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In the discussion of yesterday's post, commenter ![[livejournal.com profile]](https://www.dreamwidth.org/img/external/lj-userinfo.gif)
rodney_g_graves argued in favor of the Laffer curve and tax cuts. For those who don't know, the Laffer curve says that lower income tax rates will increase government tax revenues. The theory is that people will spend less effort hiding money in tax shelters and otherwise ducking out on paying.
Well, the first problem with the Laffer curve is that we only know one datum point - 0% tax equals zero revenue. Laffer argued that 100% tax is also no revenue, since people don't have an incentive to work. But here's the problem - we have no idea what the inflection point is! In other words, at what tax rate does the curve turn down, where higher taxes equals lower revenue? I have no idea how we could determine that.
What we can use as a proxy for Laffer's inflection point is to look at growth rate for the national debt as a percentage of GDP. I couldn't find the cleaner graph I wanted, but if you go here and scroll down, you'll see that US debt to GDP was going down until Reagan came in and cut taxes. Under Reagan, debt to DGP spiked. The ratio started to trend down under Clinton, and spiked again under Bush 43. This suggests that the revenue increases predicted by Laffer aren't there or are insignificant.
It has become a fetish with Republicans that tax cuts are good, especially for the top incomes. When Reagan took office, they were. US tax rates topped out at 50%, and regulation was stifling economic growth. Reagan cut and deregulated, and the economy grew. So did the national debt. Clinton came in, imposed modest tax hikes which did not seem to stifle GDP growth while actually balancing the budget.
So the Laffer curve's revenue portion seems off. More importantly, if tax cuts were effective at stimulating the economy, the two rounds of Bush tax cuts would have yielded a great economy. I don't know about you, but "great" is not a word I'd use in the same sentence with "current economy."
Tax cuts, like regulation (or deregulation) are tools. Sometimes those tools are the correct ones for the problem. In the late 1970s, the US economy was over-regulated and over-taxed. Now it's under-regulated, and the current tax code is skewed to favor the wealthy. Obama gets that, and is proposing a tax plan that evens out the burden by reducing taxes on the middle class.
Conditions change, and political parties, if they want to survive, change as well. That's a different post, but consider two Republicans - Nixon and Reagan. How different were their economic policies? Could Nixon have won a Republican primary today?
rodney_g_graves argued in favor of the Laffer curve and tax cuts. For those who don't know, the Laffer curve says that lower income tax rates will increase government tax revenues. The theory is that people will spend less effort hiding money in tax shelters and otherwise ducking out on paying. Well, the first problem with the Laffer curve is that we only know one datum point - 0% tax equals zero revenue. Laffer argued that 100% tax is also no revenue, since people don't have an incentive to work. But here's the problem - we have no idea what the inflection point is! In other words, at what tax rate does the curve turn down, where higher taxes equals lower revenue? I have no idea how we could determine that.
What we can use as a proxy for Laffer's inflection point is to look at growth rate for the national debt as a percentage of GDP. I couldn't find the cleaner graph I wanted, but if you go here and scroll down, you'll see that US debt to GDP was going down until Reagan came in and cut taxes. Under Reagan, debt to DGP spiked. The ratio started to trend down under Clinton, and spiked again under Bush 43. This suggests that the revenue increases predicted by Laffer aren't there or are insignificant.
It has become a fetish with Republicans that tax cuts are good, especially for the top incomes. When Reagan took office, they were. US tax rates topped out at 50%, and regulation was stifling economic growth. Reagan cut and deregulated, and the economy grew. So did the national debt. Clinton came in, imposed modest tax hikes which did not seem to stifle GDP growth while actually balancing the budget.
So the Laffer curve's revenue portion seems off. More importantly, if tax cuts were effective at stimulating the economy, the two rounds of Bush tax cuts would have yielded a great economy. I don't know about you, but "great" is not a word I'd use in the same sentence with "current economy."
Tax cuts, like regulation (or deregulation) are tools. Sometimes those tools are the correct ones for the problem. In the late 1970s, the US economy was over-regulated and over-taxed. Now it's under-regulated, and the current tax code is skewed to favor the wealthy. Obama gets that, and is proposing a tax plan that evens out the burden by reducing taxes on the middle class.
Conditions change, and political parties, if they want to survive, change as well. That's a different post, but consider two Republicans - Nixon and Reagan. How different were their economic policies? Could Nixon have won a Republican primary today?
