By Simon Grey, on December 11th, 2012
There are a lot of people calling for raising taxes. Tom Coburn (a Republican, it should be noted) is in favor of increasing tax revenue by raising nominal rates on the wealthy. Daniel Berger thinks it’s unfair that the rich (himself excepted, of course) don’t pay their fair share. These two stories, then, reveal the two main arguments for increase tax rates on the wealthy: increasing revenue and making society fairer. Unfortunately, these two arguments have nothing to do with reality.
It’s surprising that anyone seriously thinks that raising relatively high tax rates to an even higher level will automatically lead to higher revenues. Britain tried this last year by raising the top income rate on millionaire earners to 50% and saw a £7 billion decrease in tax revenue. California attempted to create the highest state income tax in the nation and saw its revenue fall as well. Furthermore, federal tax revenues actually increased after the Bush tax cuts. Clearly, the argument that increasing revenue is as simple as raising tax rates is demonstrably false.*
What’s interesting, though, is that a progressive tax system doesn’t actually alleviate unfairness (aka inequality). California and New York, for example, have two of the most progressive tax codes, relative to other states. They also have a surprising amount of income inequality, relative to other states. Of course, correlation is not causation. But the absence of correlation should certainly indicate the absence of causality (since the theory is that progressive tax rates reduce income inequality, the complete absence of this theory in practice should lead to the conclusion that this theory is complete and utter bunk).
Why it is the case that progressive tax rates don’t lead to greater income equality is difficult to discern. Perhaps it is the case that, in response to increased taxes, the moderately wealthy leave while the uber-wealthy stay. Perhaps there is a connection between progressive tax rates and expansive regulation, with said regulation tending to benefit the wealthy. Perhaps the progressive tax system is a mirage of nominally tax rates coupled with lots and lots of loopholes. Perhaps God hates progressive and loves nothing more than a good joke at their expense. Perhaps the elite exploit progressive naiveté for gain. Whatever the case may be, it appears that it’s time to refrain from arguing that progressive tax rates make things fair.
At any rate, it should be clear that the two main reasons for increasing nominal tax rates are nothing more than crap. Raising rates doesn’t increase revenue, nor does it make things more fair. Now, let’s stop pretending that it does.
* Of course, this doesn’t mean that decreasing tax rates necessarily leads to a revenue increase. The Laffer curve suggests that there is a revenue-optimal tax rate between 0% and 100%. Where this specific point is for federal revenue is unknown, but history suggests that revenue will not generally exceed 20% of GDP, and that optimal tax rates generally tend to be below 50%. My personal opinion is that, assuming a highly simplified tax code (one or two collection points and few to zero loopholes), the optimal tax rate will be in the low to mid twenty percent range.
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By Simon Grey, on April 5th, 2012
This is what annoys me about the Laffer curve: it’s perfectly mathematically and logically sound, but once that’s granted, everyone assumes the precise optimum is wherever agrees with their ideology. The extreme value theorem says nothing about WHERE the extreme value occurs. Republicans seem to assume it must occur somewhere around 0.0000001% tax rate (I exaggerate, but only a little). It’s just as reasonable (read: not reasonable at all) to conclude, from the fundamental Laffer assumptions, that the nominal rate should be INCREASED, rather than decreased. And I’m pretty sure you know this, so I’m not sure why you wrote what you wrote.
There are probably a few things I should clarify regarding my beliefs in the Laffer curve. In the first place, it seems obvious that no government will collect any taxes if the rate is 0% or 100%. The reasons why are obvious, so I won’t elaborate further.
In the second place, the revenue-optimal tax rate (i.e. the tax rate that generates the most money for the government) will be between 0% and 100%. I don’t think we can ever know what precise rate will generate the absolute largest amount of revenue, but we can be generally sure.
In the third place, I believe that a revenue-optimal tax plan will be simple and feature relatively low rates. Note that I’m focusing on net revenue (i.e. revenue minus collection costs). The most efficient tax system will impose minimal costs, and is likely to be either a flat tax or a single-stage consumption tax, with minimal or zero loopholes. The more complex a tax system, the easier avoidance becomes, and the more costly collection becomes.
As a side note, I would like to point out that there has only ever been one year in which the federal government managed to collect more than 20% of GDP in taxes. There has never been a single year in which the federal government collected more than 25% of GDP in taxes. Keep in mind that this 20% wall has existed across extremely high and relatively low tax rates, and across relatively simple and complex tax systems. For whatever reason, the government is pretty much unable to claim more than 20% of GDP in taxes, which is why I believe that a relatively low tax rate will be the most revenue-optimal.
Finally, note that my optimal tax system would be either a consumption tax set at 20% with no loopholes or a flat tax of 25%. I would also accept either a slightly progressive income tax (three brackets, 15%, 20%, and 25% tax rates) or a flat income tax of 35% with a few deductions (mostly for oneself, one’s spouse, and one’s children). I do not think that a revenue-optimal tax rate will be lower than 20%, nor do I think that multiple taxes are revenue-optimal.
In regards to the current system, I do actually agree that taxes should be raised, but only in one particular manner: I believe that the lower income tax brackets should have their loopholes closed and their effective rates set to at least 15%. This should effectively increase revenue.
I do not see much point in raising income taxes on the wealthy, since they will either leave or find a way to shelter their income. I don’t see any point in raising corporate taxes, since they are already high, and will carry the risk of offshoring companies and their correlating capital. In fact, I don’t really see much point in raising any of the taxes that are currently popular with the increase-taxes crowd (taxes on the wealthy, on corporations, on capital gains, etc.) because I don’t think they will increase tax revenue or improve the US’s future economic prospects. Essentially, raising taxes would be a lose-lose scenario.
In sum, most of the current tax rates would have to be lowered for revenue optimality, and the one tax raise that would increase revenues is sure to be politically unpopular. The better solution, at this point, is to cut spending by at least 50%, and to reduce tax rates as much as possible without eliminating revenue.
By Simon Grey, on November 1st, 2011
There’s a lot to comment on here: I think most people like the idea of a simpler tax code. No argument there. But I’ve never met a person who would volunteer to pay higher taxes in exchange for simplicity.
I don’t know if most would actually pay higher taxes. Sure, direct taxes might increase for some, but a flat tax would really cut down on indirect taxes. If everyone paid a flat 15% income tax, I don’t think most people would see their tax payments rise because everyone already pays a base level 9% income tax (in the form of Social Security and Medicare payroll taxes), not to mention plenty of indirect taxes. So, while nominal net income might decrease, the purchasing power of that income would increase, assuming the money supply would remain stable (note: inflation is considered, for purposes of this post, an indirect tax).
The flat tax idea is a brilliant bit of psychological class warfare. At least I hope that’s what it is. I’d hate to think the people in the highest tax brackets, i.e. my peeps, are as dumb as the people they hope to screw with promises of unicorns and flat taxes.
The flat tax seems brilliant, but most of the supporters of either a flat tax or FairTax are decidedly upper-middle class, and they know that they will be better off. The lower-class people I know don’t seem at all sold on the idea of increased rates, so maybe the flat tax isn’t as brilliant as is supposed.
The flat tax diversion is a deliciously cynical way to maintain the status quo while appearing to be in favor of change. The diversion works because the middle class has been duped by the media into thinking high income people pay a lower tax rate than the general public, so maybe a flat tax will set things right. That’s the power of anecdotes. If you hear a few stories about Warren Buffett paying a lower tax rate than his secretary, you assume your dentist is beating the system too. He probably isn’t.
I don’t personally know of any middle class people who think that high income people pay lower rates. I’ll chalk Adams’ analysis up to self-selection bias. Also, Chuck proved that Buffet wasn’t paying a lower rate than his secretary. Another brilliant aspect of the flat tax argument is that it’s simple to explain, and our brains are wired to perceive simple solutions as better than complicated ones. In reality, the simplest solution is usually the one that comes from someone who is either trying to screw you or who isn’t capable of understanding the full situation.
Actually, the simplest solutions are the best. However, that doesn’t mean that everyone will benefit from changing to a simpler solution. For example, in the case of a Flat Tax, lots of lawyers and lobbyists would be out work. And possibly several bureaucrats.
Furthermore, I don’t see how it’s “screwing over” people to make them pay for the benefits they receive from the government.
The flat tax diversion is weasel-clever because it shines a light on the absurd “fairness” argument coming from the folks who want to raise taxes on the rich. Fairness is an illusion our parents taught us as kids to make us stop fighting with our siblings over the appropriate division of candy. Fairness isn’t an objective quality of the real world. The reality is that the rich willingly pay higher taxes for the same reason that the British monarchy willingly converted from a dictator model to a symbolic role: If you want to avoid being beheaded, sometimes you need to be flexible.
If I could ban one word from the common vernacular, it would be “fairness.” It doesn’t exist, and never has. Plus, no two people and ever agree on what it means, at least in terms of practical application. Justice is a much better concept, and more objective in application, though not perfectly so.
Personally, I’m quite comfortable paying taxes at the highest rate. It’s like paying protection money to the Mafia, and I mean that in the best possible way. High taxes reduce the odds that jealous mobs will kill me for succeeding in my chosen field. Oh, and my taxes are also helping fund national defense, education, social program, and other good stuff. That’s a win-win. But please don’t insult me with arguments of fairness. Save the fairy tales for your kids.
I’d rather get rid of the mafia, personally. I suppose that buying protection is the next-best solution. However, never underestimate mankind’s propensity for killing the goose that lays the golden eggs.
I know some of you will leave comments about your own fairy tales of Laffer Curve economics, in which lower tax rates stimulate the economy and fill the treasury with free money. And then someone will point out that economic growth in the Unites States has often coincided with higher tax rates. Can we agree that the Laffer Curve has been debunked everywhere but on Fox News?
While I’m not one who has studied the Laffer curve with any degree of depth, I always thought the it existed to show a) that tax revenue is $0 and rates of 0% and 100% and that b) the rate optimal for maximizing revenue was somewhere between 0% and 100%. That’s all I use it for.
And I’m not sure how federal tax revenue equates to economic growth, except by definition per the widely used Samuelsonian macroeconomic metrics like GDP. Also, lower tax rates don’t stimulate the economy per se; they simply don’t disincentivize certain market behaviors.
By Rok Spruk, on July 11th, 2011
The economic crisis of 2008/2009 had confronted the mainstream economic theory with an unpalatable task of revisiting the notions and perils of the ideas which dominated the course of economic theory in the last few decades. In 2003, delivering a speech to the American Economic Association, Robert Lucas famously noted that the central problem of depression prevention had been solved by mainstream macroeconomic theory which was built by combining the rational expectation hypothesis with New Keynesian macroeconomics. Although one should not obscure the achievements of new classical macroeconomics and new Keynesian macroeconomics, the criticism of contemporary macroeconomic theory is not uniform. It stems from the unrecognized role of systemic shocks in the financial sector and the spillovers from Wall Street to the Main Street. In contemplating the the linkages of over-leveraging and biased financial deregulation, it should not come as a surprise that early warnings of the financial crisis, mainly leveraged borrowing in the U.S subprime mortgage market, were earmarked in the mainstream economic theory.
In fact, in 1970, George Akerlof’s influential paper on the issue of adverse selection in the market for lemons, was a landmark achievement in the economic theory since it demonstrated the fallacies of perfectly competitive market mechanism when the information on quality of various commodities is distributed unevenly. In addition, a series of papers in 1970s by Joseph Stiglitz on screening theory and asymmetric information, has dealt exactly with the central origins of the 2008/2009 financial crisis. Subprime loans and highly-complex derivative schemes which enabled the exponential growth of overleveraging of the banking sector were most likely to be used by the least sophisticated and accordingly the most risky borrowers. The only difference is that in normal circumstance, banks would recognize adverse selection by rationing credit to risky borrowers but the continuous obsession with home-ownership and the reluctance of the Federal Reserve to “remove the bowl of punch when the party started” – to use the analogy of Preston Martin, former Vice President of the FED – added to the turbulence of overleverage that turned into the most disastrous financial meltdown after the Great Depression.
The fact is that contemporary macroeconomics had little to offer to predict the subsequent financial meltdown although Robert Shiller of Yale University has repeatedly warned against unstable stock market fundamentals, particular notorious price-earnings ratios after the dot-com bubble came to burst. However, the central element of the critic of mainstream economic theory should revisit the notorious paradigm of supply-side economics whose intellectual melange of fervent belief in tax cuts and a dangerous preoccupation with deregulation as the cure of the malaise which led to stagflation in early 1970s, have proved how dangerous the conclusions could become.
First, the rise of the supply-side economics in the political economy began in early 1980s. But the intellectual influence of the supply-side economics should not be confined to the theoretical paradigm itself. The field of the political economy of taxation manifested itself as the intellectual triumph of supply-side economics. The original idea of the Laffer curve, the relationship between tax rate and tax revenues, was not disputable after all. In fact, if tax rates reached predatory levels, decreases in total tax burden would yield considerable gains, not only in total tax revenue but also in terms of higher level of productivity. However, when average and marginal tax rates were at moderate levels, it would be foolish to believe immense revenue gains would ensue by reducing the rates of taxation to bottom-levels, arguing for significant gains in terms of employment growth, productivity boost and total tax revenues. Even though cross-country empirical evidence does suggest an increase in tax revenues amid the decline in average tax rate, the pattern is confined to the episodes where average and marginal tax rates were very high, exceeding 70 percent threshold. Once tax rates were reduced, there is no evidence of higher revenue gains.
The major peril of supply-side economics is the claim that tax reduction would boost the aggregate supply and stimulate productivity growth. On the other hand, the valuable contribution of supply-side economics is the notion that additional tax increases do not generate much higher revenue. One should not feel reluctant to recall the 1964 Kennedy-Johnson tax cut which decreased marginal tax rates substantially. Although supply-side economics has repeatedly blasted the intelectual heritage of Keynesian macroeconomics, the 1964 tax reform was itself a Keynesian prescription for the U.S recession in the years prior to Vietnam war. Back in early 1960s, Paul Samuelson wrote that “Congress could legislate, for example, a cut of three or four percentage points in the tax applicable to every income class, to take effect immediately under our withholding system in March or April, and to continue to the end of the year.” (link). Therefore, Samuelson’s mindful observation that additional spending would not automatically counteract the recession unless complemented by tax reductions, probably would not come due in the framework of supply-side economics. Moreover, what distinguished the supply-side economics from the framework of sound economic analysis taught in microeconomic and macroeconomic textbooks, was adverse propensity to enforce tax cuts for the rich while leaving the middle class and low-income households no pie from tax reductions. The striking features of income inequality in the U.S. suggest that from 1970s, median household income stagnated (link) while top 5 percent of households have received disproportionately windfall gains from tax reductions up the point where more than 85 percent of total income was earned by top 5 percent of households (link). Moreover, one should distinguish between patterns of good and bad inequality as Gary Becker recently suggested (link). It is envitable that income inequality has some great value in the society when market outcomes lead to better overall health, less stress and higher standard of living and the evidence is yet inconclusive whether the narrowing of income inequality would return health improvements for the poor – since poor health outcomes of low-income households are mainly attributed to deteriorating dietary habits and dangerous lifestyle.
While bad inequality, especially rents from non-market outcomes, have precipitated the decline in good inequality in the last two decades, there is an overwhelming evidence that stagnation of median household income (despite moderate productivity improvements) caused a somehow lower quality of the U.S. labor force and a widening gap in educational achievements of American children. The drawbacks of widening inequality were largely ignored by supply-side economics or justified on the hands-off approach to the issues of the poor. It should not be forgotten that negative income tax, which favored low-income families, was suggested by Milton Friedman, whom supply-siders have taken for the intellectual father without a detailed knowledge of his precious contribution to economics.
Second, supply-side economics has been perhaps known for favoring the deregulation as the cure for social ills and staggering income growth. Despite substantial euphoria caused by the pioneers of deregulation of banking and financial sector, the regulatory framework eventually jeopardized sound regulation that could prevent hazardous outcomes as shown in the seminal work of George Akerlof and Joseph Stiglitz. In fact, deregulation of the banking sector, hailed by supply-side economics as the triumph of its own ideology, laid the basis for rigorous financial innovation by special investment vehicles (SIV) and shadow banking institutions.
In fact, deregulation of the banking and financial sector was not the central issue per se. The main systemic flaw was rather the adoption of unsound regulation that did not predict the perils of over-leveraged banking sector and especially the system-wide spillovers during the financial crisis. Moreover, the loosening of the monetary policy and the series of fiscal stimulus have notified two main drawbacks in the macroeconomic outlook. The first is the invariant postponement of taxation fuelled by the mountain of government debt. And the second is the hidden explosive potential for inflation following the flood of money supply in the balance sheet of the banking sector.
Generally speaking, the intellectual adventure of supply-side economics has overlooked the possibility of pitfalls brought up by rigorous tax cuts to the wealthy and deregulation of banking and financial sector. It would not come due to label mainstream economic theory as a cataclysm which the financial crisis proved accordingly. It would be either insensible to tarnish the useful contribution of supply-side economics. In fact, tax cuts do generate systemic incentives, particularly in the response of the labor supply to tax reductions. However, the elusive quest for higher growth and job creation after reducing tax rates for the wealthy, is an important lesson we should learned from the unfortunate turn of supply-side economics in favoring deregulation without acknowledging the possibility of systemic banking collapse and the consequences carried over by society at large.
By Rok Spruk, on November 22nd, 2010
In 2001 and 2003, former U.S president George W. Bush signed Economic Growth and Tax Relief Act (EGTRAA) and Jobs and Growth Tax Relief Reconciliation Act (JGTRAA). EGTRAA reduced personal income tax rates, increased child tax credit, decreased estate tax and introduced a various range of tax-favored retirement savings plans. In 2003 when EGTRAA was enacted, the Congress cut the top capital gains tax rate from 20 percent to 15 percent while the individual dividend tax rate was reduced from 35 percent to 15 percent.
Bush tax cuts are set to expire in 2011. Hence, a bold increase in marginal tax rates is expected. David Leonhardt recently asked whether the Bush tax cuts were good for economic growth amid the fact that under Bush administration, the U.S economic growth was the lowest since the World War II. Eight years of Bush administration were known for the largest expansion of federal government spending compared to the six preceding presidents. In eight years, President Bush increased discretionary federal outlays by 104 percent compared to 11 percent increase under President Clinton.
Under Bush tax cuts, the reduction in personal income tax rates was imposed across all income brackets. Tax Policy Center estimated that extending Bush tax cuts in 2011 would increase the after-tax income across all income quintiles but it differed substantially. For instance, the increase in after-tax income in the lowest quintile would represent 12.19 percent of the increase in after-tax income of the highest quintile. The average federal tax rate would decrease by 2.5 percentage points. The reduction in average federal tax rate would be the most significant for top 1 percent and 0.1 percent cash income percentile, -3.8 percentage points and -4.4 percentage points respectively. Assuming the extension of the Bush tax cuts, the average federal tax rate, which includes individual income tax rate, corporate income tax rate, social security, Medicare and estate tax, would be substantially lower compared to Obama Administration’s FY2011 Budget Proposal. The increase in the average federal tax rate would be roughly proportional across the cash income distribution. The federal tax rate would increase by 1 percentage point for the lowest quintile and 3.1 percentage point for the top quintile. The federal tax rate would for earners in top 1 percent of cash income distribution would increase by 4.2 percentage point. The chart shows the distribution of average effective tax rates and current law and current policy of Bush tax cuts not assumed to expire in 2011. The current proposal would increase the effective tax rate across all income quintiles. The highest increase (3.3 percentage points) would hit the earners in top 20 percent of income distribution.
Effective Tax Rates: A Comparison
Source: Urban-Brookings Tax Policy Center Microsimulation Model
The expiration of the Bush tax cuts would substantially increase the effective tax burden across the cash income distribution. Recently, Center on Budget and Policy Priorities estimated that letting the Bush tax cuts expire would create a net gain of $22 billion in economic activity. Hence, allowing high-income tax cuts expire would, on impact, result in a net gain of $42 billion in economic activity which is about five times the economic stimulus from extending high-income tax cuts.
The years of the Bush administration were earmarked by the escalation of federal government spending both in absolute and relative terms. The growth in federal government spending was driven mostly by discretionary defense spending while non-discretionary federal outlays increased as well. Since 2001, the federal government spending in the Bush administration increased by 28.8 percent with a 35.7 percent growth in non-defense discretionary spending. The growth of the federal government under Bush administration was the highest since the presidency of Lyndon B. Johnson and Richard Nixon. The Independent Institute compared the growth of federal government spending from Lyndon B. Johnson onwards.
Letting the Bush tax cuts expire would probably not impose a negative effect on small businesses since less than 2 percent of tax returns in the top 2 income brackets are filed by taxpayers reporting small business. William Gale contends that the Bush tax cuts significantly raised the government debt. The economic consequences of the 9/11 and wars in Iraq and Afghanistan were detrimental. William Nordhaus estimated that the total cost of war in Iraq between 2003 and 2012 could exceed $1 trillion in 2002 dollars considering unfavorable and protracted cost scenario. To a large extent, the wars in Iraq and Afghanistan have added substantially to the increase in government spending. However, even after excluding defense outlays from the spending structure, the increase in non-defense discretionary spending exceeded the growth of the federal government spending by 5.6 percentage points. Between 2000 and 2008, the number of federal subsidy programs increased from 1,425 to 1,804 – a 26 percent increase compared to 21 percent increase during Clinton years.
The Bush tax cuts failed to result in a Laffer curve effect mostly because they were implemented alongside a bold and significant increase in federal government spending. Had a substantial reduction in government spending been enforced, the tax cuts would not place should an enormous weight in the growth of federal debt. Higher federal debt would inevitably ponder the structural fiscal imbalance. Since debt interest payments would increase, a combination of tax cuts and spending growth would stimulate investment demand, creating an upward pressure on interest rates, especially during the economic recovery when the difference between potential output and real output is expected to diminish.
Critics of the Bush tax cuts often claim that cuts amassed a growing fiscal deficit. However, in 2007, the fiscal deficit stood at 1.2 percent of the U.S GDP while in 2009, the deficit increased to 9.9 percent of the GDP as a result of $787 billion fiscal stimulus from Obama Administration. Since tax cuts were enacted in 2001 and 2003 respectively, something else is to blame for the deficit.
U.S Federal Debt: Long-Term Forecast
Source: Office of Budget and Management; author’s own estimate
The main premise of the economic policy of the Bush administration had been a significant increase in federal government spending. Spending policies were mostly aimed at covering the growing cost of the Iraqi war. In addition, domestic non-defense outlays on social security and domestic priorities grew significantly, creating an upward pressue on federal debt. The growth of entitlments such as Social Security and Medicare poses a serious long-term risk regarding the sustainability of federal government spending. In the upper chart built a simple forecasting framework to estimate the long-run level of U.S federal government debt as a percent of the GDP. Surprisingly, time trend accounts for 85 percent of the variability of the share of federal debt in the GDP. A more robust framework would include the lagged dependent variable and several regressors in the set of explanatory variables to increase the share of variance explained by independent effects of regressors. The results indicate that by 2020, the federal debt could easily reach the 90 percent thresold.
The growing stock of entitlements such as Social Security and Medicare are central to understanding the looming pressure on federal budget to tackle the challenges of ageing population and demand for health care. The tax cuts imposed by the Bush administration reduced average federal tax rates across quintiles in cash income distribution. However, tax cuts were no supplemented by the reduction in federal government spending. Consequently, the growth of federal government spending increased future interest debt payments and failed to take into account the long-term pressure of Medicare and Social Security on federal budget set. Extending the Bush tax cuts would be superior to letting them expire. But lowering tax burden should nevertheless be comprehended by the reduction in federal government spending.
By Thomas Knapp, on October 22nd, 2009
The “Laffer Curve” first came to public prominence back in the heyday of Reaganomics and “supply side” ideas. The concept is simple and, once you think about it, obvio
us (I say “once you think about it,” because even though it’s been around since the 14th century, it took Arthur Laffer to get people thinking about it).
What the Laffer Curve tells us is that the “optimal” tax rate t — the rate which will produce the most revenue for government — is less than 100%. There’s a tipping point in tax rates beyond which people work less and produce less, creating less wealth to tax, than they otherwise would have. This is because they’re not keeping as much of what they earn, making the earning of it less attractive. If the tax rate is x%, you get out of bed and go to work even if you have the flu; if the tax rate is x%+1, you take a sick day if you wake up with the sniffles, or maybe you pad your week of paid vacation out with a couple of unpaid days off on either side. The Laffer Curve treats that in the aggregate — everyone’s “tipping point” can be different, but there’s still an overall tipping point at which increasing taxes would decrease, rather than increase, government revenues and vice versa.
One problem with the Laffer Curve as illustrated: 100% taxation would probably not produce zero government revenue. Even in the most complete state socialist system — a system where every dime you earn goes to the government, which doles part of it back out to you in “benefits” — some people would continue working right up to the minute the system was overthrown.
Anyway, here’s the thing: Reaganites and other “conservative” politicians love the Laffer Curve because it allows them to promise tax cuts and maintenance of the welfare state. That’s been the mantra since the 1980s: “We can cut taxes and still grow the federal budget — our revenues will go up, not down, because we’re on the right side of the Laffer Curve!” This is a great way to sell tax cuts (and the politicians who promise them) to those who are directly employed by government or who depend on a government check, a government contract, etc. for their livings.
BUT!
Reducing the size, scope and power of government is a worthwhile end aside from the issue of how heavy the tax burden is. Increased government revenues are a bad thing, because most of what government gets up to is mischief of one sort or another.
More government revenue means more drug warriors prowling the streets and locking people up for possession of unapproved plants.
More government revenue means more education bureaucrats sending more money to more “public” schools to teach our sons and daughters how to not read, not do math, not learn science and not know history.
More government revenue means more “national greatness” idiots sending more troops to far-off places to prove how big America’s penis is.
More government revenue means more money coming out of your pockets and flowing into the bank accounts of the various privileged elites who lobby Congress for subsidies, protections and other favors.
More government revenue means more government.
So, when someone tells me that a tax cut will enhance government revenues, my reaction is “the tax cut you’re proposing isn’t big enough.” There may even be a point at which a tax cut which keeps the rate to the right of the Laffer Curve’s t is a bad idea because the evils the enhanced government revenue will pay for outweigh the evil of the marginally higher taxes themselves. I don’t see that point as calculable, so it’s not worth belaboring, but it seems theoretically likely.
Setting aside the possibility of abolishing taxation entirely (a worthy goal!), the least we can do is work to get taxation over to the left side of the Laffer Curve — to the point where politicians who want to grow government have to try to sell the public on a tax increase to pay for that growth, instead of being able to have it both ways.
How do we know that we’re to the left of t? Once again, there’s that calculation problem — this isn’t a zero sum game, since tax cuts feed money back into the economy and strengthen it. The best we can do (as long as we insist on keeping government around, anyway) is cut taxes and then cut taxes, and then cut taxes some more, while keeping an eye on government revenues to see when they start going down (and then keeping an eye on them after that, too — t will probably move downward as lower taxes improve the economy, making more people more prosperous and thus more able to say “screw it, I’m taking the day off — government would just take x% of what I earned anyway”).
My income tax cut proposal (in lieu of repeal of the tax until we can get that) is for a regular, annual increases to the personal exemption. Tying that into a project to get us onto the left side of the Laffer Curve would entail reviewing the results of the increased exemption each year. Did government revenues go up, or did they go down? If they went up, then the exemption needs to be increased even more. If they went down, hey, we’re on the left side of t! We’re actually cutting government, not just taxes! At that point, some will argue that it’s time to stop cutting taxes. But (I say, with a cryptic politician’s smile) let’s cross that bridge when we come to it.
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