let me ask your respectfully to go somewhere else where they want people endlessly screaming “You’re a troll! You’re really person x who got banned here 2 years ago!” Give a rest….please.”
Anonymous

Thanks. I was digging around and found that post about the same time you posted this.

Let me first say there is an amusing inconsistancy in the post by Hawkins. On one hand he expresses a negative opinion about those who flag the posts of known trolls regardless of content bt on the other hand he indicates that those who bypass bans would quickly find all their posts (presumably regardless of content) “flagged into oblivion”. So which is it, Hawkins? Is flagging posts based upon the author rather than content acceptable to you or not?

That being said , I’m going to knock off the PSAs and the flagging based upon author rather than content. But I’m going to say a few things first.

John Hawkins does not own this community. We, the regulars who created this community own it…especially those of us who have been here for many years. We built this place and many of us hate to see petulant children trying to get their jollies by trolling ruin it for everyone. But, John Hawkins does indeed own the venue in which the community exists. So he sets the rules. It’s rather akin to a club renting a room for a meeting. The owner of the building owns the room, but he does not own the club.
I’ll comply out of respect for the rules of the venue and self preservation. I enjoy this community and value it as a source of entertainment and information. I’ll follow the rules, but do not have to agree with them.

I think most of you know that my intention has never been to disrupt this community. Far from it. I seek to aid it in combating the problems that plague it. The staff of this site has historically been reluctant to police this community, so it’s been up to the membership to do what we can to do so. But in making his statement about, Hawkins has really confirmed what many of us have suspected all along: that at best he does not care about the community he is host to and regards our attempts at self-policing (ie the recent flagging campaigns) as annoying or at worst he actually WANTS trolling as it ups his post numbers and thus helps the bottom line when it comes to advertisers.

Ok, that is enough sopa box time for me. Let’s get back to what we came here for.

TR
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

Having people who disagree with us here makes the site a better place. Hell, it gives us someone to argue with.

I’ve personally typed out a long retort simply to see it discarded because you flagged the Liberal before I could hit “post.” Yes, many are trolls (Petey comes to mind), but I have no interest in an echo chamber either. Not all of their posts are trollish either. Some are legitimate questions and we should have an opportunity to respond.

Liberal are all children mentally, but we don’t win arguments by matching their (lack of) mental skills. We win by bombarding them with facts and information. Show them just how stupid they are until they realize they’re over-matched.

If someone is a troll flag them, but more importantly, ignore them. If they are simply someone we disagree with, then we should destroy them intellectually. Liberal sites ban anyone who questions the Leftist line. We are better than that.
President Friedman

While I often disagree with you on who is trolling and who is just wrong/misinformed, when it comes to the incontrovertably true trolls like M*rtha, I agree they create a problem… I just think the attempts at troll policing tends to make the problem worse than it was before, more distracting, more likely to ruin a thread. And also, there are times when people like Vega or Danny aren’t doing anything trollish, they are just tossing out contrary viewpoints, and my ability to engage them is actually diminished by the flame wars that are continued across multiple threads from things that were said and done 3 months ago. As a consumer of what this community has to offer, there’s not a lot of difference in the experience I end up with, between that and what Martha does.

Anonymous

The interesting thing about the Laffer Curve, if you believe in it (and I think it makes intuitive sense at a basic level), is that no one really knows where that maximum revenue point is. And given the complexity of our economy (and its interdependence on the global economy) and all the factors that go into it (monetary policy, unemployment rates, individual attitudes towards work, the productivity of government spending, the litigiousness of a culture, trade policy, currency exchange rates, etc.) it’s almost impossible to know what this maximum revenue point is.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

They attempted to prove that the optimal point was around 70% for the top marginal tax rate. It’s somewhat of a simplification, since there are other tax rates and economic complexities, but based on how our economy has performed in the past 30 years with low top marginal rate, vs the previous 30 years with high marginal rate, I still believe our top marginal rate is too low under a progressive system.

http://www.wordaroundthenet.com Christopher Taylor

Hands up, who here is surprised to find that Browning thinks we aren’t taxed enough? Anyone?

…anyone?

http://www.wordaroundthenet.com Christopher Taylor

We can’t know exactly where we are, but we can know approximately. For example, right now we know (from past experience) that we aren’t on the “less revenue from cuts” side of the curve because cutting taxes increased the tax revenues. Thus, rolling back the tax cuts would be detrimental not just to the economy but government revenues.

But don’t tell that to Obama or Democratic leadership – or most leftists. They just think in terms of zero sum: tax more=more revenue.

Anonymous

Well, C_T, recent past experiences have shown us that the financial crisis, high unemployment rates, and a host of other non-tax related issues caused a reduction in revenues even under the very same Bush era tax rates. My point is that tax rates are one of a variety of factors that affect revenue generation for the U.S. treasury. For instance, tax cuts without any serious attempts to curb current levels (or even Bush-era levels) of borrowing and spending, may have the effect of worsening the Treasury’s revenue streams as people lose confidence in the government’s fiscal stability and hold off on investment, job creation, and production. Likewise, tax cuts coupled with a monetary policy of rising interest rates could also negatively impact total revenue generation for the Treasury by curtailing access to affordable credit that can be used to generate jobs, increase productivity, etc. In fact, higher interest rates could mean larger amounts of income going to pay off debt instead of generating more production that can produce wealth that’s taxable. And I could go on, but I think you get the point.
Anonymous

Well, C_T, recent past experiences have shown us that the financial crisis, high unemployment rates, and a host of other non-tax related issues caused a reduction in revenues even under the very same Bush era tax rates. My point is that tax rates are one of a variety of factors that affect revenue generation for the U.S. treasury. For instance, tax cuts without any serious attempts to curb current levels (or even Bush-era levels) of borrowing and spending, may have the effect of worsening the Treasury’s revenue streams as people lose confidence in the government’s fiscal stability and hold off on investment, job creation, and production. Likewise, tax cuts coupled with a monetary policy of rising interest rates could also negatively impact total revenue generation for the Treasury by curtailing access to affordable credit that can be used to generate jobs, increase productivity, etc. In fact, higher interest rates could mean larger amounts of income going to pay off debt instead of generating more production that can produce wealth that’s taxable. And I could go on, but I think you get the point.

Okvlconservative

Here is the BIGGEST problem with our current situation. All governments, federal, state and local, continue to initiate and maintain discussion around tax revenue. It becomes a moot point if there isn’t equal, probably greater emphasis on decreasing spending. If a person makes $100K a year, but spends $150K a year, raising their income to $120K helps, but they’re still going to be in a $30K hole. I don’t understand why the brilliant progressives can’t grasp the simple notion that decreased taxes encourages business investment, creates jobs, which in turn ultimately raise aggregate tax revenue. But if all you want to do is spend and move other people’s money, I guess that argument becomes moot as well.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

You said decreased taxes, not decreased business taxes. Brilliant progressives grasp that decreased business taxes encourage business investment and creates jobs. It cannot be shown that keeping tax rates low on the upper 5% creates the same effect. The upper 5% don’t put all their money to work in America, instead spending or saving portions of it overseas. Keeping their tax rates low will not produce as much of a return as keeping tax rates low on businesses, investors in US banks/businesses, or the low and middle class.

Anonymous

“Brilliant progressives ”

Starting with the personal attacks early. And you are the main one that complains about them.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Brilliant progressives came from his comment.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Pretty much dead on. The current rates and the current state of the economy will determine whether tax cuts or tax increases are appropriate for generating revenue. You still have to ask what the appropriate revenue level is (I think 21% of GDP is a little low), but given a specific revenue level, tax increases or tax cuts must both be evaluated as methods of reaching that revenue level.

Given how low our current rates are historically, and how the economy has performed under the low rates, I think the current rates are too low, leading to a devaluation of the dollar in the face of insufficient revenue, insufficient infrastructure investment, and stagnation of our economy.

Anonymous

Our economy still leads the world, and has for 60 years. A two-second look at a pie chart of the budget reveals the problem: out of control entitlement spending.

No amount of taxation on working people can possibly pay for the level of entitlements that the government is forking out to the unproductive. Half of state budgets go to entitlements for health care, welfare, and unemployment. The Federal government is spending about $1.6 trillion on SS, Medicare, Medicaid, and Unemployment alone in 2010. Total Federal revenue is expected to be about $2.3 trillion. Borrowing gets us to the $3.5 trillion spending total.

70% (1.6/2.3) of the government is nothing but one big socialist wealth transfer engine. No amount of taxation can possibly sustain it. Alternatively, eliminate all Federal entitlements (none of which exist in the Constitution, by the way) and we can not only wipe out the deficit, but also cut all tax rates by another 50%. If there’s a balance to be found, it’s in the direction of drastic cuts. There’s no other way.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

That’s in the assumption that we can cut entitlements, and in doing so, can maintain the American way of life, providing for those that entitlements support.

I don’t believe that will be able to cut entitlements significantly enough to both lower taxes and increase spending on infrastructure and research, which will allow us to continue being economic leaders. That’s why the other way is to both raise taxes and cut entitlements.

Anonymous

No one should depend on entitlements for support.

Perhaps we can start by eliminating all fovernment payments of any type to illegal aliens. Saves many billlions right off of the bat.
Anonymous

And you don’t see the problem with the “American way of life” now being defined as leeching off of others in order to enjoy a comfortable work-free lifestyle?

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Do you define being 70 years old and drawing on Social Security after you’ve paid on it your entire adult life as leeching off others?
Anonymous

Retirees aren’t the problem. We owe them the promised benefits, as foolish as this country has been in making and continuing them. We do need to find a way to extricate ourselves from Social Security however, which is insolvent and unsustainable.

I propose ending all welfare for able-bodied adults first. Wipe out Medicaid, unemployment, all benefits for illegals, and all other kinds of income and lifestyle based entitlements and subsidies. The first two items is $400 billion alone and would have balanced any Bush-era budget easily.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Medicaid, although huge, does provide insurance to a large number of Americans, including children. Not having that insurance will cause your own insurance cost to go up. However, it does need reform, just like general health insurance needs reform. Same thing with welfare. Not having mandatory birth control for those on welfare is one of my biggest problems with it. You shouldn’t be paid to sit around and have babies, ala Octomom.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Medicaid, although huge, does provide insurance to a large number of Americans, including children. Not having that insurance will cause your own insurance cost to go up. However, it does need reform, just like general health insurance needs reform. Same thing with welfare. Not having mandatory birth control for those on welfare is one of my biggest problems with it. You shouldn’t be paid to sit around and have babies, ala Octomom.
Anonymous

Retirees aren’t the problem. We owe them the promised benefits, as foolish as this country has been in making and continuing them. We do need to find a way to extricate ourselves from Social Security however, which is insolvent and unsustainable.

I propose ending all welfare for able-bodied adults first. Wipe out Medicaid, unemployment, all benefits for illegals, and all other kinds of income and lifestyle based entitlements and subsidies. The first two items is $400 billion alone and would have balanced any Bush-era budget easily.
Greg

Only when when your payments exceed the amount you paid into it.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

That’s in the assumption that we can cut entitlements, and in doing so, can maintain the American way of life, providing for those that entitlements support.

I don’t believe that will be able to cut entitlements significantly enough to both lower taxes and increase spending on infrastructure and research, which will allow us to continue being economic leaders. That’s why the other way is to both raise taxes and cut entitlements.
Stocky

The first problem with entitlements is that we call them that. Then a lot of people learn to believe that they are actually entitled to them.

We definitely need to cut entitlement spending, but we also need to do something about people who think they deserve to receive it.

Markhrobinson

That’s all very well, but while the gross tax revenues increased from $20 to $24, entitlement expenses to support the two who decided to stop working increased by more than the $4 value of the additional revenues raised. On the other hand, if you had decreased the tax rate from $2 to $1.5, an additional two people would have come into the workforce, so while the gross tax revenue would have decreased from $20 to $19, the cost if entitlements for the two persons now working would have been eliminated, meaning the effective available tax revenue would have increased.
Anonymous

“The” Laffer Curve is kind of a misnomer. With our ridiculous tax structure, the concept would have to be presented as an array of overlapping and interrelated curves…which is all but impossible to model in any meaningful way, much less extrapolate policy recommendations from.

It should be a strong signal that it’s time for tax reform when the government can’t really predict what the result of tax cuts or increases would even be. Now would be an excellent time to consider some sort of Fair Tax/Flat Tax as a replacement for our obviously broken and burdensome tax code.

Conservatives should force the debate, as the only real reason to maintain the current system is the power it gives Congress to favor trade, engage in social engineering, and punish their opponents. It’s indefensible.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

With the votes Fair Tax got on America Speaking Out, I was really disappointed not to see a push for Fair Tax in the Pledge to America.

There are entirely too many loopholes, deductions, and ways to hide income now, that we can’t even determine the effective tax rate from our current tax rates. It’s a mess. As regressive as Fair Tax is, it seems the best way to get the fiscal house in order, and ensuring that people pay their fair share.

Anonymous

Fair Tax isn’t regressive, it’s flat. That’s kind of the whole point.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

It’s considered regressive since a larger portion of the lower 95% income is spent, so more of their income is subject to the tax. The upper 95% spend less, so less of their income is subject to the tax.

Anonymous

Hence the annual-poverty line rebate to every taxpayer, which represents a much greater proportion of low-earners income.

People much smarter than you thought of this stuff already. Maybe you should actually read the plan.
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

And for those above the poverty line? They’ll still be paying taxes on more of their income than the wealthy, since they spend most of their income.

Just because there is a poverty line rebate doesn’t mean it’s not regressive. It just exempts a portion of the population from the regressive nature.
Anonymous

You have no idea what you’re talking about. Here’s your homework assignment:

http://en.wikipedia.org/wiki/FairTax
http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

From your own link:

“With the rebate taken into consideration, the FairTax would be progressive on consumption,[4] but would also be regressive on income at higher income levels (as consumption falls as a percentage of income).[7][8]“
Anonymous

Which would be relevant…if the Fair Tax increased the retail price of goods or services. Which it does not.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

It’s considered regressive since a larger portion of the lower 95% income is spent, so more of their income is subject to the tax. The upper 95% spend less, so less of their income is subject to the tax.

President Friedman

I think it is also important to consider what the curve represents. Excepting a perfectly balanced tax-to-income ratio that sits on the very peak of the curve, *any* other amount of government income has the potential to occur on both the right and the left quadrants of the curve. If the government can raise $2 Trillion dollars with both an (averaged across all the brackets) 25% income tax rate and with a 10% income tax rate… then they have an ethical obligation to the taxpayers to pursue the figure that is produced by a lower tax. The goal should never be simply to produce as much money as possible for government coffers, but to responsibly fund the government programs you have, with the least amount of pain to the taxpayer.

Therefore, I believe the government is always ethically obliged to cut taxes FIRST (and, although the argument is more subjective, first to the people with the highest tax burden). If a tax cut is followed by a decrease in revenues, THEN we should look at experimenting with adjustments on the right quandrant of the Laffer Curve.

Anonymous

But P_F, this presumes that increases or decreases in revenue are attributable exclusively to changes in tax rates. There is so much more than tax rates that affect revenues such as consumer confidence, rates of investment and savings, monetary policy (i.e. interest rates), currency exchange rates, individual tastes, etc. For instance, since the financial meltdown and subsequent recession revenues to the federal treasury have decreased dramatically even though tax rates have remained the same. Your cause-effect scenario assumes ceteris paribus, which we know is never the case in the real world.

http://conservativebootcamp.com Martin Hale

Allow me to put forth the notion that there are multiple “solutions” to the equation which the Laffer Curve contemplates. That is to say that the “sweet spot” at which tax revenues are optimised, is different during differing economies – there is no absolute taxation rate which will optimise government revenues under all possible conditions.

Individual’s decisions about how much money they earn versus how much income they defer aren’t made solely based on tax rates. Inflation, interest rates, debt service, fixed obligations, credit availability, liquidity all play a role in shaping those individual decisions, which, after all is said and done, lie at the heart of the Laffer Curve.

Looking at our economy in overly simplistic terms is likely to yield rather simplistic results which might just be misleading.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

That’s why you can never say tax cuts are always good or tax increases are always good. You must look at how those tax rates affect production, how much additional revenue is gained from the tax rates, how that revenue can be spent to further enhance production via infrastructure and research, and at what rates the lost revenue will be redirected to production.

http://conservativebootcamp.com Martin Hale

Allow me to put forth the notion that there are multiple “solutions” to the equation which the Laffer Curve contemplates. That is to say that the “sweet spot” at which tax revenues are optimised, is different during differing economies – there is no absolute taxation rate which will optimise government revenues under all possible conditions.

Individual’s decisions about how much money they earn versus how much income they defer aren’t made solely based on tax rates. Inflation, interest rates, debt service, fixed obligations, credit availability, liquidity all play a role in shaping those individual decisions, which, after all is said and done, lie at the heart of the Laffer Curve.

Looking at our economy in overly simplistic terms is likely to yield rather simplistic results which might just be misleading.
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

There are other ways that have a much more immediate impact, yet still follow Laffer’s concepts. The WSJ had a column a few months back detailing the overall cost of government regulation in this country. I always knew it was a large drag on the economy, but I had never seen in quantified before. The WSJ conveniently did that for us.

The overall cost of government regulation on our economy? 14%. Yes, 14% of our entire economy, $1.3 trillion dollars per year, is spent on enforcement and compliance with government regulation at all levels. A massive burden that simply cannot be overcome with tax cuts. If you ever question why Germany, with a highly paid workforce, can still be a net exporter, and we can’t, start with our government’s (national, state, and local) hostility to business. Throw our idiotic tort law system that no other country has to cope with on top of it, and you can see why so few industries can compete globally.

Some regulation is very necessary. We all want safe food to eat. We want the FAA to make sure that planes aren’t colliding in mid-air. I personally don’t want toxic waste being dumped into our waterways. But the cost difference between necessary regulation, and onerous regulation is huge. The new banking rules are so overbearing and controlling, on an industry that was already one of the most regulated industries in the world, they will kill future growth.

Start by getting government off our industry’s backs, and it will have a much faster, and more effective, affect than corporate tax cuts. regulation is a topline cost that affects business whether they are profitable or not (and can in fact create that difference), whereas income taxes are bottom-line and can only have a positive impact if a company is profitable enough to be paying taxes. Couple deregulation with tort reform and you might even see manufacturing start to return to the U.S. Make labor unions subject to anti-trust law, and we will return to being a net exporter within our lifetimes.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

Tort reform would go a long way on a number of fronts.

I saw an interesting graphic that showed the number of people in each industry in 1000′s. I think physicians were 5000, engineers were 10,000, and lawyers were 50,000. Far and away the largest job segment for jobs requiring significant education.

http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

You are referring to the number of people “entering” each industry, and yes, the US graduates about 50K lawyers per year with nothing to do but find someone to sue in order to earn a living. It’s more lawyers than the rest of the world combined.

Unfortunately, half the political spectrum benefits from this financially and politically. They have convinced too large of a segment of America that if something bad happens they should win the equivalent of the lottery. Spill coffee on yourself? You should get millions from the company that served the coffee. Crash your car? It’s the car company’s fault you hit the gas instead of the brake, millions for you too.

Even worse are class action lawsuits. An abomination whose sole beneficiary is the legal profession, yet it destroys companies and industries wholesale. In any other form it would be called extortion. The average plaintiff gets a coupon for less than $20; the law firm gets tens of millions of dollars, and the company goes bankrupt or has to sell off assets to pay the settlement.

I want to see tort lawyers as an endangered species (as opposed to my former preference that they be lined up against a wall with blindfolds on). They are the true leaches on society, draining a nation of its wealth while offering absolutely nothing of value. Politicians can legitimately look down their noses at them.
http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

You are referring to the number of people “entering” each industry, and yes, the US graduates about 50K lawyers per year with nothing to do but find someone to sue in order to earn a living. It’s more lawyers than the rest of the world combined.

Unfortunately, half the political spectrum benefits from this financially and politically. They have convinced too large of a segment of America that if something bad happens they should win the equivalent of the lottery. Spill coffee on yourself? You should get millions from the company that served the coffee. Crash your car? It’s the car company’s fault you hit the gas instead of the brake, millions for you too.

Even worse are class action lawsuits. An abomination whose sole beneficiary is the legal profession, yet it destroys companies and industries wholesale. In any other form it would be called extortion. The average plaintiff gets a coupon for less than $20; the law firm gets tens of millions of dollars, and the company goes bankrupt or has to sell off assets to pay the settlement.

I want to see tort lawyers as an endangered species (as opposed to my former preference that they be lined up against a wall with blindfolds on). They are the true leaches on society, draining a nation of its wealth while offering absolutely nothing of value. Politicians can legitimately look down their noses at them.

http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

One last thing in regards to Laffer’s curve and what is often claimed about it. Our goal should never to be to reach the optimum level of tax revenue. Quite the opposite, our goal should be to minimize tax revenue while maximizing economic growth. Make government as small as we can and it still be able to perform its basic, necessary functions. It’s going to require a complete reset of how our politicians and bureaucrats think.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

I think until we define taxes as a percent of GDP, and likewise spending on different programs with a similar metric, we will continue to have this problem. The hard part is setting limits on programs, and defining their portion of tax revenue. People have different rankings of what is important.

http://profiles.yahoo.com/u/ELCWV5ANDUEJ5D5PB35FL2LZ6Y Bildo

Until we have a flat tax that every single worker pays into, the argument isn’t fair. When a majority of the population doesn’t pay into the system, yet receives the majority of the benefit from it, our society will never have an honest debate over what tax rates should be.

The typical argument that a flat tax is regressive is intellectually dishonest. A “progressive” tax rate doesn’t flatten the tax burden, it subsidizes the less productive at the expense of the more productive. In fact, it financially punishes the productive to the benefit of others. We should encourage success, not punish it.

http://www.facebook.com/people/Danny-Browning/1666222445 Danny Browning

It would be nice to encourage success. However, a good portion of our population is unproductive, or engaged in jobs to make a portion successful (see service and retail industry). This same portion is almost entirely consumptive with their income. Since our economy is driven by consumerism, the best driver for our economy is to lower taxes on the consumers, and raise taxes on the non-consumers.

Yeah, it’s not fair, yeah, we have to rely on success being its own reward, but in terms of how our economy works, it’s the best way to keep it going.
http://www.patriotpost.com bthewolf

Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Ronald Reagan

That’s why we’re taxing income because it moves the faster it moves(the Rich & middle class) the more it’s taxed, while the slower or non-moving aspects(the poor) get subsidies. The Rich get hit with regulations(AMT etc.).

Gunny2862

FairTax!
http://www.wordaroundthenet.com Christopher Taylor

The thing the left notices about tax increases is that they result in short-term revenue gains (the first couple quarters) before the economic damage is done. They also notice that the first couple quarters of a tax decrease result in lower revenues because the lag before increased economic activity and investment starts to show results.

What they don’t see is that tax increases result in damage to the economy and lower revenues in the long run, and the opposite for tax decreases.
D-Vega

The opposing viewpoint on this issue has nothing to do with the Laffer Curve (which is a theory anways).

It has to do with whether you believe there should be a Progressive Tax or Flat Tax(or)Vat tax.

Conservatives believe (or most do) that there shouldn’t be a Progressive Tax. That people who have more income (income, not wealth) should pay a higher percentage than those who make less. You can correct me if you think I am wrong here.

We can argue for days as to what percentage would be “okay” in terms of tax bracket, but when you are coming from a viewpoint that there shouldn’t be a progressive tax, then why are we arguing about percentages?

I would be open to going back to the brackets of the 90′s. Or even keep the brackets the way they are, but close loopholes (which amounts to a tax increase.)

But if I am arguing with a person who wants to abolish the whole system and start from scratch, then what’s the point?

http://www.wordaroundthenet.com Christopher Taylor

The point is that maybe the system is so trashed that it needs to be rebuilt. However, if the present system is a certain way, then we have to discuss the way the present system is being implemented. People can hold more than one idea in their heads at once, even conservatives.

Telescoper

While I think I get the intended scope of your article, for me the point is whether the proper function of government is to maximize revenue at all. I think we need to take a step back another step and ask that. Then determine the proper limits of government, projects costs, then lay as small a tax burden as can meet those scrutinized costs. The Laffer Curve is important, but seems to leapfrog what I see as the real bone of contention.
Daniel

I didn’t see this point yet address… I’ll try to be concise.

As the gov’t confiscates more money from free citizens, their ability to generate wealth is drastically reduced. This reduces the population’s ability to create even more wealth, which reduces the societies ability to take care of those less fortunate.
Let’s look at the other half of Mr. Hawkins’ equation:
Let’s assume all those working are making $10. The first tax rate would be 20% and the second rate would be at 30%… reasonable I think.

10 people taxed for $2, allowing them to keep $8 of their own money.
This leaves $80 for the citizenry to spend as they see fit.

8 people taxed for $3, only allows them to keep $7 of their own money.
(remember 2 people left the job market because they felt it was not worth working for the difference… think stay at home moms who now can’t pay for daycare.)

This leaves only $56 for the citizenry to spend for what they believe is important.
It also gives more of someone else’s money to Politicians to use for the public good, or to feather their own nest, give to their buddy’s, buy votes, etc.

Two things…
1. Reduce taxes to allow people to keep more of their own money makes for a citizenry who can pay for themselves as well as help those who need the help.
2. Reduce taxes to take away politician’s power to control more of your lives. Every change, changes the population’s behavior.

This isn’t that hard.
Daniel

I didn’t see this point yet address… I’ll try to be concise.

As the gov’t confiscates more money from free citizens, their ability to generate wealth is drastically reduced. This reduces the population’s ability to create even more wealth, which reduces the societies ability to take care of those less fortunate.
Let’s look at the other half of Mr. Hawkins’ equation:
Let’s assume all those working are making $10. The first tax rate would be 20% and the second rate would be at 30%… reasonable I think.

10 people taxed for $2, allowing them to keep $8 of their own money.
This leaves $80 for the citizenry to spend as they see fit.

8 people taxed for $3, only allows them to keep $7 of their own money.
(remember 2 people left the job market because they felt it was not worth working for the difference… think stay at home moms who now can’t pay for daycare.)

This leaves only $56 for the citizenry to spend for what they believe is important.
It also gives more of someone else’s money to Politicians to use for the public good, or to feather their own nest, give to their buddy’s, buy votes, etc.

Two things…
1. Reduce taxes to allow people to keep more of their own money makes for a citizenry who can pay for themselves as well as help those who need the help.
2. Reduce taxes to take away politician’s power to control more of your lives. Every change, changes the population’s behavior.

This isn’t that hard.
Hugh Dempsey

I strongly agree with PF comment on the Laffer curve. The question is, “Are we on the left half or the right half of the curve?” Our recent tax cuts and increases indicate that we are on the right half of the curve, and that we should reduce the tax rate, thereby increasing revenue.

During his presidential campaign, Bob Schieffer asked Barrack Obama if he would raise taxes and was told “Yes”. Schieffer then continued, saying that it had been shown that raising taxes reduced government revenue [in terms of this thread, “we’re on the right half of the Laffer Curve”. Obama replied that that didn’t matter, it would be more fair. “Fair” sounds good, but when you study the statement, it is saying that let’s tax the rich more, even though it benefits the government (and those receiving entitlements) less, which will necessitate even more government effort by borrowing money or inflating the money to achieve the needed revenue.

Scary!

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