The Laffer Curve Has Flatlined

[applegrove]

The Laffer Curve Has Flatlined

by Dante Atkins at Daily Kos

http://www.dailykos.com/story/2015/01/11/1356171/-The-Laffer-Curve-has-flatlined

"SNIP.................


“I don’t want to say the Laffer theory is disproven, but it’s a difficult time to advance that way in Wisconsin because our revenue numbers aren’t as robust as we need,” said a senior Senate GOP leadership aide, adding that Republicans were disappointed that Walker tax cuts from earlier this year didn’t grow revenue as much as they predicted.
--Rachel Bade, Politico

There's only one upside to the fact that Republicans have complete control of so many state legislatures and can use them as incubators for arch-conservative policies: it gives the perfect opportunity to demonstrate that these same policies are blindingly wrong and produce bad outcomes for just about everyone. Case in point? The most famous economic theory ever devised on the back of a napkin, the Laffer Curve.

The Laffer Curve came about as the result of a lunch conversation in 1974 among conservative economist Arthur Laffer, Dick Cheney, and Donald Rumsfeld. The curve in question is the relationship between tax revenues and tax rates—at zero percent, no tax revenue will be collected because no income is taxed, while at 100 percent, no revenue will be collected because there is no incentive to work if all income is confiscated. Somewhere in the middle is a sweet spot: the perfect rate of taxation at which revenue is maximized, and where any tax increases past that point will actually result in a decrease in revenue.

The Laffer Curve has been consistently used as justification for the supply-side belief that tax cuts will pay for themselves through the increased economic activity that they will create. This belief is no longer simply a theory, but is now official federal policy: the 114th Congress changed the rules for how budget bills are evaluated from static scoring to what is called "dynamic scoring," which will mask the actual cost of tax cuts by simply assuming that they will increase economic output.




...................SNIP"

[Major Nikon]

1. The horse-and-sparrow theory collides with Laffer's free lunch, hilarity ensues

At least for the .01%.

[sendero]

2. The Laffer curve...

.... was disproven within years of its proposal. It is a complete and utter joke.

[Nye Bevan]

6. How can you say the Laffer curve has been "disproven"?

Do you seriously think a tax rate of 100% would garner more revenue than any other tax rate, such as 70% or 80%?

[sendero]

8. Laffer ...

... posited that reducing taxes would raise revenues to the govt. It never happened, period, end of story.

[Nye Bevan]

9. No he didn't.

http://en.m.wikipedia.org/wiki/Laffer_curve

He pointed out that this is the case under some circumstances, namely, if the current tax rate exceeds the revenue-maximizing point on the graph. The debate is not over the existence of the curve itself, but more over at which tax rate the maximization of revenue is achieved.

[NoGOPZone]

13. Did you read your own link?

"However, the actual existence and shape of the curve is uncertain and disputed."

[Nye Bevan]

14. Ummmm, "disputed" does not mean "disproven" (nt)

[NoGOPZone]

17. Do you remember what your own post said?

"The debate is not over the existence of the curve itself"

The quote from your link, to repeat:

"However, the actual existence and shape of the curve is uncertain and disputed"

See the problem?

Now show me where I said it was discredited

[PoliticAverse]

29. The problem is no one knows what the shape of the curve really is...

and no one knows what rate would actually maximize revenue.

[metalbot]

10. That rather depends on where you are on the curve, no?

If you are on the right of the apex, reducing taxes raises revenue. If you are on the left of the apex, then raising taxes raises revenue. Of course, we don't actually know where the apex is, or where we are on the curve, so it puts us back to arguing policy rather than math.

[JaneyVee]

11. Laffer disproved his own theory...

By stating "The Laffer Curve itself does not say whether a tax cut will raise or lower revenues, it was never meant to serve as proof that lowering taxes increases revenues"

But the neocons ran with the myth of it anyway.

[Nye Bevan]

16. That statement was not inconsistent with any of his previous statements (nt)

[JDPriestly]

31. The key is flexibility. The proponents of the Laffer curve are extremiss who hang on to the

theory that low or no taxes will boost the economy no matter what is going on.

Fact is that taxes can ruin the economy if they are too low or too high.

It's a matter of balance. Republicans do not understand that.

They also do not understand the importance of investing in certain productive social programs like education and healthcare when the private economy cannot adequately or will not adequately fund those programs.

It's all a matter of balance.

Republicans don't understand that. Two-year-olds don't understand the importance of balance either. Rather sad for our country that the Republicans with their extremism will be in charge of so much over the next couple of years.

But extreme philosophies, whether of the left or right, are attractive because they promise simple, swift results. They don't deliver. But they promise them.

Balance is the key.

[doc03]

3. The Laugher Curve

[daleo]

4. Evidence doesn't sway most right wingers, though.

[closeupready]

5. No - it's just another convenient lie dressed up to sound 'revolutionary' lol

when in fact, it's sheer nonsense deployed to help attack the New Deal and progressive taxation.

[jmowreader]

7. To accept the theory of the Laffer Curve, you have to ignore human nature

It is the nature of Homo opulen to evade taxes any way they can get away with. Why do you think the Ivy League schools, the largest hospitals and the biggest churches have the money they do? If you said, "because donations to those things are tax deductible," give yourself a gold star.

Pretend the top tax rate was 75 percent. Tax revenues will be lower than expected - not because the high rate disincentivizes work (come on, we're Americans...you know, land of the Type A Personality) but because the first thing every rich person buys himself is an accountant.

Okay, so we're sick of The Rich evading taxes and We Have A Plan to keep them from doing it: we'll lower the tax rate to 37.5 percent. This won't cause tax revenues to magically increase: if you were evading taxes at 75 percent, you'll evade taxes if we cut them to 2 percent. Closing loopholes won't solve the problem because The Rich will just start using different loopholes.

[Prophet 451]

22. Be careful

if you were evading taxes at 75 percent, you'll evade taxes if we cut them to 2 percent. Closing loopholes won't solve the problem because The Rich will just start using different loopholes.

That kind of thinking eventually leads to "why bother having taxes at all?".

[jmowreader]

23. That is exactly what they'd like to do

"The Rich will create SOOOOOOO many jobs if they're just not taxed..."

[Adrahil]

12. I heard about the CBO reformulation....

... the guy being interviewed (I forget who it was) was saying that even pretty conservative economists no longer believe tax cuts pay for themselves. Only candidates and demagogues advance that idea anymore.

[Silent3]

15. The curve itself isn't wrong, it's the belief that we're always, always, always...

...at some point along the curve where lower taxes would mean higher revenues.

In real life in the US we've probably never gone around that bend.

[tclambert]

19. When I first heard of the Laffer Curve, I asked, "Okay, so where is that optimum point in the curve?

And where are we on that curve? If you don't know those things, you can't say whether it justifies decreasing or INCREASING taxes." But Republicans didn't care. They just wanted to use it as fake intellectual justification for what they wanted to do anyway.

[Calista241]

18. The problem isn't with the Laffer curve IMO...

The Laffer curve probably is true when you're talking about 75% and greater tax rates.

But Wisconnsin was dealing with much smaller rates than that. If Wisconnsin's tax rate went from 8% to 5%, that will have a significant and harmful effect on the Wisconnsin budget. But if my income goes up by 3%; sure it's nice, I can buy some more stuff, or save some more money, but it's not significant enough to make me change my behavior. It's simply the law of diminishing returns.

And the largest portion of Wisconnsin citizens tax burden, the Federal and social security rates, were unchanged.

But if the total tax rate was 75%, and it gets a blanket cut to 50%, that would probably change my behavior. I'd have the opportunity to make twice as much money, and employers wouldn't have any additional costs. they'd just be paying their existing expenses out in different ratios.

[tclambert]

20. The Laffer Curve is just a propaganda tool for Republicans. They don't care how it really works.

Where the optimum point in the curve lies depends on what kind of tax cuts. It also depends on how the government spends that money. Laffer incorrectly assumed that government spending does not stimulate the economy. But, of course, it does, some kinds of spending better than others.

Some studies indicate the optimal point would be around a 70% tax rate.

Republicans don't care about any of these details. Laffer always qualified his hypothesis with "in some circumstances" cutting tax rates could increase revenues. But Republicans try to pretend it applies "in all circumstances."

[Prophet 451]

21. The Laffer Curve has always been misinterpreted anyway

The original principle, that both 0% taxes and 100% taxes would produce near zero revenue, was fine. It made sense. But the point of the curve was that the optimal point for tax revenues would be somewhere between 0 and 100 (examples from other countries seems to suggest that a maximum rate of around 70% is the point at which revenues start to decrease again). It was never intended to be for tax cuts everywhere all the time and it's a deliberate misinterpretation of the theory that the Repubs have put into play with "dynamic scoring" (aka, just plucking the numbers out of thin air).

[Nye Bevan]

24. +1.

Anyone who claims that the Laffer curve "does not exist" are essentially saying that everyone would still go out to work every day for zero compensation (100% taxation).

What these people are really questioning, and this is a legitimate point, is the highly questionable assumption that we are currently at a point on the Laffer curve where reducing the tax rate increases revenue. Laffer himself never even made this claim.

[Prophet 451]

25. I think a few people would still go to work

The lucky people who are fortunate enough to have a job doing what they love would probably continue working anyway. But those for whom work is just a way to pay the bills wouldn't bother.

[MannyGoldstein]

26. We used to have a top marginal rate of 91%

The economy was far better then than today.

[Prophet 451]

27. Sure

But we're talking about a theoretical optimum rate, that which attracts the maximum possible revenue. Even when the top rate was 91%, not many actually paid that rate for various reasons.

[MannyGoldstein]

28. True, the wealthiest paid about 50% back then

Vs less than 20% today.

[Prophet 451]

30. Agreed

The top rate needs to go up in a major way. I would unhesitatingly support inserting several more bands, topping out at 50%. Beyond that, I'd need to be convinced.