Cliff diving

On New Year’s Day, the Bush-era tax cuts will expire and mandatory cuts in government spending will go into effect, a double-whammy to the economy that is being called “the fiscal cliff.”  Republicans do not want the tax increases and Democrats do not want the spending cuts.  So Congress is negotiating with the President about compromises, reforms, and trade-offs, all in an effort to avoid what nobody wants, the country going off the cliff.

But might falling off the fiscal cliff, in the long run, be the best solution, despite the horrible short-term consequences?  Under that scenario, taxes would rise dramatically (giving the government more revenue, the Democrats’ dream) but also government expenditures would be cut dramatically (resulting in a smaller government, the Republicans’ dream).  The combination of higher revenues plus lower expenditures would solve the deficit.

Isn’t this a true bi-partisan solution?  Don’t we as a nation need to take our bitter medicine before we can get better?  Other countries, such as Great Britain, have gone through austerity programs as a necessary step to fiscal health.  Could we Americans handle austerity?

(I am not necessarily advocating this, simply proposing for now a mental experiment.  Some of you suggested this in yesterday’s discussion of “Breaking Pledges,” but it’s worth discussing in its own right.)

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • Patrick kyle

    Does anyone else detect a hint of irony in calling measures needed to avert a far worse disaster a ‘fiscal cliff’? On the other hand, what does it say about the severity of our situation when the very things we need to do to solve the problem will cause a short term implosion of the economy?

  • Patrick kyle

    Does anyone else detect a hint of irony in calling measures needed to avert a far worse disaster a ‘fiscal cliff’? On the other hand, what does it say about the severity of our situation when the very things we need to do to solve the problem will cause a short term implosion of the economy?

  • http://www.brandywinebooks.net Lars Walker

    Republicans are toast either way. If they compromise, it’s a great victory for the Great Obama, and the continuing recession that will follow will still be blamed on them. If they take us over the cliff, they’ll be blamed for raising everyone’s taxes in order to protect their fat cat millionaire cronies.

  • http://www.brandywinebooks.net Lars Walker

    Republicans are toast either way. If they compromise, it’s a great victory for the Great Obama, and the continuing recession that will follow will still be blamed on them. If they take us over the cliff, they’ll be blamed for raising everyone’s taxes in order to protect their fat cat millionaire cronies.

  • Hanni

    Lots of people think it might be ok, certainly temporarily, until they can figure out the tax code reform thing. Better than rushing into a bad deal with little planning, since waiting so long. After all, it’s hard to find time with constnt campaigning, money raising (already happening for next election).

  • Hanni

    Lots of people think it might be ok, certainly temporarily, until they can figure out the tax code reform thing. Better than rushing into a bad deal with little planning, since waiting so long. After all, it’s hard to find time with constnt campaigning, money raising (already happening for next election).

  • MarkB

    “Under that scenario, taxes would rise dramatically (giving the government more revenue, the Democrats’ dream) but also government expenditures would be cut dramatically (resulting in a smaller government, the Republicans’ dream).”

    I am not too sure of this scenario. First raising tax rates does not equate to more revenue for the government. If raising taxes hits the economy, which is what Laffer says, then revenues may well be less.

    Secondly, I doubt very much these cuts will do anything to make government smaller. Those in government seem to think small decreases in the rate of growth of government spending equals cuts. Which is patently not true. And they always find ways around any of these laws, by for example calling everything an emergency and bypassing the more stringent aspects of these constraints.

  • MarkB

    “Under that scenario, taxes would rise dramatically (giving the government more revenue, the Democrats’ dream) but also government expenditures would be cut dramatically (resulting in a smaller government, the Republicans’ dream).”

    I am not too sure of this scenario. First raising tax rates does not equate to more revenue for the government. If raising taxes hits the economy, which is what Laffer says, then revenues may well be less.

    Secondly, I doubt very much these cuts will do anything to make government smaller. Those in government seem to think small decreases in the rate of growth of government spending equals cuts. Which is patently not true. And they always find ways around any of these laws, by for example calling everything an emergency and bypassing the more stringent aspects of these constraints.

  • WebMonk

    The Laffer curve is highly theoretical. In practice, raising taxes almost never has enough effect on the economy to overcome the increase in revenues.

    The raised taxes would need to pound the economy into a Great Depression to actually start reducing federal revenues. Federal tax revenues are expected to increase by almost 20% due to the “fiscal cliff”.

    $2.45 trillion was the 2012 tax revenue for the Federal govt – about 15.7% of GDP. The 19.63% increase in tax revenues will crank that up to $2.93 trillion in 2013 Federal revenues, and that’s with a projected recession of .5% caused by the increased taxes and the cuts in expenditures.

    To get to the point on the Laffer curve that the tax increases would start being counter-productive, they would need to send the economy into a MASSIVE depression where the economy shrinks by 10% or more – that’s the Great Depression at it’s very worst.

    Wildly outside the projections of anyone but the nuttiest of economic doom-sayers.

  • WebMonk

    The Laffer curve is highly theoretical. In practice, raising taxes almost never has enough effect on the economy to overcome the increase in revenues.

    The raised taxes would need to pound the economy into a Great Depression to actually start reducing federal revenues. Federal tax revenues are expected to increase by almost 20% due to the “fiscal cliff”.

    $2.45 trillion was the 2012 tax revenue for the Federal govt – about 15.7% of GDP. The 19.63% increase in tax revenues will crank that up to $2.93 trillion in 2013 Federal revenues, and that’s with a projected recession of .5% caused by the increased taxes and the cuts in expenditures.

    To get to the point on the Laffer curve that the tax increases would start being counter-productive, they would need to send the economy into a MASSIVE depression where the economy shrinks by 10% or more – that’s the Great Depression at it’s very worst.

    Wildly outside the projections of anyone but the nuttiest of economic doom-sayers.

  • Lou G.

    The cuts would make the government smaller, to be sure. In fact, one of the sure things would be a loss of about federal 110,000 jobs put into effect immediately — ie, “Sequestration”. 110,000 layoffs=immediate impact. Add to that the indirect impacts to the economy by all of those people no longer working. The cuts also call for more workforce reductions down the line. Also, the 17% cut in spending would come to defense programs and cost millions to contractors who would be forced to lay off their workers by about mid-year, if not sooner by anticipation.
    The cuts are real and they will do real harm to real people –more than simply letting the tax cuts roll back.

    If I could have my way, I’d say, let the tax cuts roll back. Seriously. They were never intended to last forever and we can’t afford them anymore.
    But the 17% across the board cuts will not be good for any of us. For one thing, the rules that will be used for applying the cuts will not be in the best interests of the administration, the respective agencies, or the people of this country. Any personnel reductions will be based primarily on tenure and not performance. Typically, cuts are announced well in advance and agencies can start working their numbers down by natural attrition and realignment according to mission goals and employee performance and contribution.
    This sequestration hatchet job is the absolute worst way possible to reform government or downsize agencies.
    Much more could be said, I’ll just leave it at that.
    I’ll leave it there.

  • Lou G.

    The cuts would make the government smaller, to be sure. In fact, one of the sure things would be a loss of about federal 110,000 jobs put into effect immediately — ie, “Sequestration”. 110,000 layoffs=immediate impact. Add to that the indirect impacts to the economy by all of those people no longer working. The cuts also call for more workforce reductions down the line. Also, the 17% cut in spending would come to defense programs and cost millions to contractors who would be forced to lay off their workers by about mid-year, if not sooner by anticipation.
    The cuts are real and they will do real harm to real people –more than simply letting the tax cuts roll back.

    If I could have my way, I’d say, let the tax cuts roll back. Seriously. They were never intended to last forever and we can’t afford them anymore.
    But the 17% across the board cuts will not be good for any of us. For one thing, the rules that will be used for applying the cuts will not be in the best interests of the administration, the respective agencies, or the people of this country. Any personnel reductions will be based primarily on tenure and not performance. Typically, cuts are announced well in advance and agencies can start working their numbers down by natural attrition and realignment according to mission goals and employee performance and contribution.
    This sequestration hatchet job is the absolute worst way possible to reform government or downsize agencies.
    Much more could be said, I’ll just leave it at that.
    I’ll leave it there.

  • WebMonk

    Most of the projections for after the “fiscal cliff” goes into effect are that we’ll have a year of recession, about 0.5% GDP decrease, and then after that a much improved economy.

    I work in a sector where my job could very well be lost if the sequestration goes through, but I still hope the “fiscal cliff” goes through.

    There are much better ways that I think the fiscal cliff could be handled, but given the options that the White House and Congress are putting forward, I would rather go cliff diving.

  • WebMonk

    Most of the projections for after the “fiscal cliff” goes into effect are that we’ll have a year of recession, about 0.5% GDP decrease, and then after that a much improved economy.

    I work in a sector where my job could very well be lost if the sequestration goes through, but I still hope the “fiscal cliff” goes through.

    There are much better ways that I think the fiscal cliff could be handled, but given the options that the White House and Congress are putting forward, I would rather go cliff diving.

  • Lou G.

    FYI – the actual projected job losses for 2013 due to sequestration is 2.14 million. The quote I had of 110,000 is just for Dept. of Army Civilians. Unemployment will go up automatically by 1.5% or more.

  • Lou G.

    FYI – the actual projected job losses for 2013 due to sequestration is 2.14 million. The quote I had of 110,000 is just for Dept. of Army Civilians. Unemployment will go up automatically by 1.5% or more.

  • Lou G.

    I work in a sector where my job could very well be lost if the sequestration goes through, and if the “fiscal cliff” goes through this country is going to be in for a world of hurt. We’ve got to have a sane way through this quagmire. I know most of the top execs have formulated numerous proposals for downsizing their agencies to meet the fiscal demands in a phased, surgically targeted approach that would eleviate the majority of the pain of the blunt instrument, while achieving the correct end state. Unfortunately, the politicians are more interested in playing childish games than actually doing business.

  • Lou G.

    I work in a sector where my job could very well be lost if the sequestration goes through, and if the “fiscal cliff” goes through this country is going to be in for a world of hurt. We’ve got to have a sane way through this quagmire. I know most of the top execs have formulated numerous proposals for downsizing their agencies to meet the fiscal demands in a phased, surgically targeted approach that would eleviate the majority of the pain of the blunt instrument, while achieving the correct end state. Unfortunately, the politicians are more interested in playing childish games than actually doing business.

  • helen

    Better than rushing into a bad deal with little planning, since waiting so long.

    It was too much to expect, of course, that they would have spent this time “planning” instead of politicking… it’s not like the problem wasn’t obvious ever since the “Bush tax cuts”…which should never have happened like, and because of, the “Bush wars”.

  • helen

    Better than rushing into a bad deal with little planning, since waiting so long.

    It was too much to expect, of course, that they would have spent this time “planning” instead of politicking… it’s not like the problem wasn’t obvious ever since the “Bush tax cuts”…which should never have happened like, and because of, the “Bush wars”.

  • SKPeterson

    Lou – Why not extend your argument: the government should hire 2.5 million more people and pay them all lots of money. We’ll just print it and hand it out.

    The problem with the tax increases is not a Laffer-type reduction in investment by the wealthy that will spillover into lower levels of real investment. It also isn’t that there will be reductions in the employment levels within the government – government expenditures should not be added to GDP anyway, they should be subtracted if anything. If your business model is based upon seizing private property assets from a subject population in order to compensate your work force and then spending money you don’t have because you have a credit system that will give you whatever you ask for (i.e. print however much you need in paper so fresh it still smells of green ink!) based upon the maybe-not-so-theoretical notion that you could seize all the private property to pay off your debts (we do, after all, owe it to ourselves ;P) except that eventually you do start to run out of other people’s money to spend isn’t really such a great piece of economic sense or moral acuity is it?

    The problem is that taxes always reduce demand and often have an impact on employment. First off, reducing family incomes will reduce consumer spending and savings, thereby reducing both near-term and long-term consumer welfare. On the flip side, there is the economic truism regarding the joint-incidence of a tax, i.e. how is the increased tax burden split between firms and consumers. To the extent that increased taxes fall on firms, they will attempt to pass on that increased cost burden to consumers through higher prices. It remains to be seen how successful firms will be in passing on the costs, but suffice it to say that some increases in prices (or reductions in goods availability, i.e. increased scarcity) will happen. Therefore, consumers will face both an increased tax burden and some mix of increases in prices; again a general decrease in household welfare. Now to the extent that firms will be asked to bear a large share of the increased tax burden because they cannot pass a larger share on to consumers, they will face a situation of reduced profits. In some cases, the reduction may be severe enough that the firm will need to liquidate. In most other cases, firms will seek to lower their costs, and will usually focus on variable cost factors and not fixed costs. For most firms, the largest component of variable costs is wages, so the logical action for firms to take is to lower the wage burden either through reductions in the labor force or through reductions in benefits, through eliminating new hires, increasing the amount of physical capital investment if possible (doesn’t sound like this is too much in play), or relocating operations to lower costs locations. In short, higher rates of private sector unemployment are likely to result.

  • SKPeterson

    Lou – Why not extend your argument: the government should hire 2.5 million more people and pay them all lots of money. We’ll just print it and hand it out.

    The problem with the tax increases is not a Laffer-type reduction in investment by the wealthy that will spillover into lower levels of real investment. It also isn’t that there will be reductions in the employment levels within the government – government expenditures should not be added to GDP anyway, they should be subtracted if anything. If your business model is based upon seizing private property assets from a subject population in order to compensate your work force and then spending money you don’t have because you have a credit system that will give you whatever you ask for (i.e. print however much you need in paper so fresh it still smells of green ink!) based upon the maybe-not-so-theoretical notion that you could seize all the private property to pay off your debts (we do, after all, owe it to ourselves ;P) except that eventually you do start to run out of other people’s money to spend isn’t really such a great piece of economic sense or moral acuity is it?

    The problem is that taxes always reduce demand and often have an impact on employment. First off, reducing family incomes will reduce consumer spending and savings, thereby reducing both near-term and long-term consumer welfare. On the flip side, there is the economic truism regarding the joint-incidence of a tax, i.e. how is the increased tax burden split between firms and consumers. To the extent that increased taxes fall on firms, they will attempt to pass on that increased cost burden to consumers through higher prices. It remains to be seen how successful firms will be in passing on the costs, but suffice it to say that some increases in prices (or reductions in goods availability, i.e. increased scarcity) will happen. Therefore, consumers will face both an increased tax burden and some mix of increases in prices; again a general decrease in household welfare. Now to the extent that firms will be asked to bear a large share of the increased tax burden because they cannot pass a larger share on to consumers, they will face a situation of reduced profits. In some cases, the reduction may be severe enough that the firm will need to liquidate. In most other cases, firms will seek to lower their costs, and will usually focus on variable cost factors and not fixed costs. For most firms, the largest component of variable costs is wages, so the logical action for firms to take is to lower the wage burden either through reductions in the labor force or through reductions in benefits, through eliminating new hires, increasing the amount of physical capital investment if possible (doesn’t sound like this is too much in play), or relocating operations to lower costs locations. In short, higher rates of private sector unemployment are likely to result.

  • http://www.bikebubba.blogspot.com bike bubba

    For a picture of the fiscal cliff, one needs only look at what happened when Roosevelt drastically raised taxes in 1937. The economy plunged, and didn’t really come out until World War Two broke out.

    A similar thing happened in the early 1920s when a “millionaire tax” was imposed–curiously, none of them had any income to declare afterwards. However, when the tax was repealed, the number of million-dollar earners soared. A similar result was observed by Maryland and Oregon with their “millionaire taxes.”

    On the flip side, revenues increased after tax cuts by Kennedy, Reagan, and “W” Bush.

    What happens, in a nutshell, is that when the return on investment is artificially decreased by taxation, the level of investment decreases–it is a simple supply/demand equation.

    Plus, whatever else is true about the wealthy–whether you think they’re moral or wicked or whatever–most of them did NOT get to that point (or stay at that point) by being stupid about money. So when you make it expensive to do business in the United States, guess what happens? The money goes elsewhere–and the guy who suffers is the poor guy trying to find a job.

  • http://www.bikebubba.blogspot.com bike bubba

    For a picture of the fiscal cliff, one needs only look at what happened when Roosevelt drastically raised taxes in 1937. The economy plunged, and didn’t really come out until World War Two broke out.

    A similar thing happened in the early 1920s when a “millionaire tax” was imposed–curiously, none of them had any income to declare afterwards. However, when the tax was repealed, the number of million-dollar earners soared. A similar result was observed by Maryland and Oregon with their “millionaire taxes.”

    On the flip side, revenues increased after tax cuts by Kennedy, Reagan, and “W” Bush.

    What happens, in a nutshell, is that when the return on investment is artificially decreased by taxation, the level of investment decreases–it is a simple supply/demand equation.

    Plus, whatever else is true about the wealthy–whether you think they’re moral or wicked or whatever–most of them did NOT get to that point (or stay at that point) by being stupid about money. So when you make it expensive to do business in the United States, guess what happens? The money goes elsewhere–and the guy who suffers is the poor guy trying to find a job.

  • Lou G.

    SK if you think hiring 2.5 million more people to work for the government in anyway is an extension of my argument, you’ve not read my comments.

  • Lou G.

    SK if you think hiring 2.5 million more people to work for the government in anyway is an extension of my argument, you’ve not read my comments.

  • MarkB

    Webmonk @5

    Do you really think that taxes and income to the government are static equations?

    We will see what the income to government is for 2013 after they raise tax rates.

    I still say income to the government will no go up anywhere near the levels you predict, if we raise tax rates. The Laffer effect will have an effect along with the things that SKP and bike bubba mention.

  • MarkB

    Webmonk @5

    Do you really think that taxes and income to the government are static equations?

    We will see what the income to government is for 2013 after they raise tax rates.

    I still say income to the government will no go up anywhere near the levels you predict, if we raise tax rates. The Laffer effect will have an effect along with the things that SKP and bike bubba mention.

  • WebMonk

    MarkB, you didn’t read my comment or maybe you just skimmed it. I specifically said that taxes and income are not ‘static equations’, as you phrase it. What I said is that we are nowhere near the theoretical Laffer curve point of negative net revenue change for increasing tax rates.

    The projected 2013 tax revenue is already taking into account a decrease in economic activity. If it weren’t, then the projected increase in tax revenues would be around $120 billion higher than they are projected at the moment.

    Basic math shows that for the tax increase due to the fiscal cliff to actually decrease government tax revenues, the economy would have to go into a HUGE depression of 10+% drop in GDP.

    If that’s what you’re predicting, I think you’re pretty much alone with that prediction.

  • WebMonk

    MarkB, you didn’t read my comment or maybe you just skimmed it. I specifically said that taxes and income are not ‘static equations’, as you phrase it. What I said is that we are nowhere near the theoretical Laffer curve point of negative net revenue change for increasing tax rates.

    The projected 2013 tax revenue is already taking into account a decrease in economic activity. If it weren’t, then the projected increase in tax revenues would be around $120 billion higher than they are projected at the moment.

    Basic math shows that for the tax increase due to the fiscal cliff to actually decrease government tax revenues, the economy would have to go into a HUGE depression of 10+% drop in GDP.

    If that’s what you’re predicting, I think you’re pretty much alone with that prediction.

  • http://www.toddstadler.com/ tODD

    Can we all just admit that the “Laffer curve” is nothing but a rhetorical device employed always and only to argue that taxes should never be raised?

    Honestly, people, there’s no math involved. No one can plot the curve, much less say where we are on it. No one ever even bothers to explain what the inputs are to the function that plots it. It is merely a rhetorical device.

    Prove me wrong.

  • http://www.toddstadler.com/ tODD

    Can we all just admit that the “Laffer curve” is nothing but a rhetorical device employed always and only to argue that taxes should never be raised?

    Honestly, people, there’s no math involved. No one can plot the curve, much less say where we are on it. No one ever even bothers to explain what the inputs are to the function that plots it. It is merely a rhetorical device.

    Prove me wrong.

  • http://www.toddstadler.com/ tODD

    Anyhow, it says something about American politics that our elected leaders are scrambling to avoid a situation where our country takes in more revenue and spends less. We must avoid this peril at all costs! It is too great! Quick, let us pass hasty measures that none of us have time to read, much less consider!

  • http://www.toddstadler.com/ tODD

    Anyhow, it says something about American politics that our elected leaders are scrambling to avoid a situation where our country takes in more revenue and spends less. We must avoid this peril at all costs! It is too great! Quick, let us pass hasty measures that none of us have time to read, much less consider!

  • Steve Billingsley

    tODD @ 17
    To add to your comment – this hasn’t exactly been an unknown possibility. For the first two years of his administration, President Obama had large majorities in both houses of Congress. He could have raised the top marginal rate at any time. (FWIW, I don’t think having the top marginal rate go up to 39.6% from 35% is any sort of catastrophe). And by the same token, Republicans could have forced the issue by voting for the recommendations of the Simpson-Bowles commission in 2010. It recommended the lowering of all tax rates and removing or limiting various deductions (sounding suspiciously like Romney’s tax plan) and actually proposed to deal with Social Security (raising the retirement age slowly and employing a modified means test). Both sides have invested in this brinksmanship and surprise, surprise – both sides are much more interested in the political optics and who wins or loses than in the substance of what is actually done.

  • Steve Billingsley

    tODD @ 17
    To add to your comment – this hasn’t exactly been an unknown possibility. For the first two years of his administration, President Obama had large majorities in both houses of Congress. He could have raised the top marginal rate at any time. (FWIW, I don’t think having the top marginal rate go up to 39.6% from 35% is any sort of catastrophe). And by the same token, Republicans could have forced the issue by voting for the recommendations of the Simpson-Bowles commission in 2010. It recommended the lowering of all tax rates and removing or limiting various deductions (sounding suspiciously like Romney’s tax plan) and actually proposed to deal with Social Security (raising the retirement age slowly and employing a modified means test). Both sides have invested in this brinksmanship and surprise, surprise – both sides are much more interested in the political optics and who wins or loses than in the substance of what is actually done.

  • WebMonk

    Well, let’s not go overboard, tODD. I’m not sure that it’salways used to argue taxes should never be raised.

    How about “almost always” and “almost never”?

    I’m sure someone, somewhere, sometime hasn’t used the Laffer curve for that purpose. I’ve never seen it happen, but surely it has at some point! :-D

  • WebMonk

    Well, let’s not go overboard, tODD. I’m not sure that it’salways used to argue taxes should never be raised.

    How about “almost always” and “almost never”?

    I’m sure someone, somewhere, sometime hasn’t used the Laffer curve for that purpose. I’ve never seen it happen, but surely it has at some point! :-D

  • http://www.toddstadler.com/ tODD

    WebMonk (@19), right. I’d offer to pay you serious cash for every instance you could find in the wild of someone saying, “Oh, don’t worry, we could increase marginal rates several more percentage points, according to the Laffer curve!” But the temptation would be too great for you to be the first person ever on the Internet to say that.

  • http://www.toddstadler.com/ tODD

    WebMonk (@19), right. I’d offer to pay you serious cash for every instance you could find in the wild of someone saying, “Oh, don’t worry, we could increase marginal rates several more percentage points, according to the Laffer curve!” But the temptation would be too great for you to be the first person ever on the Internet to say that.

  • Joe

    Here is a good article (written by Arthur Laffer himself) that explains the principle behind the curve (and notes that this is not his idea – just that he has been teaching these principles. This idea is a pretty old one dating back to the 14th century)

    http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future

  • Joe

    Here is a good article (written by Arthur Laffer himself) that explains the principle behind the curve (and notes that this is not his idea – just that he has been teaching these principles. This idea is a pretty old one dating back to the 14th century)

    http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future

  • peter henderson

    The Laffer idea is simply that there is a point where raising the tax rate is counter-productive, reducing tax revenues. As to where that point is and whether we are above it or below it, those are further questions to which there is no simple answer. But however much tax revenue we take in we can always spend much more, thanks to our ability to borrow. Thus, during the GW Bush years, tax cuts were accompanied by modestly rising revenues but expenditures rose much faster thanks to our sometimes ill-conceived military campaigns. So the ultimate solution to deficits must involve fiscal restraint.

    Those who argue that a higher rate will discourage investment are right with respect to those earnings that we are equally tempted to spend or invest. If I am on the cusp whether to buy a second car or buy some GM stock, the tax rate on capital gains just might be the deciding factor. But very rich people would have a hard time consuming their wealth, nor do they with to do so. In lieu of buying their fifth Ferrari or seventh vacation house they will invest it at any remotely reasonable tax rate. Moreover, buying Ferraris or vacation homes provides additional funding for the makers of these products.

    One thing I find very troubling about recent GOP rhethoric is the notion that people who receive government checks are bums who are on the dole. In the old days the GOP used to complain that social security provided a very poor rate of return in comparision to Wall Street. This was supposed to be an argument for privatizing social security. Now we are told that people who want something back from their mandatory payroll contributions are parasites. If you bumped all the deadbeats off the payroll you would still have a hugely unbalanced budget. People who say we can’t afford to make already promised social security payments but have plenty of money to invade a fresh list of countries are talking out of both sides of their mouths and should be ashamed of themselves.

  • peter henderson

    The Laffer idea is simply that there is a point where raising the tax rate is counter-productive, reducing tax revenues. As to where that point is and whether we are above it or below it, those are further questions to which there is no simple answer. But however much tax revenue we take in we can always spend much more, thanks to our ability to borrow. Thus, during the GW Bush years, tax cuts were accompanied by modestly rising revenues but expenditures rose much faster thanks to our sometimes ill-conceived military campaigns. So the ultimate solution to deficits must involve fiscal restraint.

    Those who argue that a higher rate will discourage investment are right with respect to those earnings that we are equally tempted to spend or invest. If I am on the cusp whether to buy a second car or buy some GM stock, the tax rate on capital gains just might be the deciding factor. But very rich people would have a hard time consuming their wealth, nor do they with to do so. In lieu of buying their fifth Ferrari or seventh vacation house they will invest it at any remotely reasonable tax rate. Moreover, buying Ferraris or vacation homes provides additional funding for the makers of these products.

    One thing I find very troubling about recent GOP rhethoric is the notion that people who receive government checks are bums who are on the dole. In the old days the GOP used to complain that social security provided a very poor rate of return in comparision to Wall Street. This was supposed to be an argument for privatizing social security. Now we are told that people who want something back from their mandatory payroll contributions are parasites. If you bumped all the deadbeats off the payroll you would still have a hugely unbalanced budget. People who say we can’t afford to make already promised social security payments but have plenty of money to invade a fresh list of countries are talking out of both sides of their mouths and should be ashamed of themselves.

  • Lou G.

    Steve #18, good points about the politicians not willing to actually accomplish anything.

  • Lou G.

    Steve #18, good points about the politicians not willing to actually accomplish anything.

  • http://www.bikebubba.blogspot.com bike bubba

    “Can we all just admit that the “Laffer curve” is nothing but a rhetorical device employed always and only to argue that taxes should never be raised?”

    No, it’s an economic fact, tODD. Above a certain threshold, revenues drop, below a certain threshold, revenues rise. The fact that recent tax hikes decrease revenue, and recent tax cuts increase revenue, simply means that at 40% or so overall taxes, we’re on the wrong side of the curve, tODD.

    And even if we were not on the wrong side of the Laffer curve (which we are not), Adam Smith has a compelling argument against tax revenue maximization; some things are simply not public goods, and hence government does an exceedingly poor job with them. A great example is solar subsidies; over 55% of those made under the 2009 “spendumore” plan have been given to companies which have since gone bankrupt.

  • http://www.bikebubba.blogspot.com bike bubba

    “Can we all just admit that the “Laffer curve” is nothing but a rhetorical device employed always and only to argue that taxes should never be raised?”

    No, it’s an economic fact, tODD. Above a certain threshold, revenues drop, below a certain threshold, revenues rise. The fact that recent tax hikes decrease revenue, and recent tax cuts increase revenue, simply means that at 40% or so overall taxes, we’re on the wrong side of the curve, tODD.

    And even if we were not on the wrong side of the Laffer curve (which we are not), Adam Smith has a compelling argument against tax revenue maximization; some things are simply not public goods, and hence government does an exceedingly poor job with them. A great example is solar subsidies; over 55% of those made under the 2009 “spendumore” plan have been given to companies which have since gone bankrupt.

  • peter henderson

    I’ve written a little ditty to inspire us to ‘do the right thing.’

    “Let’s go over the cliff”
    Peter Henderson
    Lyrics copyright 2012 all rights reserved
    To the tune of “Let’s Go Back to the Waltz” by Irving Berlin

    Let’s go over the cliff
    Take the plunge, get it over with
    I’ve been talking to Adam Smith – he said
    Let’s go over the cliff, boys -
    Let’s go over the cliff.

    Let’s go over the cliff
    Then life will be looking up.
    No more begging from the old tin cup
    When we’ve gone over the cliff, boys
    When we’ve gone over the cliff

    [Bridge:]
    Nothing in life is ever free
    Sometimes ya gotta pay some taxes
    Bombs cost money, then there’s AIG
    Not to mention Goldman Sachses.

    So let’s go over the cliff
    Pull the plug and get it over with
    Cuz our kids we must not stiff
    We must go over the cliff, girls
    Il faut go over the cliff,
    – citoyens –
    Let’s go over the cliff,
    — my fellow Americans —
    Let’s go over the cliff.

  • peter henderson

    I’ve written a little ditty to inspire us to ‘do the right thing.’

    “Let’s go over the cliff”
    Peter Henderson
    Lyrics copyright 2012 all rights reserved
    To the tune of “Let’s Go Back to the Waltz” by Irving Berlin

    Let’s go over the cliff
    Take the plunge, get it over with
    I’ve been talking to Adam Smith – he said
    Let’s go over the cliff, boys -
    Let’s go over the cliff.

    Let’s go over the cliff
    Then life will be looking up.
    No more begging from the old tin cup
    When we’ve gone over the cliff, boys
    When we’ve gone over the cliff

    [Bridge:]
    Nothing in life is ever free
    Sometimes ya gotta pay some taxes
    Bombs cost money, then there’s AIG
    Not to mention Goldman Sachses.

    So let’s go over the cliff
    Pull the plug and get it over with
    Cuz our kids we must not stiff
    We must go over the cliff, girls
    Il faut go over the cliff,
    – citoyens –
    Let’s go over the cliff,
    — my fellow Americans —
    Let’s go over the cliff.

  • http://steadfastlutherans.org/ SAL

    The Laffer Curve is fairly well demonstrated for capital gains taxes. That’s to be expected as capital gains are much more sensitive to risk then income (Most of us need to work for income, very few have to invest).

    The Laffer Curve seems to not work for income taxes because work is an inferior good compared to leisure. In the aggregate we don’t work more when take-home pay rises, we actually tend to work less in the aggregate.

  • http://steadfastlutherans.org/ SAL

    The Laffer Curve is fairly well demonstrated for capital gains taxes. That’s to be expected as capital gains are much more sensitive to risk then income (Most of us need to work for income, very few have to invest).

    The Laffer Curve seems to not work for income taxes because work is an inferior good compared to leisure. In the aggregate we don’t work more when take-home pay rises, we actually tend to work less in the aggregate.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “The cuts would make the government smaller, to be sure. In fact, one of the sure things would be a loss of about federal 110,000 jobs put into effect immediately — ie, “Sequestration”. 110,000 layoffs=immediate impact.”

    that alone is a good enough reason jump off the cliff.

    I am starting to like this cliff.

    It is like Brer Rabbit.

    Oh, please don’t throw me over that cliff!

    Can we get the Democrats to negotiate another cliff?

    Like write some more legislation cutting even more spending if we don’t agree to x?

    Oh, no, please don’t throw me off that cliff! ;-)

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    “The cuts would make the government smaller, to be sure. In fact, one of the sure things would be a loss of about federal 110,000 jobs put into effect immediately — ie, “Sequestration”. 110,000 layoffs=immediate impact.”

    that alone is a good enough reason jump off the cliff.

    I am starting to like this cliff.

    It is like Brer Rabbit.

    Oh, please don’t throw me over that cliff!

    Can we get the Democrats to negotiate another cliff?

    Like write some more legislation cutting even more spending if we don’t agree to x?

    Oh, no, please don’t throw me off that cliff! ;-)

  • http://enterthevein.wordpress.com J. Dean

    God is bigger than any cliff. I’d rather take the plunge knowing it’s part of His will than try to do any pathetic form of self-saving or hand-wringing and essentially function out of a viewpoint that would best be described as “practical atheism.”

  • http://enterthevein.wordpress.com J. Dean

    God is bigger than any cliff. I’d rather take the plunge knowing it’s part of His will than try to do any pathetic form of self-saving or hand-wringing and essentially function out of a viewpoint that would best be described as “practical atheism.”

  • WebMonk

    (sorry about the repetitiveness of this comment -I read it, and I realize it’s repetitive, but it’s late and it’s easier to type than it is to edit :-) )

    bike – it’s a fact that the Laffer Curve has effects in theoretical exercises, but never has it been seen in real life. Any appeal to the Laffer Curve as a reason against raising taxes in real life is an appeal to something without any real-life effect.

    There are perfectly valid reasons to oppose raising taxes. Fear of reaching the tipping point on the Laffer Curve is not one of them.

    Raising and lower taxes do affect the ways people invest or spend their money. However, there are no real-life examples of where the government broadly raised taxes, and got less revenue because the taxes caused the economy to shrink so much.

    It has never happened. Ever.

    Appeals to the Laffer Curve as a realistic reason to not raise broad stroke taxes is an appeal to something that doesn’t exist.

    The best estimates that have been made by economists say that the point of negative gains to rising taxes is around 70%. 70%! We are so extremely far away from that, that the Laffer Curve can’t even be used as a good reason in a theoretical manner.

    There are all sorts of good reasons to oppose higher taxes, or to oppose higher taxes in certain areas. There is plenty of evidence showing lower tax rates can have a positive effect on economic growth. There is lots of evidence that high tax rates can inhibit economic growth.

    What there is NOT any evidence for -NONE whatsoever – is that jumping from a broad 25% tax rate to a broad 30% tax rate will actually lower the revenue received from taxes.

    Using the Laffer Curve as a reason to not raise broad taxes is a merit-less argument. There are lots of other very good reasons that can be used.

    Use them, not the Laffer Curve.

  • WebMonk

    (sorry about the repetitiveness of this comment -I read it, and I realize it’s repetitive, but it’s late and it’s easier to type than it is to edit :-) )

    bike – it’s a fact that the Laffer Curve has effects in theoretical exercises, but never has it been seen in real life. Any appeal to the Laffer Curve as a reason against raising taxes in real life is an appeal to something without any real-life effect.

    There are perfectly valid reasons to oppose raising taxes. Fear of reaching the tipping point on the Laffer Curve is not one of them.

    Raising and lower taxes do affect the ways people invest or spend their money. However, there are no real-life examples of where the government broadly raised taxes, and got less revenue because the taxes caused the economy to shrink so much.

    It has never happened. Ever.

    Appeals to the Laffer Curve as a realistic reason to not raise broad stroke taxes is an appeal to something that doesn’t exist.

    The best estimates that have been made by economists say that the point of negative gains to rising taxes is around 70%. 70%! We are so extremely far away from that, that the Laffer Curve can’t even be used as a good reason in a theoretical manner.

    There are all sorts of good reasons to oppose higher taxes, or to oppose higher taxes in certain areas. There is plenty of evidence showing lower tax rates can have a positive effect on economic growth. There is lots of evidence that high tax rates can inhibit economic growth.

    What there is NOT any evidence for -NONE whatsoever – is that jumping from a broad 25% tax rate to a broad 30% tax rate will actually lower the revenue received from taxes.

    Using the Laffer Curve as a reason to not raise broad taxes is a merit-less argument. There are lots of other very good reasons that can be used.

    Use them, not the Laffer Curve.

  • WebMonk

    SAL – I’d be interested in knowing what you think the examples of Laffer Curve effects with Capital Gains taxes are. I know the examples that are commonly trotted out, and they’re more than a bit shaky as examples of the Laffer Curve point coming into play.

    The difficulty isn’t in finding times when tax rates have risen and revenues have fallen (there aren’t many, but there are a few), nor is the trick to find a time when tax rates have fallen and tax revenues have risen (those exist too – no one would say otherwise)

    What needs to be shown is that the change in tax rate is the direct cause of the increase/decrease.

    Take a commonly used example for the 1920s in the US – in 1921 the top tax rates went up to 70+% which is well with the area where economists estimate the Laffer Curve would start having an effect. By the time 1929 rolled around, the top tax rates were only at 25%.

    Over this same period of time, tax revenues increased! Proof that the Laffer Curve was having an effect?

    No, though it’s possible that there was a Laffer Curve effect at that point. No one has been able to find it, though. Doesn’t mean it wasn’t there, but no one has found it.

    The economy was growing rapidly already. In the decade before the Great Depression the economy was growing rapidly, but that had little to nothing to do with lowering tax rates. The economy was growing before the tax rates started dropping, and the economy didn’t suddenly start growing even faster when the tax rates were dropped.

    The tax rates dropped, but not nearly as dramatically as the 73% to 25% spread might indicate at first glance – the highest rate was only potentially applicable to one to two individuals, literally, and so had extremely minimal impact. The rates that affected 90% of the population had much less change.

    The dropping tax rate almost certainly did help the economy, but the economy was already growing strongly for other reasons, so here’s the rub – tax rates, had they stayed the same, would have brought in even more revenue than the lower rate taxes did.

    To demonstrate a real-life example of the Laffer Curve effect, you have to show a point where the higher tax rate would have brought in less money than the lower tax rate.

    The lowered tax rates of the 1920s almost certainly helped the economy to grow, and the high tax rate of 1921 brought in $700+ million in revenue while the lower tax rate of 1929 brought in a billion dollars in revenue.

    BUT, had the tax rates remained at the same high rate, the economy would have grown more slowly, but the tax revenues in 1929 would have been higher than the billion dollars garnered by the lower tax rate. Estimates of the tax rate changes on the 1920s economy vary between being 10% and 40% of the growth.

    Had the tax rate stayed the same, the economy would have grown 10-40% slower, and the higher tax rates would have been pulling in around $1.4 billion. The 1920s are not an example of the Laffer Curve being in effect.

    If the Laffer Curve doesn’t have a visible effect when dropping tax rates as dramatically as happened in the 1920s, there is no freakin’ way that the <20% change that we're seeing now is going to take us anywhere near the Laffer Curve territory.

    Maybe you have an example in mind that's different than normal. If so, I'd be interested in hearing it.

    And I'm half asleep at the moment, and so I apologize if this is a rambling, disjointed, incoherent comment. I need to go to bed. If anyone is actually interested, I'll try to be more lucid in the morning. If this comment is as bloviated as I suspect it might be, I don't think anyone will be interested.

    Is bloviated a word? I'm pretty sure it is, but it's showing up as misspelled in the comment window here. I suspect the deficiency is in the dictionary being utilized by whatever doohickey is doing the spellchecking in this browser.

    Ok, now "spellchecking" is showing up as misspelled too. I know that's a word. Or maybe it needs a dash in there.

    Who knows. I don't, anyway. G'night.

  • WebMonk

    SAL – I’d be interested in knowing what you think the examples of Laffer Curve effects with Capital Gains taxes are. I know the examples that are commonly trotted out, and they’re more than a bit shaky as examples of the Laffer Curve point coming into play.

    The difficulty isn’t in finding times when tax rates have risen and revenues have fallen (there aren’t many, but there are a few), nor is the trick to find a time when tax rates have fallen and tax revenues have risen (those exist too – no one would say otherwise)

    What needs to be shown is that the change in tax rate is the direct cause of the increase/decrease.

    Take a commonly used example for the 1920s in the US – in 1921 the top tax rates went up to 70+% which is well with the area where economists estimate the Laffer Curve would start having an effect. By the time 1929 rolled around, the top tax rates were only at 25%.

    Over this same period of time, tax revenues increased! Proof that the Laffer Curve was having an effect?

    No, though it’s possible that there was a Laffer Curve effect at that point. No one has been able to find it, though. Doesn’t mean it wasn’t there, but no one has found it.

    The economy was growing rapidly already. In the decade before the Great Depression the economy was growing rapidly, but that had little to nothing to do with lowering tax rates. The economy was growing before the tax rates started dropping, and the economy didn’t suddenly start growing even faster when the tax rates were dropped.

    The tax rates dropped, but not nearly as dramatically as the 73% to 25% spread might indicate at first glance – the highest rate was only potentially applicable to one to two individuals, literally, and so had extremely minimal impact. The rates that affected 90% of the population had much less change.

    The dropping tax rate almost certainly did help the economy, but the economy was already growing strongly for other reasons, so here’s the rub – tax rates, had they stayed the same, would have brought in even more revenue than the lower rate taxes did.

    To demonstrate a real-life example of the Laffer Curve effect, you have to show a point where the higher tax rate would have brought in less money than the lower tax rate.

    The lowered tax rates of the 1920s almost certainly helped the economy to grow, and the high tax rate of 1921 brought in $700+ million in revenue while the lower tax rate of 1929 brought in a billion dollars in revenue.

    BUT, had the tax rates remained at the same high rate, the economy would have grown more slowly, but the tax revenues in 1929 would have been higher than the billion dollars garnered by the lower tax rate. Estimates of the tax rate changes on the 1920s economy vary between being 10% and 40% of the growth.

    Had the tax rate stayed the same, the economy would have grown 10-40% slower, and the higher tax rates would have been pulling in around $1.4 billion. The 1920s are not an example of the Laffer Curve being in effect.

    If the Laffer Curve doesn’t have a visible effect when dropping tax rates as dramatically as happened in the 1920s, there is no freakin’ way that the <20% change that we're seeing now is going to take us anywhere near the Laffer Curve territory.

    Maybe you have an example in mind that's different than normal. If so, I'd be interested in hearing it.

    And I'm half asleep at the moment, and so I apologize if this is a rambling, disjointed, incoherent comment. I need to go to bed. If anyone is actually interested, I'll try to be more lucid in the morning. If this comment is as bloviated as I suspect it might be, I don't think anyone will be interested.

    Is bloviated a word? I'm pretty sure it is, but it's showing up as misspelled in the comment window here. I suspect the deficiency is in the dictionary being utilized by whatever doohickey is doing the spellchecking in this browser.

    Ok, now "spellchecking" is showing up as misspelled too. I know that's a word. Or maybe it needs a dash in there.

    Who knows. I don't, anyway. G'night.

  • DonS

    Going over the “cliff” is the only way both parties will negotiate seriously to reform taxes and spending. They will, at that time, both be motivated to change the system. So, I favor letting the tax increases and sequestration occur, as opposed to Obama’s proposal to cancel the spending cuts and tax increases except for the top two brackets — which half-baked measure does next-to-nothing to resolve our debt issues.

  • DonS

    Going over the “cliff” is the only way both parties will negotiate seriously to reform taxes and spending. They will, at that time, both be motivated to change the system. So, I favor letting the tax increases and sequestration occur, as opposed to Obama’s proposal to cancel the spending cuts and tax increases except for the top two brackets — which half-baked measure does next-to-nothing to resolve our debt issues.

  • Joe

    WebMonk – the problem with our current Laffer Curve discussion is that we have two different discussion going on. tODD has proclaimed it a rhetorical device – which several people responded to and disagreed with. You then responded to those responses with an argument that is very different from tODD’s — that it is a theory that is probably correct in broad strokes but either hard to quantify or not actually quantifiable because there are so many other variables. (in other words its a macro economic principle :) ).

    I agree with you but not with tODD’s characteristic of it as merely a rhetorical device and I suspect that bike does too.

  • Joe

    WebMonk – the problem with our current Laffer Curve discussion is that we have two different discussion going on. tODD has proclaimed it a rhetorical device – which several people responded to and disagreed with. You then responded to those responses with an argument that is very different from tODD’s — that it is a theory that is probably correct in broad strokes but either hard to quantify or not actually quantifiable because there are so many other variables. (in other words its a macro economic principle :) ).

    I agree with you but not with tODD’s characteristic of it as merely a rhetorical device and I suspect that bike does too.

  • Joe

    I guess I would ask the following question: should we ignore supply and demand because it is very hard to calculate exactly where the two intersect when there are other variables involved?

  • Joe

    I guess I would ask the following question: should we ignore supply and demand because it is very hard to calculate exactly where the two intersect when there are other variables involved?

  • http://steadfastlutherans.org/ SAL

    WebMonk, you comment refers to income taxes which may not follow a Laffer Curve (because labor is an inferior good).

    I suppose you could see a Laffer Curve type effect if you drive people into the underground economy and get mass tax avoidance. That’s going to require a tax code that:
    1) Doesn’t have many loopholes
    2) Is extremely high

    When top marginal income tax rates were ~90% hardly anyone even paid 50% of their income as taxes because of generous loopholes.

    The historical data isn’t much of an argument for or against the Laffer Curve because in when tax rates tend to rise the number and complexity of tax loopholes also tends to rise.

    In theory Laffer Curves should only exist for things with good substitutes. Capital gains are easily avoided by holding onto to ‘paper gains’ and using those gains as collateral for loans (assuming interest rates are cheaper than the cap gains tax rate).

    In this sense capital gains taxes are entirely voluntary. I only pay on a capital gain when I realize it (EI sell the asset). Higher capital gains tax rates reduce the buying and selling of assets which causes a Laffer Curve type of effect fairly quickly.

    Although it would reduce capital gains revenue I’d favor higher capital gains taxes (25-35%) because that tends to shift investment from risky speculation to long-term investment.

  • http://steadfastlutherans.org/ SAL

    WebMonk, you comment refers to income taxes which may not follow a Laffer Curve (because labor is an inferior good).

    I suppose you could see a Laffer Curve type effect if you drive people into the underground economy and get mass tax avoidance. That’s going to require a tax code that:
    1) Doesn’t have many loopholes
    2) Is extremely high

    When top marginal income tax rates were ~90% hardly anyone even paid 50% of their income as taxes because of generous loopholes.

    The historical data isn’t much of an argument for or against the Laffer Curve because in when tax rates tend to rise the number and complexity of tax loopholes also tends to rise.

    In theory Laffer Curves should only exist for things with good substitutes. Capital gains are easily avoided by holding onto to ‘paper gains’ and using those gains as collateral for loans (assuming interest rates are cheaper than the cap gains tax rate).

    In this sense capital gains taxes are entirely voluntary. I only pay on a capital gain when I realize it (EI sell the asset). Higher capital gains tax rates reduce the buying and selling of assets which causes a Laffer Curve type of effect fairly quickly.

    Although it would reduce capital gains revenue I’d favor higher capital gains taxes (25-35%) because that tends to shift investment from risky speculation to long-term investment.

  • Lou G.

    Sequestration is the equivalent of chopping off one’s leg because of a broken knee, instead of seeing a specialist and having it treated surgically and over time.

    I don’t have a problem with saying that we need to cut 2.5 million federal jobs by say FY2014 (October 2013). That’s usually what the congressional budget actually does – hello?. You know, tell the various agencies how much they’re allowed to spend next year so they get to plan ahead. The agency heads always figure out the best way to achieve any reductions in force, and they know they’re legally required to do so on time and to budget. And they get to exercise leadership by making sure to retain the most qualified and best performing workers.

    A hatchet job like sequestration eliminates the possibility of a sane and deliberate approach. And it is that it is entirely unnecessary. Remember Congress hasn’t passed a budget in years. That is essentially their job — why we elected them. The key thing that they are responsible to do to keep government functioning and they refuse to do it.

    So, instead of letting agency leaders realign their workforces and downsizing by attrition, etc.. Sequestration means that all of the lowest paid workers with the least tenure are let go in knee jerk fashion, and we get to keep all the dinosaurs who hate their jobs, are maxed out at step 10 in their pay grades, have 6 weeks or more of vacation banked every year, and have fought tooth and nail against keeping up with technological reforms.
    What a bunch of childish, selfish idiots.

  • Lou G.

    Sequestration is the equivalent of chopping off one’s leg because of a broken knee, instead of seeing a specialist and having it treated surgically and over time.

    I don’t have a problem with saying that we need to cut 2.5 million federal jobs by say FY2014 (October 2013). That’s usually what the congressional budget actually does – hello?. You know, tell the various agencies how much they’re allowed to spend next year so they get to plan ahead. The agency heads always figure out the best way to achieve any reductions in force, and they know they’re legally required to do so on time and to budget. And they get to exercise leadership by making sure to retain the most qualified and best performing workers.

    A hatchet job like sequestration eliminates the possibility of a sane and deliberate approach. And it is that it is entirely unnecessary. Remember Congress hasn’t passed a budget in years. That is essentially their job — why we elected them. The key thing that they are responsible to do to keep government functioning and they refuse to do it.

    So, instead of letting agency leaders realign their workforces and downsizing by attrition, etc.. Sequestration means that all of the lowest paid workers with the least tenure are let go in knee jerk fashion, and we get to keep all the dinosaurs who hate their jobs, are maxed out at step 10 in their pay grades, have 6 weeks or more of vacation banked every year, and have fought tooth and nail against keeping up with technological reforms.
    What a bunch of childish, selfish idiots.

  • WebMonk

    Joe, I think tODD intended to convey that it is only every used as a rhetorical device. Obviously it is a serious theory put forward by at least a couple serious economists. However, in reality, it is only ever used as a rhetorical device.

    That’s how I took his comment. It did have just a tiny little smidgen of snark in it, after all. :-)

  • WebMonk

    Joe, I think tODD intended to convey that it is only every used as a rhetorical device. Obviously it is a serious theory put forward by at least a couple serious economists. However, in reality, it is only ever used as a rhetorical device.

    That’s how I took his comment. It did have just a tiny little smidgen of snark in it, after all. :-)

  • WebMonk

    SAL, I agree with you, partly. There are lots of situations where the Laffer Curve might have an effect. All those situations are theoretical, though, not real life.

    Even the real-life capital gains situation you mention isn’t necessarily an example. A higher CG tax rate certainly would shift behavior so that people do less activity to which the CG tax would apply. However, even for CG, the tax revenue will still rise if the CG tax rate were to increase to 25%. Obviously it won’t rise in a 1% for 1% change, but it will still rise. Over the last 40+ years, the CG tax rate has bounced around between 40% and 15%. The changes in tax revenue from those changes hasn’t followed a Laffer Curve pattern of behavior.

    I think we would need to get at least above 40% to see some Laffer behavior. On the other hand, interest rates at the moment are so low that it’s conceivable that CG tax payers are more willing to work harder to avoid the CG taxes through some of the means you mentioned since the reward is comparatively larger.

    If we were to see a Laffer Curve situation in Capital Gains taxes, the current situation is probably as conducive as possible. I still doubt we would see that by just jumping up to 25%, though. Maybe if we were to jump up to 40% or something like that.

    Theory, such as the Laffer Curve, can inform our actions and decisions, but right now we are so far away from a Laffer Curve situation that it can be thoroughly ignored for all the situations we are looking at right now.

    Maybe someday we’ll have a real life situation to which the Laffer Curve theory can be usefully applied. Someday.

  • WebMonk

    SAL, I agree with you, partly. There are lots of situations where the Laffer Curve might have an effect. All those situations are theoretical, though, not real life.

    Even the real-life capital gains situation you mention isn’t necessarily an example. A higher CG tax rate certainly would shift behavior so that people do less activity to which the CG tax would apply. However, even for CG, the tax revenue will still rise if the CG tax rate were to increase to 25%. Obviously it won’t rise in a 1% for 1% change, but it will still rise. Over the last 40+ years, the CG tax rate has bounced around between 40% and 15%. The changes in tax revenue from those changes hasn’t followed a Laffer Curve pattern of behavior.

    I think we would need to get at least above 40% to see some Laffer behavior. On the other hand, interest rates at the moment are so low that it’s conceivable that CG tax payers are more willing to work harder to avoid the CG taxes through some of the means you mentioned since the reward is comparatively larger.

    If we were to see a Laffer Curve situation in Capital Gains taxes, the current situation is probably as conducive as possible. I still doubt we would see that by just jumping up to 25%, though. Maybe if we were to jump up to 40% or something like that.

    Theory, such as the Laffer Curve, can inform our actions and decisions, but right now we are so far away from a Laffer Curve situation that it can be thoroughly ignored for all the situations we are looking at right now.

    Maybe someday we’ll have a real life situation to which the Laffer Curve theory can be usefully applied. Someday.

  • WebMonk

    Lou G – I agree that sequestration is a horrible, sucky way to go about cutting government spending. I have a front row seat to the absolute insanity of how these cuts are affecting people. Heck, my job has a decent chance of being one of the casualties of sequestration.

    Unfortunately, it’s less horrible than continuing on with the current system of massive deficits.

    I agree with you wholeheartedly that Congress should be cutting government expenditures in a much more sane manner. I have exactly ZERO belief that they will do any cutting at all unless they are in this sort of situation.

    Given that sort of choice, I tend to come down on the side of letting sequestration go through, while wishing the would instead do the cutting in a non-stupid manner.

    Maybe the country has a massive stupidity surplus they’re trying to use up all at once.

  • WebMonk

    Lou G – I agree that sequestration is a horrible, sucky way to go about cutting government spending. I have a front row seat to the absolute insanity of how these cuts are affecting people. Heck, my job has a decent chance of being one of the casualties of sequestration.

    Unfortunately, it’s less horrible than continuing on with the current system of massive deficits.

    I agree with you wholeheartedly that Congress should be cutting government expenditures in a much more sane manner. I have exactly ZERO belief that they will do any cutting at all unless they are in this sort of situation.

    Given that sort of choice, I tend to come down on the side of letting sequestration go through, while wishing the would instead do the cutting in a non-stupid manner.

    Maybe the country has a massive stupidity surplus they’re trying to use up all at once.

  • http://www.bikebubba.blogspot.com bike bubba

    WebMonk, you’re simply trying to make a simple fact of our economy obscure. Yes, correlation between tax cuts and revenue increases, and vice versa, does not in itself equal causation. However, when we combine the existing data with a theory that, if established, will exclude others, then we do have causation.

    In this case, there are two reasons that Illinois, California, and such have not been able to “beat” the Laffer Curve. First, when you take funds out of the hands of the rich, those funds obviously aren’t there for investment. The economic growth the tax man was counting on simply isn’t there.

    Second–and this one is huge in today’s era of free trade–money is free to follow better incentives, and who knows better than the rich how to follow economic incentives?

    So if you want to punish the poor and middle class, pull an Obama and try to punish the rich.

  • http://www.bikebubba.blogspot.com bike bubba

    WebMonk, you’re simply trying to make a simple fact of our economy obscure. Yes, correlation between tax cuts and revenue increases, and vice versa, does not in itself equal causation. However, when we combine the existing data with a theory that, if established, will exclude others, then we do have causation.

    In this case, there are two reasons that Illinois, California, and such have not been able to “beat” the Laffer Curve. First, when you take funds out of the hands of the rich, those funds obviously aren’t there for investment. The economic growth the tax man was counting on simply isn’t there.

    Second–and this one is huge in today’s era of free trade–money is free to follow better incentives, and who knows better than the rich how to follow economic incentives?

    So if you want to punish the poor and middle class, pull an Obama and try to punish the rich.

  • Joe

    WebMonk and tODD — I think I have an example of someone using the Laffer Curve to justify a tax rate increase. Bill Clinton. I don’t remember if he used the Laffer Curve itself but he argued that the economy could “absorb” the impact of his proposed tax rate increase (which by the way are the tax rates were are going to head back to).

  • Joe

    WebMonk and tODD — I think I have an example of someone using the Laffer Curve to justify a tax rate increase. Bill Clinton. I don’t remember if he used the Laffer Curve itself but he argued that the economy could “absorb” the impact of his proposed tax rate increase (which by the way are the tax rates were are going to head back to).

  • Lou G.

    “Maybe the country has a massive stupidity surplus they’re trying to use up all at once.” LOL, that made me snort.

  • Lou G.

    “Maybe the country has a massive stupidity surplus they’re trying to use up all at once.” LOL, that made me snort.

  • WebMonk

    bike, I’m not sure you’re understanding what the Laffer Curve is because your examples aren’t of the Laffer Curve effect.

    The Laffer Curve effect isn’t just a tax rate drop with tax revenues increasing over time. Neither is it a slowing economy due to heavier taxes.

    The Laffer Curve is the situation in which when taxes increase, the economy responds by slowing so much, or evasion increases so much, that the resulting tax revenues are smaller than they were before.

    This has never, ever been seen with broad scale tax increases. Ever. You can try to find an example, but you won’t be able to.

    It’s possible to argue (with considerable uncertainty) that the effect has been seen in very narrow niches of taxing, but that’s a very different animal, as SAL has mentioned before.

    You seem to be saying that tax cuts can stimulate the economy, and later revenues are larger than the revenues back when the taxes were higher. That may all be true, and lower taxes will stimulate the economy to grow, and higher taxes will burden the economy, and, and, and…. Yes! Agreed!

    But that’s not an example of the Laffer effect.

    The Laffer effect is a precise thing, but it gets used all over the place as a baseless argument in situations to which it doesn’t apply, such as the examples you’re giving. None of them are examples of the Laffer effect.

    To show the Laffer effect, one needs to show that a tax increase results in lower tax revenues than if the taxes had stayed lower,
    OR that a tax decrease results in higher revenue than if the taxes had stayed higher.

    Here’s an example to demonstrate what isn’t a Laffer Curve effect. Call the economy a dollar. Two situations:

    1) Taxes are 20%. Economy grows at 4% annually. Year 1 tax revenue is 20 cents.

    2) Raise taxes to 25%. Economy would grow at 2%. Year 1 tax revenue is 25 cents.
    (Note: that’s a HUGE effect – a 25% change in taxes causing a 50% change in economic growth is nowhere near realistic, but I’m using it as an extreme example)

    After ten years of situation 1, yearly tax revenue is 28 cents! It has increase beyond the revenues of the higher tax rate in the first year! Laffer Curve is true!!

    … Er, not. Look at situation 2.

    After ten years of situation 2, yearly tax revenue is 30 cents – still more than situation 1.

    The Laffer Curve effect still isn’t seen even in that extreme example.

    Now, I would very much prefer to live in the economy of the first example where the economy is growing more quickly with lower taxes. BUT, that has nothing at all to do with the Laffer Curve. You’re making good points, but they don’t have anything to do with the Laffer Curve.

    Joe @40 – similar situation. Saying the economy can “absorb” the impact is a different thing than the Laffer Curve. Clinton was far from being an economic genius, so even if he did use the term, if he used it in the manner you described, he was using it incorrectly – using it only as a rhetorical device and not as a real-life effect.

  • WebMonk

    bike, I’m not sure you’re understanding what the Laffer Curve is because your examples aren’t of the Laffer Curve effect.

    The Laffer Curve effect isn’t just a tax rate drop with tax revenues increasing over time. Neither is it a slowing economy due to heavier taxes.

    The Laffer Curve is the situation in which when taxes increase, the economy responds by slowing so much, or evasion increases so much, that the resulting tax revenues are smaller than they were before.

    This has never, ever been seen with broad scale tax increases. Ever. You can try to find an example, but you won’t be able to.

    It’s possible to argue (with considerable uncertainty) that the effect has been seen in very narrow niches of taxing, but that’s a very different animal, as SAL has mentioned before.

    You seem to be saying that tax cuts can stimulate the economy, and later revenues are larger than the revenues back when the taxes were higher. That may all be true, and lower taxes will stimulate the economy to grow, and higher taxes will burden the economy, and, and, and…. Yes! Agreed!

    But that’s not an example of the Laffer effect.

    The Laffer effect is a precise thing, but it gets used all over the place as a baseless argument in situations to which it doesn’t apply, such as the examples you’re giving. None of them are examples of the Laffer effect.

    To show the Laffer effect, one needs to show that a tax increase results in lower tax revenues than if the taxes had stayed lower,
    OR that a tax decrease results in higher revenue than if the taxes had stayed higher.

    Here’s an example to demonstrate what isn’t a Laffer Curve effect. Call the economy a dollar. Two situations:

    1) Taxes are 20%. Economy grows at 4% annually. Year 1 tax revenue is 20 cents.

    2) Raise taxes to 25%. Economy would grow at 2%. Year 1 tax revenue is 25 cents.
    (Note: that’s a HUGE effect – a 25% change in taxes causing a 50% change in economic growth is nowhere near realistic, but I’m using it as an extreme example)

    After ten years of situation 1, yearly tax revenue is 28 cents! It has increase beyond the revenues of the higher tax rate in the first year! Laffer Curve is true!!

    … Er, not. Look at situation 2.

    After ten years of situation 2, yearly tax revenue is 30 cents – still more than situation 1.

    The Laffer Curve effect still isn’t seen even in that extreme example.

    Now, I would very much prefer to live in the economy of the first example where the economy is growing more quickly with lower taxes. BUT, that has nothing at all to do with the Laffer Curve. You’re making good points, but they don’t have anything to do with the Laffer Curve.

    Joe @40 – similar situation. Saying the economy can “absorb” the impact is a different thing than the Laffer Curve. Clinton was far from being an economic genius, so even if he did use the term, if he used it in the manner you described, he was using it incorrectly – using it only as a rhetorical device and not as a real-life effect.


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