Liberals Vs. The Laffer Curve

Like a lot of liberals, economist Charles Wheelan simply cannot wrap his mind around the concept of the Laffer Curve.

In his latest column, Charles Wheeler explains why cutting taxes absolutely, positively, cannot lead to more revenue flowing into the treasury as a result of the economy being stimulated:

“Economist Arthur Laffer made a very interesting supposition: If tax rates are high enough, then cutting taxes might actually generate more revenue for the government, or at least pay for themselves. (In one of life’s great coincidences, he first sketched a graph of this idea on Dick Cheney’s cocktail napkin.) If the government cuts taxes, then Uncle Sam gets a smaller cut of all economic activity — but reducing taxes also generates new economic activity. Laffer reasoned that, under some circumstances, a tax cut would stimulate so much new economic activity that the government would end up with more in its coffers — by taking a smaller slice of a much larger pie.

…Think about a simple numerical example: Assume you’ve got a $10 trillion economy and an average tax rate of 30 percent. So the government takes $3 trillion.

Let’s cut the average tax rate to 25 percent and, for the sake of example, assume that it generates $1 trillion in new economic growth (a Herculean assumption, by the way). So now, what does Uncle Sam get? One quarter of $11 trillion is only $2.75 trillion. The economy grows, government revenues shrink.

That’s basically what happened with the large Reagan and George W. Bush tax cuts, both of which were followed by large budget deficits. Yes, spending has a lot to do with that, but the bottom line is unequivocal: In both cases, government revenue was lower than it would have been without the tax cuts.

…Neither the Reagan nor the George W. Bush tax cuts were “self-financing,” as the Laffer disciples like to argue.

…Let me be perfectly clear: I’m not arguing that tax cuts are bad. I’m simply pointing out that we can’t pretend that tax cuts won’t require reductions on the spending side to balance the budget.”

That all sounds very nice and very convincing, except for one thing: after the Bush and Reagan tax cuts, the amount of revenue coming into the treasury didn’t go down, it went up.

But, this never seems to make a dent in liberal thinking. It’s like:

Liberal: We’ve got to pay for these tax cuts!

Conservative: Why? Revenue went up after the tax cuts.

Liberal: That’s impossible!

Conservative: But, it did. Just look at the numbers.

Liberal: The tax cuts are driving up the deficit!

Conservative: How can that be when revenues went up after the tax cuts?

Liberal: There is a consensus among liberal economists that the Laffer curve won’t work at our current tax rate. You see…

Conservative: Stop there. Could we conceivably get to the point where cutting taxes doesn’t increase revenue? Sure. But, are we there yet? Apparently not, because revenues went up after the tax cuts.

Liberal: You conservatives just won’t see reason!

These guys just will not let stubborn facts get in the way of a liberal theory.

PS: Charles Wheeler wrote an entire column on the Laffer Curve and judging by this excerpt from his article, he doesn’t even have the most basic understanding of how it’s supposed to work:

“In fact, you can disregard every other argument in this column and think about one thing: If Laffer were right, lower taxes would never require any spending sacrifice. We could pay a mere one percent of our income in taxes and still fund all of our government spending — and maybe more! Do you think that’s really possible?”

What Wheeler wrote there would be embarrassing if it came from an 18 year old taking his first economics class. All you have to do is look at the Laffer Curve to see that Wheeler’s assertion about it is completely incorrect:

Note how the revenue generated drops as the tax rate passes the maximum revenue point and gets closer to zero? Laffer’s argument isn’t that tax cuts will always generate more revenue, it’s that reducing the tax burden will generate more revenue if taxes are too high. Obviously, if taxes are already too low, cutting taxes further will reduce revenue.

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