How much would economy have to grow, for tax-cuts to pay for themselves?

[DetlefK]

We have all heard that talking-point over and over again:
Low tax-rates lead to higher economic growth, leading to higher tax-income for the government, compared to a situation with high taxes.

I don't have the numbers, so I can't crunch this, but can anybody give me an estimate or an example? Let's say a tax-cut is dolled out: At which rate would the economy have to grow, so the government could collect the same or more tax-income with a lower tax-rate?

[Turbineguy]

1. Hmmm.....

I think it's a non-linear equation. The lower the tax rate the more it would have to grow (or the longer it would take), but I suspect there's a square or cubed function in there. This would also mean that on the negative side, the economy would collapse faster.

In order to calculate the base we would have to pick tax rates during periods when the economy was growing. It's an interesting thing because it might turn out that the economic problems attributed to Bush may be due to something other than the tax cuts for the rich.

It's like correcting a problem, doing six things and making it worse. Which one of the solutions caused the problem to get worse?

[bloomington-lib]

2. I have no idea if this is how it would work but just glancing at it, it seems

If you made $100 and were charged 35%, the person collecting the taxes would make $35

If you drop the tax rate to a flat 10%, you would have to grow your income to 350 to make the same $35

So is 3.5 times larger correct?

[unc70]

3. You are starting with a false paradigm

Theses terms are thrown around in eats that are meaningless. Lowering tax rates alone have almost no impact on an economy, the impact is primarily government spending - direct and indirect hiring, or the lack thereof.

[liberal N proud]

4. What we DO know is...

Cutting taxes will not grow the economy. I think 30+ years of applied Reaganomics proves without any doubt that you can't cut away the deficit or grow the economy.

As failed as tax cut keep proving to be, the right wing keeps working for lower still taxes.

[immoderate]

5. It's an idea favored by the gullible.

It's based on the Laffer curve.

Article:

http://scienceblogs.com/goodmath/2007/07/a_laughable_laffer_curve_from.php

--imm

[mbperrin]

8. Yep. it was helped along by Rumsfeld and Cheney. Cheney was Laffer's roommate in college.

The Story Behind the Laffer Curve

The Laffer Curve earned its name from a 1978 article by the late Jude Wanniski (then-associate editor of the Wall Street Journal) appearing in The Public Interest entitled, “Taxes, Revenues, and the ‘Laffer Curve.’” Wanniski recounted a 1974 dinner he attended with Arthur Laffer (the professor at The University of Chicago), Donald Rumsfeld (chief of staff to President Gerald Ford), and Dick Cheney (Rumsfeld’s deputy and a former classmate of Laffer’s). When the foursome’s dinner discussion turned to President Ford’s “WIN” (Whip Inflation Now) proposal for tax increases, Dr. Laffer is said to have grabbed his napkin to sketch the curve as an illustration of the tradeoff between tax rates and tax revenues. Wanniski dubbed the tradeoff described as the “Laffer Curve.”

http://www.laffercenter.com/arthur-laffer/the-laffer-curve/


If the names of the suspects don't give away the game, nothing does...

[exboyfil]

9. I don't think any sane person thinks we are sitting on the right hand side of the Laffer

Curve where reducing rates will increase revenue. We have to be on the left hand side with these historically low rates (especially capital gains and dividends).

[mbperrin]

10. I really don't think any trained economist believes that there is such a thing as the Laffer

curve. My advisor called it voodoo of the dumbest kind.

[exboyfil]

13. So you will get maximum revenue with 100% top marginal tax rate?

If you say no, then you have a Laffer Curve. At that point it becomes a question of where do you draw it. It exists.

On edit - Paul Krugman thinks the Laffer Curve exists -
http://krugman.blogs.nytimes.com/2010/08/10/the-laffer-test-somewhat-wonkish/


So the way I see it, even quite high marginal tax rates on high earners — even rates in, say, the 70 percent range that prevailed pre-Reagan — are unlikely to put us on the wrong side of the Laffer curve by discouraging effort. High earners won’t work much less; they might even work harder, because it takes more effort to make enough to buy that fourth home.

That doesn’t mean, however, that it’s OK to go back to Eisenhower-era 91 percent top marginal rates. The problem with super-high rates isn’t so much that they reduce incentives to work; it’s that they create huge incentives to avoid or evade.

But we’re nowhere near Laffer country now. In terms of taxes and revenue, up is up, down is down.

[mbperrin]

14. Yeah, you will get maximum revenue at 100%.

The 50s were great, because high marginal rates meant invest money for the deduct or pay the tax on it. Couldn't just leave it lay like the trillions that companies have now.

100% rate simply says we will take any money not productively working, and if the tax code does not allow deducts for productive work, fix it.

Not rocket science, and it worked well, along with the GI Bill and VA loans (oh noesssss!!!! That is nearly welfare!!!!!!)

Single income households owned homes, took vacations, had nice holidays. My 8th grade dropout mechanic dad who used his GI bill to become factory certified did that for us. And yes, the minimum wage then would be approaching $25 now.

But the corporations have it their way - multiple family workers making less effective income and stuffing the profits into their corporate pockets to be distributed to the hyenas who run them.

So yes, the higher the better. Unless you think it's okay for my neighbor to earn $220 a year on her $100,000 CD with Citi. She's 84.

[Demeter]

6. The First Rule of Holes Applies Here

Tax cuts are a way of digging a big hole in the government's budget. When you find yourself in a hole, you stop digging.....and fill it up with dirt, if you have any brains.

[broiles]

7. Voodoo economics. n/t

[hay rick]

11. Basic math, reality.

Last edited Mon May 21, 2012, 08:00 PM - Edit history (1)

The basic math answer should be a simple inverse function. If the new rate is expressed as a percentage of the old rate, then the new income needed to maintain the original level of revenue should be the old income divided by the new rate (also expressed as a percentage of the old rate).

Example (old rate = 35%, new rate = 25%), income x rate = tax revenue:
old rate tax revenue = $100,000 x 0.35 = $35,000.
new rate as a percentage of the old rate = 25/35 = 5/7 = 0.714.
new income needed to maintain $35,000 revenue = $100,000/0.714 = $140,000

Notice that in this case, a 28% tax cut (2/7) requires a 40% increase in income (2/5) to make up for the lost revenue. We're talking some serious voodoo here.

Real world examples would be much more complex and would have to account for deductions and rates other than the taxpayer's top marginal rate, for starters. I really don't think it's worth the effort, however. Proponents of the Laffer curve are ignorant or disingenuous or both- and not worth debating.

[snot]

12. They don't.