B12 Solipsism

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The Laffer Curve has flatlined

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Sketchy ATM Inside

It is almost amusing how much crazy economic policy was initiated by the expense account of Dick Cheney and Donald Rumsfeld. Without the Laffer Curve, there would be no Supply Side Economic Voodoo theory, and perhaps our country wouldn’t be on a downward spiral. Also, the Laffer Curve, as originally formulated, never claimed to know what the magical tax rate was, and in fact, could be interpreted as arguing that tax rates should increase! 

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.

(click here to continue reading The Laffer Curve has flatlined.)

As an aside, I’m amazed that for years, the PR slogan was that the Republican Party was the business party, despite much evidence to the contrary. 

Since World War II, there’s been a strikingly consistent pattern in American politics: The economy does much better when a Democrat is in the White House.

More specifically, since 1947, the U.S. economy has grown at an average real rate of 4.35 percent under Democratic presidents and just 2.54 percent under Republicans

(click here to continue reading The U.S. economy does better under Democratic presidents — is it just luck? – The Washington Post.)

Really though, it seems as if the GOP is better for business executives instead of businesses. The executives make more, by outsourcing jobs, enjoying reduced tax rates and increased tax loopholes for things like private jets and so on. More take-home pay, in other words, and less investing in the business itself. For non-executives, the GOP is not your party, nor are you even invited, except during election season. 

I Am A Lonely Visitor
I Am A Lonely Visitor

Reactionary conservatives like Governor Sam Brownback and Governor Scott Walker have put the Laffer Curve to work, slicing government revenue, with predictably dire results:

Kansas Gov. Sam Brownback brought on Arthur Laffer as an advisor to steer his radical experiment of cutting taxes to the bone under the assumption that the cuts would simply pay for themselves through economic expansion. The results, however, have been absolutely horrific: job growth on the Missouri side of the Kansas City metropolitan area is occurring at four times the rate on the Kansas side. Education is being vastly underfunded. And perhaps most tellingly, the state collected far less money in taxes than it expected in December, even after downgrading expectations. In other words, Laffer was wrong in every single way possible.

In Wisconsin, meanwhile, Republican Gov. Scott Walker has followed a path nearly has extreme as that of Brownback, but is being forced to scale his ambitions back because the theory just isn’t working:

Earlier this year, just before enacting the half-billion-dollar tax cut, Walker said it was just the beginning — that he wanted to eliminate income taxes. Now, a representative of Walker, asked about the elimination plan said the governor “has only said that he would explore other areas of tax reform.” The state has a projected $2.2 billion deficit for the next biennium, 2015 to 2017. There’s also a transportation funding problem.

Now, not even his top allies in the House think new cuts aren’t possible.

The situation is so bad in Wisconsin that to try to balance the budget in anticipation of a possible 2016 presidential campaign, Walker is rumored to be considering selling off public assets as a stopgap measure just to make the numbers look good. The contrast with states like California, which raised taxes to help balance its budget and cover a shortfall in education, couldn’t be clearer: California’s revenue is surging, while tax-cutting states are figuring out how to mitigate the damage.

(click here to continue reading The Laffer Curve has flatlined.)

Put Money in the Parking Meter or else!
Put Money in the Machine or else!

Will this example stop the next GOP executive branch from claiming that cutting tax rates will help grow economies? Probably not. In fact, I wouldn’t be surprised if newly elected Illinois Governor Bruce Rauner tries his best to lower tax rates on his own wealth during the next four years. If Rauner was such a good business man, perhaps he’d let facts and history convince him that perhaps the marginal tax rates are too low…

To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent. Preposterous, right? Well, it turns out that’s what the data tells us, or would, if we had the ears to listen.

This post will be a bit more complicated than my usual “let’s graph some data” approach, but not by much, and I think the added complexity will be worth it. So here’s what I’m going to do – I’m going to use a statistical tool called “regression analysis” to find the relationship between the growth in real GDP and the top marginal tax rate. If you’re familiar with regressions you can skip ahead a few paragraphs.

Regression analysis (or “running regressions”) is a fairly straightforward and simple technique that is used on a daily basis by economists who work with data, not to mention people in many other professions from financiers to biologists. Because it is so simple and straightforward, a popular form of regression analysis (“ordinary least squares” or “OLS”) regression is even built into popular spreadsheets like Excel.

(Click here to continue reading http://angrybearblog.com/2010/12/top-marginal-income-tax-rate-should-be.html The top marginal income tax rate should be about 65%…)

Written by Seth Anderson

January 12th, 2015 at 9:01 am

Posted in government,politics

Tagged with ,

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