A primer on the Laffer curve for both left and right

Having worked on this issue for decades, I can state with great confidence that there are two groups that make my job difficult:

The folks who don’t like pro-growth tax policy and thus claim that changes in tax policy have no impact on the economy
The folks who do like pro-growth tax policy and thus claim that every tax cut will “pay for itself” because of faster growth

or all intents and purposes, I’m Goldilocks in the debate over the Laffer Curve. Except instead of stating that the porridge is too hot or too cold, my message is that changes in tax policy generally lead to more taxable income, but the growth in income is usually not enough to offset the impact of lower tax rates.

In other words, some revenue feedback but not 100 percent revenue feedback.

https://fee.org/articles/the-laffer...-right-understand-this-basic-economic-theory/

KLATTU said:

Having worked on this issue for decades, I can state with great confidence that there are two groups that make my job difficult:

The folks who don’t like pro-growth tax policy and thus claim that changes in tax policy have no impact on the economy
The folks who do like pro-growth tax policy and thus claim that every tax cut will “pay for itself” because of faster growth

or all intents and purposes, I’m Goldilocks in the debate over the Laffer Curve. Except instead of stating that the porridge is too hot or too cold, my message is that changes in tax policy generally lead to more taxable income, but the growth in income is usually not enough to offset the impact of lower tax rates.

In other words, some revenue feedback but not 100 percent revenue feedback.

https://fee.org/articles/the-laffer...-right-understand-this-basic-economic-theory/

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And when Kansas brought in Art Laffer for their tax experiment... what happened there?

Winston said:

And when Kansas brought in Art Laffer for their tax experiment... what happened there?

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The author of the article (Daniel J. Mitchell) is pretty extreme (libertarian, worked for Cato etc), so... don't expect much contrition from him when it comes to Kansas.

Unsurprisingly, he blamed it on spending. Somehow he ignored that Kansas already had a very thin state government, and that the tax cuts eviscerated revenues. He crowed that tax rates didn't jump back to pre-Brownback levels, that they never should have promised that the tax cuts will pay for themselves, and insisted that Kansas should have cut more -- without, of course, him actually saying what else should have been cut, or having to live with the consequences of those cuts.
(e.g. https://danieljmitchell.wordpress.com/2017/06/21/three-lessons-from-the-tax-defeat-in-kansas/)

2 close-minded ( IT DOESN"T WORK!!!!!)hyper-partisan liberals Focus on the one example that doesn't support the lw narrative, ignore the rest.

How shocking!



As if there were some panacea that always works every time under all conditions.


LAFFRIOT

KLATTU said:

2 close-minded ( IT DOESN"T WORK!!!!!)hyper-partisan liberals Focus on the one example that doesn't support the lw narrative, ignore the rest.

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Yeah, OK. Try looking in a mirror.

Among economists, this is not a partisan issue. The overwhelming majority of economists, from pretty much all political positions and ideologies, know that the Laffer Curve does not work (or, to be more specific, only comes into play when effective tax rates hit the 70% range). The Laffer Curve epically failed during the Reagan years, during Bush 43's term, UK in 2013, in Louisiana under Jindal, and now with Trump. Kansas is just a glaring example, as Laffer himself helped design the cuts, and who promoted the cuts as generating a surplus... eventually.

This is only a "partisan" issue in the sense that a partisan dedication to tax cuts has pushed many (not all) conservatives into the highly irrational claim that "tax cuts pay for themselves!" despite the abundant evidence to the contrary.

As if there were some panacea that always works every time under all conditions.

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lol

I hate to break this to you, but: Conservatives has proclaimed, for years and years, that tax cuts are the panacea that work every time, under all conditions. If the economy is up? Cut taxes. We're in a recession? Cut taxes. Unemployment is high? Cut taxes. Unemployment is at record lows? Cut taxes. Were you not paying attention?

Visbek said:

YeThe Laffer Curve epically failed during the Reagan years,ntion?

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It did huh?




There’s lots of data here, but pay close attention to the columns on the right and see how much income tax was collected from the rich in 1980, when the top tax rate was 70 percent, and how much was collected from the rich in 1988, when the top tax rate was 28 percent.

The key takeaway is that the IRS collected fives times as much income tax from the rich when the tax rate was far lower. This isn’t just an example of the Laffer Curve. It’s the Laffer Curve on steroids and it’s one of those rare examples of a tax cut paying for itself.

Folks on the right, however, should be careful about over-interpreting this data. There were lots of factors that presumably helped generate these results, including inflation, population growth, and some of Reagan’s other policies. So we don’t know whether the lower tax rates on the rich caused revenues to double, triple, or quadruple. Ask five economists and you’ll get nine answers.

But we do know that the rich paid much more when the tax rate was much lower.
https://danieljmitchell.wordpress.com/2011/11/06/a-lesson-on-the-laffer-curve-for-barack-obama/

Of course , being a hyper-partisan liberal ,you'll spin it so that all the OTHER ( stuff in italics) factors were the reason for the spectacular results, but only a hyper-partisan liberal would call that an an *epic* failure.

And course , being hyper- partisan Democrat, your primary concern is how much money comes in to feed the BIG GOVERNMENT machine ,but that's not the primary goal of the Laffer curve.

Real GDP grew over one-third during Reagan's presidency, an over $2 trillion increase. The compound annual growth rate of GDP was 3.6% during Reagan's eight years, compared to 2.7% during the preceding eight years.

some *epic* failure ( snicker)

Visbek said:

Yeah,

I hate to break this to you, but: Conservatives has proclaimed, for years and years, that tax cuts are the panacea that work every time, under all conditions. If the economy is up? Cut taxes. We're in a recession? Cut taxes. Unemployment is high? Cut taxes. Unemployment is at record lows? Cut taxes. Were you not paying attention?

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STRAWMAN alert!!!!
that's not what d-mitch said in his article. In fact he specifically refuted that.


"...message is that changes in tax policy generally lead to more taxable income, but the growth in income is usually not enough to offset the impact of lower tax rates."

Visbek said:

Yeah, OK. Try looking in a mirror.

Among economists, this is not a partisan issue. The overwhelming majority of economists, from pretty much all political positions and ideologies, know that the Laffer Curve does not work (or, to be more specific, only comes into play when effective tax rates hit the 70% range). The Laffer Curve epically failed during the Reagan years, during Bush 43's term, UK in 2013, in Louisiana under Jindal, and now with Trump. Kansas is just a glaring example, as Laffer himself helped design the cuts, and who promoted the cuts as generating a surplus... eventually.

This is only a "partisan" issue in the sense that a partisan dedication to tax cuts has pushed many (not all) conservatives into the highly irrational claim that "tax cuts pay for themselves!" despite the abundant evidence to the contrary.



lol

I hate to break this to you, but: Conservatives has proclaimed, for years and years, that tax cuts are the panacea that work every time, under all conditions. If the economy is up? Cut taxes. We're in a recession? Cut taxes. Unemployment is high? Cut taxes. Unemployment is at record lows? Cut taxes. Were you not paying attention?

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Exactly. I heard Laffer once answer the question "How does one know where one is on the Laffer Curve at any given time?". He laughed and said you cannot know so just cut taxes anyway. This sums the whole sorry mess up. It was a ruse to justify tax cuts, nothing more. Remember, the curve is a mathematical model only, it does not and cannot predict outcomes along the curve. There are simply too many variables involved in the real world. But Laffer uses only two, tax rates and tax revenues. Its all just bull.

Vadinho said:

Exactly. I heard Laffer once answer the question "How does one know where one is on the Laffer Curve at any given time?". He laughed and said you cannot know so just cut taxes anyway. This sums the whole sorry mess up. It was a ruse to justify tax cuts, nothing more. Remember, the curve is a mathematical model only, it does not and cannot predict outcomes along the curve. There are simply too many variables involved in the real world. But Laffer uses only two, tax rates and tax revenues. Its all just bull.

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Other way around.
I'm sure he oversells it,(and Republicans too) but the overall premise is just plain common sense.

KLATTU said:

2 close-minded ( IT DOESN"T WORK!!!!!)hyper-partisan liberals Focus on the one example that doesn't support the law narrative, ignore the rest.

How shocking!

As if there were some panacea that always works every time under all conditions.

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Yeah, see that's how science works genius. It's called a counterexample. It proves that there are actually a ton of other factors in play that truly impact the economy and taxation is just one of them. The truth is that moderate changes in tax policy do not impact the economy much if at all. However, deficit spending can boost an economy. That is why in some situations where you see tax reduction you see short-term economic improvement, but it's generally not the tax cuts - particularly if they are focused on the wealthy - it's the deficit spending. It's the injection of short-term stimulus through borrowing the boosts the economy. If you cut critical spending that benefits poorer and middle-class Americans in order to pay for your tax cuts to millionaires you will not only see no benefit you will likely tank your economy just like Kansas did.

The fundamental truth about the economy is that it is consumer based. If you want a strong economy you must improve the situation of everyday average consumers whose everyday purchases make up the bulk of our GDP. Wealthy people are already wealthy. If they weren't buying a new boat or car with the first million dollars they made this year they're not going to buy one with the next 20k in tax cuts you give them either. They're going to use the new money for the same thing they were using their other money for. In a struggling economy, they're not going to hire workers. They're going to put it into savings or buy some kind of safe investment like gold.

When you have a struggling economy you need to inject stimulus into the consumer base. Average Americans and poor Americans who are already struggling with debt, and living paycheck to paycheck. Anything that hurts them, hurts the economy, and anything that benefits them benefits the economy. These people are already not paying much in taxes so you can't help them with a tax cut. If you want to benefit average Americans you need to focus on government investments in things we always need anyway. Roads, bridges, tunnels, and other infrastructure. Energy development. Schools and health care.

It doesn't matter how bad our economy is people still get sick, and kids still need an education. There's no reason to cut funding for those things. Infrastructure updates are always necessary. A down economy is a perfect time to invest in it and take advantage of cheap construction labor. Energy will always necessary. Making investments to move us toward renewables creates good long-term jobs that can't be shipped overseas. Installing and maintaining solar panels as well as windmills can create thousands of jobs not to mention ensure that we're not beholden to ****ty countries like Saudi Arabia.

KLATTU said:

Other way around.
I'm sure he oversells it,(and Republicans too) but the overall premise is just plain common sense.

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So is the idea that eating food is good for you, but if you're using it to justify stuffing your face all day with all kinds of crap you're an idiot. As such a simple concept it's nonsensical and pointless. If you can't tell me how much I should eat, and of what types of foods then it's worthless garbage.

Clearly, our current deficits prove beyond a shadow of a doubt that the current Republican tax cuts did not pay for themselves, nor did they give us any significant boost to the economy. President Obama created the same number of jobs and presided over similar economic growth with higher taxes while reducing the deficit. So did Bill Clinton.

MrWonka said:

So.

Clearly, our current deficits prove beyond a shadow of a doubt that the current Republican tax cuts did not pay for themselves, nor did they give us any significant boost to the economy. President Obama created the same number of jobs and presided over similar economic growth with higher taxes while reducing the deficit. So did Bill Clinton.

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I would agree with first but not the second.

I was against the GOP tax cut except for the corporate part.

They have resulted in less revenue, but GDP growth....
Trump tax cuts push US economic growth to highest since 2014
https://www.thetimes.co.uk/article/us-gdp-accelerates-to-4-1-growth-after-trumps-tax-cuts-39p0gwth8


( I'm sure you can find some partisan lw site that can spin , er uh I mean explain that growth away.Or that it was Obama's doing)

LAFFRIOT

KLATTU said:

Other way around.
I'm sure he oversells it,(and Republicans too) but the overall premise is just plain common sense.

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Are you saying that cutting taxes at any point on the curve is common sense? If your only goal is to lower tax rates then yes. If your only goal is to maximize tax revenues then no. So which is it? Is the deficit a function of too little taxation or too much spending? I know the answer from a conservative view point. In the world of conservative dogma, the deficit only matters when they lose power. When they regain power, it no longer is a pressing issue because all must bow to the altar of lower tax rates especially for the rich and corporations.

KLATTU said:

I would agree with first but not the second.

I was against the GOP tax cut except for the corporate part.

They have resulted in less revenue, but GDP growth....
Trump tax cuts push US economic growth to highest since 2014
https://www.thetimes.co.uk/article/us-gdp-accelerates-to-4-1-growth-after-trumps-tax-cuts-39p0gwth8


( I'm sure you can find some partisan lw site that can spin , er uh I mean explain that growth away.Or that it was Obama's doing)

LAFFRIOT

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GDP growth is an interesting figure but are you maintaining that it alone is the most important metric? Economists would disagree. Say the one thing holding back GDP rates that reach 10% was taxation. Would you advise we abolish taxes altogether to get to that growth rate? If you say yes, then you are approaching some of the possible moves an economy run by MMT principles would give as options. But even the MMT folks would say that there would be a trade off. You could end up with inflation or loss of confidence in the dollar or very high interest rates....this is why macro is so complicated, everything is tied together but no single variable is the key, its a mix of everything. That is why the big debates are about modeling.

Vadinho said:

Are you saying that cutting taxes at any point on the curve is common sense? Ins.

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no.next

Vadinho said:

GDP growth is an interesting figure but are you maintaining that it alone is the most important metric?g.

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Not what I said.

Read it again.

KLATTU said:

Not what I said.

Read it again.

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OK, just trying to clarify what you said. You said that some left wing site would spin something or other to give Obama credit for something or other. That one line needs further explanation in my opinion.

KLATTU said:

Having worked on this issue for decades, I can state with great confidence that there are two groups that make my job difficult:

The folks who don’t like pro-growth tax policy and thus claim that changes in tax policy have no impact on the economy
The folks who do like pro-growth tax policy and thus claim that every tax cut will “pay for itself” because of faster growth

or all intents and purposes, I’m Goldilocks in the debate over the Laffer Curve. Except instead of stating that the porridge is too hot or too cold, my message is that changes in tax policy generally lead to more taxable income, but the growth in income is usually not enough to offset the impact of lower tax rates.

In other words, some revenue feedback but not 100 percent revenue feedback.

https://fee.org/articles/the-laffer...-right-understand-this-basic-economic-theory/

Click to expand...

Yawn.

https://qz.com/895785/laffer-curve-...about-trickle-down-economics-and-reaganomics/

Tanngrisnir said:

Yawn.

https://qz.com/895785/laffer-curve-...about-trickle-down-economics-and-reaganomics/

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Form *YOUR LINK*
"Laffer’s general idea of supply-side stimulus can sometimes work. Cutting tax rates that primarily benefit rich people shifts wealth from the middle classes to the rich. That might sound unfair, but in developing countries where there’s not enough money to fund the investment needed to spur growth, a Laffer-style policy could (temporarily) help stimulate economic expansion by channelling wealth to potential investors."

Exaclty what Laffer says- it can sometimes work.
So even this lw reporter admits it's valid ( and then goes on to embarasses hreself with all kind of partisan blather )

KLATTU said:

Form *YOUR LINK*
"Laffer’s general idea of supply-side stimulus can sometimes work. Cutting tax rates that primarily benefit rich people shifts wealth from the middle classes to the rich. That might sound unfair, but in developing countries where there’s not enough money to fund the investment needed to spur growth, a Laffer-style policy could (temporarily) help stimulate economic expansion by channelling wealth to potential investors."

Exaclty what Laffer says- it can sometimes work.
So even this lw reporter admits it's valid ( and then goes on to embarasses hreself with all kind of partisan blather )

Click to expand...

I should have been more specific, then. It's not the magic bullet that many conservatives fawn over and genuflect before, and has never been proven to be remotely or honestly applicable to the US economy.

KLATTU said:

It did huh?

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It did. Cherry-picking numbers, whose source is not identified, while ignoring that Reagan repeatedly raised taxes during his term, and ignoring all sorts of factors like corporate tax rates and increases in income inequality, is nowhere NEAR sufficient to prove that "tax revenues from this group increased specifically because Reagan cut taxes."

Reagan went way overboard on his initial tax cuts, which increased the deficits by $208 billion (in 2012 dollars) during the first four years of his term. The 1986 Tax Reform Act, which was supposed to be revenue neutral, cost another $1 billion.

Reagan also raised taxes in 1982, 1983, 1984 and 1987 to claw back $137 billion.

Equally (if not more) important is that it wasn't actually Reagan's policies that got the nation back on track and led to increases in GDP. The biggest factor was very likely Paul Volcker's policies as Fed Chair (appointed by Carter), who stopped inflation by whacking up interest rates. While this did cause a short recession early in Reagan's term, it brought inflation under control, which allowed the economy to ultimately regain its footing, and thus get back to growth.

Folks on the right, however, should be careful about over-interpreting this data.... Ask five economists and you’ll get nine answers.

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Pretty much none of them will say that it was the tax cuts that increased tax revenues.

Of course , being a hyper-partisan liberal ,you'll spin it so that all the OTHER ( stuff in italics) factors were the reason for the spectacular results, but only a hyper-partisan liberal would call that an an *epic* failure.

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:roll:

I pay attention to actual economic data, which repeatedly shows that tax cuts do not pay for themselves.

And course , being hyper- partisan Democrat, your primary concern is how much money comes in to feed the BIG GOVERNMENT machine ,but that's not the primary goal of the Laffer curve.

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Please.

The only "partisan" factor here is that Republicans also expand government and increase spending, but just pretend that they don't; and that some Republicans use the Laffer Curve as an excuse to cut taxes, any time, rain or shine.

Tanngrisnir said:

I should have been more specific, then. It's not the magic bullet that many conservatives fawn over and genuflect before, and has never been proven to be remotely or honestly applicable to the US economy.

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WHAO not even remotely applicable.

Well, you must not have looked at the post above where I showed that growth exploded and tax revenues pentupled when Reagan cut the tax rates. So I'd say the 'not even remotely statement ' seems a little extreme . LAFFRIOT

Visbek said:

It did. Cherry-picking numbers, whose source is not identified, while ignoring that Reagan repeatedly raised taxes during his term, and ignoring all sorts of factors like corporate tax rates and increases in income inequality, is nowhere NEAR sufficient to prove that "tax revenues from this group increased specifically because Reagan cut taxes."
]

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What the author said:

"Folks on the right, however, should be careful about over-interpreting this data. There were lots of factors that presumably helped generate these results, including inflation, population growth, and some of Reagan’s other policies.]So we don’t know whether the lower tax rates on the rich caused revenues to double, triple, or quadruple. Ask five economists and you’ll get nine answers."

Boy you are determined to knoock thos strawmen you build, eh?

KLATTU said:

WHAO not even remotely applicable.

Well, you must not have looked at the post above where I showed that growth exploded and tax revenues pentupled when Reagan cut the tax rates. So I'd say the 'not even remotely statement ' seems a little extreme . LAFFRIOT

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Huh. What an interesting, fairy tale world you live in. Must be fun.

https://www.brookings.edu/blog/up-front/2017/12/08/what-we-learned-from-reagans-tax-cuts/

KLATTU said:

Exaclty what Laffer says- it can sometimes work.

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That is NOT what Laffer says.

Laffer says that it almost always works. That's why he accepted a $75,000 payment from the state of Kansas to help them craft their tax cuts, even though Kansas state taxes were already fairly low.

Most economists, again, say that there might be that effect when taxes are very high -- e.g. 70% rate. That isn't "70% top marginal tax rate," it means "the government is taking 70% of your income."