This is scheduled to disappear from Yahoo  soon — I wanted to capture it before it went away. Its a criticque of Supply Side economics by Charles Wheelan, former US columnist for the Economist, and at present an economics and public policy professor at the University of Chicago and visiting prof at Dartmouth College. Wheelan is the author of Naked Economics: Undressing the Dismal Science.

Debunking One of the Worst Ideas in Economics
Wednesday, May 3, 2006

http://finance.yahoo.com/columnist/article/economist/4065

"In this column, I’m focusing on bad economics. In fact, I’m going to write about what I consider to be the two worst economic ideas — or at least ideas that pass as economics, though both have been thoroughly repudiated by nearly all credible thinkers.

When I say worst, I don’t mean the most outlandish (e.g. stock prices are controlled by aliens) because those ideas usually collapse of their own weight. Rather, the most pernicious bad ideas in economics are those that have a ring of truth. They’re hard to debunk because they have a certain intuitive appeal. As a result, they stick around, providing bogus intellectual cover for bad policy, year after year, decade after decade.

For the sake of political balance, I’ll skewer a favorite of the right in this column, and then a favorite of the left in my next piece.

The Laffer Curve

Economist Arthur Laffer made a very interesting supposition: If tax
rates are high enough, then cutting taxes might actually generate more
revenue for the government, or at least pay for themselves. (In one of
life’s great coincidences, he first sketched a graph of this idea on
Dick Cheney’s cocktail napkin.) If the government cuts taxes, then
Uncle Sam gets a smaller cut of all economic activity — but reducing
taxes also generates new economic activity. Laffer reasoned that, under
some circumstances, a tax cut would stimulate so much new economic
activity that the government would end up with more in its coffers –
by taking a smaller slice of a much larger pie.

In fairness to Mr. Laffer, there’s nothing wrong with this theory.
It’s almost certainly true at very high rates of taxation. If you
consider the extreme, say a 99 percent marginal tax rate, then the
government will probably not be collecting a lot of revenue. To begin
with, citizens are going to hide as much income as possible. (The more
honest ones will turn to barter and avoid the tax system entirely.) And
no one is going to rush out and take a second job or build a factory if
they get to keep only $1 of every $100 that they earn.

So it’s entirely plausible that slashing tax rates from 99 percent
to 30 percent could increase government tax revenues. It would deflate
the black market and provide a huge new incentive to work and invest.

No Big Jolt for the U.S.

But here’s the problem when we take Laffer’s theory and try to apply
it in the U.S.: We don’t have a 99 percent marginal tax rate. Or 70
percent. Or even 50 percent. We start with low marginal tax rates
relative to the rest of the developed world. (Yes, I understand that it
may not feel that way after the check you wrote last month.)

So cutting the tax rate from 36 percent to 33 percent is not going
to give you the same kind of economic jolt as slashing a tax rate from
90 percent to 50 percent. There’s no huge black market to be shut down,
no big supply of skilled workers to be lured back into the labor
market, and so on.

Will it generate new economic activity? Probably. And that will
generate some incremental tax revenue for the government. But remember,
it also means that the government will be taking a smaller cut of all
the economic activity that we already have.

Think about a simple numerical example: Assume you’ve got a $10
trillion economy and an average tax rate of 30 percent. So the
government takes $3 trillion.

Let’s cut the average tax rate to 25 percent and, for the sake of
example, assume that it generates $1 trillion in new economic growth (a
Herculean assumption, by the way). So now, what does Uncle Sam get? One
quarter of $11 trillion is only $2.75 trillion. The economy grows,
government revenues shrink.

That’s basically what happened with the large Reagan and George W.
Bush tax cuts, both of which were followed by large budget deficits.
Yes, spending has a lot to do with that, but the bottom line is
unequivocal: In both cases, government revenue was lower than it would
have been without the tax cuts.

Can’t Lose Weight by Eating More

Neither the Reagan nor the George W. Bush tax cuts were
"self-financing," as the Laffer disciples like to argue. According to
The Economist — my former employer and no bastion of left-wing thought
– the current Bush Administration’s top economist, Gregory Mankiw,
estimated that decreasing taxes on labor would generate enough growth
to recoup only about 17 cents for each lost dollar; a tax cut on
capital is better, paying for more than half of itself. Still, the
bottom line from the Bush Administration itself is that tax cuts reduce
Uncle Sam’s take.

So why does Laffer’s sketch on Dick Cheney’s cocktail napkin rank
near the top of my list of bad economic ideas? Because, when applied to
the U.S., it’s intellectually dishonest. The Laffer Curve offers the
false promise that we can cut taxes without making any sacrifice on the
spending side, and that’s simply not true. It’s the economic equivalent
of arguing that you can lose weight by eating more.

Let me be perfectly clear: I’m not arguing that tax cuts are bad.
I’m simply pointing out that we can’t pretend that tax cuts won’t
require reductions on the spending side to balance the budget. In fact,
you can disregard every other argument in this column and think about
one thing: If Laffer were right, lower taxes would never require any
spending sacrifice. We could pay a mere one percent of our income in
taxes and still fund all of our government spending — and maybe more!
Do you think that’s really possible?

This column should give you a hint of why economics is called the
dismal science — it’s all about tradeoffs. We’re the ones telling you
that if you get more of something, you probably have to get less of
something else.

Whether it’s tax policy or dieting, you can’t have your cake and
lose weight, too, which is why America currently has huge deficits and
a lot of fat people.

Category: Data Analysis, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

74 Responses to “Debunking One of the Worst Ideas in Economics”

  1. Barry Miller says:

    Mr. Wheelan’s point is well taken but it raises a question in my mind which remains ignored. What is the tax rate that will allow the most good to be done both private and public? Everyone agrees 99% is too high and 1% is too low. It may be impossible to know this answer. Since it is unlikely that anyone can know the perfect rate should we aim to error on the high side or on the low side?

  2. Opihi Man says:

    Ohhhh, so that’s why America has so many fat people. (Read the article to the end for reference to fat people.)

    I get it now …

    But hey, it worked for Reagan. Hell, Laffer brought down the Iron Curtain. To hell with the dollar and our kids’ future solvency. Tear down that wall! Oh, its already down. Nevermind.

  3. JoshK says:

    It’s a fairly good idea, and one that at the time was radical. Essentially, getting the most tax revenue may not come from raising rates, but instead by encouraging growth and investment.

    That flies in the face of the Dem argument repeated ad nauseuem in the times that tax cuts only benefit “the rich”. funny how they then go on to call for “fixing” the AMT.

  4. mrmanny says:

    Debunking? .. hardly.
    It depends on time frame. Lets ussume an economy that grows at 0% and is taxed at a 35% rate. If the tax is cut to 25% lets assume the econony grows at a 2% rate. (not unreasonable in my opinion).
    Now after 30 years the economy will be 1.8 times the size of the original. 1.8 x 0.25 = .45 which is bigger than if the econmy stayed at 1.0 x 0.35 = .35.

    If this guy is an economist then it is indeed a dismal science.

  5. David says:

    I always thought that inflation played a role in being able to sell supply side economics in the late 1970s …It has made less sense ever since to me.

  6. Steve C says:

    Unfortunately Charles Wheelan does not provide any analytical evidence to bolster his case. His arguments are mainly subjective. Why is it that several economies of Europe have sluggish growth with high taxes and Hong Kong (pre-China takeover) with very low taxes had way above economic growth and was a bastion of capitalism?

    The above post by mrmanny makes a lot more sense than Wheelan’s.

  7. cdd says:

    Thought the points were incomplete because they ignored the difference between private and public decisions. Except for obviously public goods, private decisions are more efficient in the long run and a higher proportion of private decision making surely helps foster a more responsible and reliant civil society. Also, no mention of the effect of lower capital taxes which undoubtedly are stimulating investment and job growth. Hope they remain low and perhaps some economists could discuss the merits of even lower capital taxes ??

  8. JoshK says:

    Also, does anyone else pick up the “tsk-tsk”‘ing tone of the piece. Debunking the simple thoughts of the right wing simpletons? The tone of “here, let someone wiser explain this to you”.

  9. ArizonaChartist says:

    If the Laffer Curve doesn’t work then how come Federal Tax revenue increased in fiscal year 2005 by $275 billion, a 14.6 percent increase over 2004 and $207 billion of which was from higher income tax revenue? Because the economy was growing? Would the economy have been growing without the tax cuts? I think it’s called the dismal science because the field is populated mostly with pessimists like Dr. Wheelan. Give me an optimist like Arthur Laffer any day of any week of any year.

    Also, no wonder we had a surplus under Slick Willy. He and Rubin increased the tax burden of the average American household by 20% over GHW Bush. Even Carter, the previous Dem President, had a lower average tax burden by 19%. It’s also worth noting that the tax burden of the average American household is still at historically high levels even after GW Bush’s tax cuts.
    http://www.heritage.org/research/features/BudgetChartBook/charts_R/r3.cfm

    Also note how revenue did not trough until 2003, ala a J-Curve.
    http://www.heritage.org/research/features/budgetchartbook/charts_C/c1.cfm

    The Laffer Curve works. ‘Nough said.

  10. Morgan says:

    I agree with Wheelan that there are some ranges over which decreasing the tax rate will increase revenue collected, and there are other ranges over which it will decrease revenue collected (so would Laffer, I presume, since his curve implies it).

    Where we sit is an open question. What are the assumptions Wheelan is using? Where did his $1 trillion figure come from? Is that the NPV of the difference between low-tax economic activity and high-tax activity? Assuming it is, over what time period? What were the assumptions about growth and discount rate that generated the figure? Why is $1 trillion “hurculean”, if (to mrmanny’s point), the change in growth rate is permanent? If annual real growth went from 2% to 4% due to a cut from 36% tax rate to 25% tax rate, it’s not “hurculean”, it’s peanuts!

    More fundamentally, however, I disagree with the implicit assertion that the proper function of government is to maximize total taxation.

  11. Andy says:

    ArizonaChartist: you’re using ONE year’s data point to bolster an argument about a trend, while ignoring the previous 3 years of data, which showed… what? You think tax revenue increased in 2002? Look at the numbers for yourself to see whether the tax cut really did what was intended… or was it deficit spending to the tune of over $1 trillion in less than 3 years? How much is $1 trillion in a $10 trillion economy? Doesn’t that closely track how well GDP has done over the same period? Did we remove taxes or just print money to improve the economy?

    Think critically about everything you’re told. Don’t just parrot someone else’s party line.

  12. ken says:

    I suggest that anyone stupid enough to defend supply side economics be banned from this site.

  13. Craig says:

    I don’t need the politcal part of this discussion.
    I think that’s part of the dishonesty.

    What I need to know is, how would this “theory” work in reality, say in my business.

    If I borrow record sums of money (see expense side of ledger) but i don’t produce enough to cover those expenses, is my economy growing?

    How is it that perfectly intelligent people apply theories to government fiscal policy that they would never dream of in their private dealings?

    Borrowing money to increase production is how it works, not the opposite.

    We have record deficits, record trade deficits, rising interest rates and inflationary costs, and essentially zero growth in the face of static to falling real wages.

    IOW, we are taking in less money, borrowing more, and still clinging to the idea we can cut revenues or not cut spending?

    Are republicans all hanging with Rush and doing drugs?
    Are you drinking Kudlow’s kool Aide or what?

    Try it this way…..it;s the exact same thing as ethanol.
    You CANNOT get MORE from less. This is the law of thermodynamics AND economics. There is no such thing as perpetual motion, a free lunch or something for nothing.

    Can we acheive better efficiencies? Yes.
    Can it be done with voodoo? Nope.

    We have two choices or a combination.
    We have to either CUT spending (good luck) or take in more money (raise taxes).

    you cannot CUT taxes and spend like a broken water main and say the economy is growing.

    YOU HAVEN’T PAID ANY EXPENSES YET, HOW CAN YOU KNOW IF THERE IS GROWTH?

    Does ONE day of increased wages take care of a months expenses? A good month a year?

    All we have to do is apply this voodoo to our own lives to see how bankrupt it is.

    I guarantee Laffer doesn’t run his investments, business or household on his curve or a like percentage of deficit, otherwise we wouldn’t know him by anything other than a listing in the public section in the local paper announcing his bankruptcy.

    I think we better let go of ideology and grasp simple economics….quickly.

    You cannot spend more than you produce, or that the spending will produce…..for long.

    if you cite increased tax revenue from “cuts” in taxes, then you need to cite the opposite side of the ledger.

    So far no one has done that. They simply spout-off on the side of the ledger that supports their ideology….at the expense of the facts, our wallets, and our children and grandchildren.

    Not only is that bankrupt of logic, it is immoral and un-American.

  14. alan says:

    Europe and Japan have sluggish growth because they have aging populations that are in a long term savings mode and still trying to shove their exports (savings) down the throat of a customer that has been to the buffet too many times, period, end of sentence.

  15. Morgan says:

    Craig:

    If real growth increases from 2% to 4% due to a cut from 36% to 25% in total tax burden (and I’m just throwing numbers out there – I have no basis for the exact numbers), taxes collected in a given year will be higher under the low-tax scenario after about 20 years. Total cumulative taxes collected (in raw, real dollars) will be higher after 36 years. Discount future flows at an additional 3% and the cumulative tax breakeven pushes out another 2-3 years.

    So there: I’ve shown that it is at least theoretically possible that total tax revenue (citing both sides of the ledger, you’ll note, by using cumulative figures) over the next 40 years will increase given a decrease in tax rate. With our shared concern about our children and grandchildren, we should both be pleased with the possibility that their government will take less of their paycheck while collecting more total revenue when they are in their prime taxpaying years.

    The problem is this – the Laffer curve is clearly correct in positing that there is some range over which revenues will increase and some range over which it will decrease, but exactly where those ranges lie is unknown. We don’t know what change in growth rate would result from a change from x to y in tax burden.

  16. Morgan says:

    I should also note that the idea that there will be some permanent increase in growth rate from x to y is also just hypothetical.

  17. M.Z. Forrest says:

    There are a couple ideas getting mixed up here. This is typical for supply side economics.
    1) The Laffer Curve only implies that there are conditions where a tax cut will result in increased revenues. The Curve also implies that there are conditions where a tax increase will result in additional revenues. For whatever reason, the former is almost always assumed despite our historically lower marginal rates in the upper brackets.
    2) Say’s Law is assumed to be true, e.g. supply creates its own demand. Keynes pretty much demolished it, but here are the assumptions involved:
    a) Business investment is solely determined by an ability to produce.
    b) If more money is available, more goods will be produced.
    c) Therefore, if you cut taxes, production will be increased resulting in an increase in taxable events and hence more revenue.

  18. J says:

    To me, the important point that Whelan makes is not whether the Laffer curve works in the U.S. or not, but rather any policy that looks solely at the revenue side without addressing the spending side is doomed to failure.

    Given the right’s affinity for the “tax cut=revenue increase” argument and the left’s mantra “tax cut=favored rich”, I would bet the truth is somewhere in the middle. The reason the argument gets so much attention is because it helps the politicians to keep our minds off of the real problem and their larger failure: too much spending!

  19. ArizonaChartist says:

    Andy,

    Look at the second chart. No, tax revenue did not increase in 2002. The tax cuts had a J-Curve effect as per my statement. You know, J-Curve = things get worse before they get better. The trend in Federal Tax Revenue since 2003 is up. I simply used 2005 as one data point to help put some numbers to a very generalized graph.

    Ken,

    You are what’s wrong with the liberal elite. Anybody who doesn’t agree with the lefties must be stupid, huh? Well that approach hasn’t worked for the last 6 years. Just ask Al Gore and John Kerry. This is an economic discussion, not a political one, so you should check your ‘tude.

  20. JoshK says:

    “I suggest that anyone stupid enough to defend supply side economics be banned from this site. ”

    Awesome. That is the motto of today’s left. “We are smarter because we say so”.

  21. Chad K says:

    So he’s saying small cuts don’t work? :) Let’s assume the rate’s at 30% now… how about we cut it to 15%. If we turn 3% growth into 6% growth, we’re +$EV over the long term.

    Laffer Curve or not…. I’m all for anyone putting money in my pocket… because in the end, it’s my family I care about more than anyone elses.

  22. Brendon says:

    Mankiw has already solved this debate. No hypotheticals and no matter how much you want Laffer to be right, he isn’t and never will be.

  23. Craig says:

    Morgan,
    I agree that we can make this case by plugging in some numbers, but I want to plug in actual numbers, not the numbers government ‘economists’ pull from their posteriors.

    The problem is we aren’t running off an honest ledger or on a known return for a known expense….we are flying blind, or worse, on faulty political BS instead of actuals.

    If we use the standard view on this list, which is tending toward slowing growth, increasing expenses (inflation) and tapped-out bank accounts and assets, (recession/stagflation) then we are looking at the same picture in our overall personal financial lives that mirrors itself in our government.

    Afterall, it is of, by and for the people! If the people are running negative savings, record personal deficits, and looking at falling incomes, real assets and currency value, how can we expect the governmental reflection of those same people will be markedly different?

    If we are all citing trouble in personal finance, as is the case here as a result of our collective denial, then we must apply the same principle to our government, or we are simply not being honest with ourselves.

    I wonder, how many folks with ARMs, tapped-out equity and no real wage gain are telling themselves the truth about their future? The same is true for our government.

    Replace ARMs with budget deficits, trade deficits and future expenses, and falling revenues RELATIVE to these long term expenses, (static to falling wages compared to inflation) and we have a correlation between our individual (mis)management and our collective (mis)management. Micro/macro, the difference is scale, not theory.

    In theory “relative” efficiencies can be obtained, but the relative figures are the issue. Using todays budget and trade deficits, spending, future rising obligations, accompanying expenses and the cost of the debt, it is certainly more difficult to make that case with the revenues claimed.

    If we use the relativity POV and factor in the trade deficit (we are buying more than we sell) and the budget deficit, (we are spending more than we make) and we are taking in additional short-term income (taxes), but in deflated dollars and in the face of massively rising **future** expenses, (remember, we have borrowed against the “trust funds” thereby hiding increased indebtedness) then how do we see net gain enough to proclaim growth, especially over any meaningful period of time? IE: the payback period for the debt, or how long it takes us to pay it off.

    Does anyone here really say they are projecting net gain from the current tax cuts that will overcome our overall future indebtedness? If NOT, (and we know this isn’t possbile without dimentia) then how can “growth” be proclaimed by these short-term claimed gains? Come on now…..

    Can anyone proclaim growth in the face of soft expense numbers for Iraq, hard numbers for medicare/SS and trade deficits, and soft income numbers? I know in my business this would freak me out. If I get hot numbers for a month (no doubt like your tax cuts I’m grateful) but I know I have rising expenses that are soft figures for years to come and I know will be monumental, can I tell the bank
    I’m “growing income”?

    They would laugh me out of the place.

    You will note I’m not simply accepting the BS that we have actually increased revenues, that is as unsubstantiated as the “surpluses” under the previous managers. Also, you can see I’m not trusting of either political ideology….all politicians are warmed over attorneys. Make of that what you will but
    I trust em’ as far as I can throw em. See above article regarding weight.

  24. ken says:

    According to conservatives arithmatic is liberal.

    Please, leave your politics outside this discussion.

    Supply side economics is as phoney as saying that you can spend more money by taking a pay cut at work and borrow whatever you want to make up the difference. Yes, you can do it but it is not sound fiscal policy for a nation or for a household.

  25. Paul Y says:

    There is a fundamental difference between the way business and government operate.
    Business is interested primarily in growth in revenue and profit. Business spends more to earn more.
    Government is interested in spending. The more it gets the more it spends.
    My mother was a government employee. Every year at the end of the budget year everyone in her department was encouraged to spend, lest they lose thier allocated funds next year. There are lot’s of good people in government, they just have a warped incentive scheme.
    I agree that cutting taxes results in increased deficit. But to expect the government to reduce spending first and cut taxes second is a fantasy. It’s like continuing to supply drugs to a junkie and expecting him to stop. It just ain’t gonna happen.
    The only way politicians and bureaucrats will stop spending is if you take away the money. Yes, that results in deficits, the same way that taking away the drugs results in violent withdrawl symptoms. But at the risk of being simplistic, pain is the only way to get better.
    For business minded people, this sounds completely counterintuitive. But big government is a different species and needs to be approached as such.

  26. Tom D says:

    ArizonaChartist: I haven’t dug into the data, but think about it: our economy over the past 5 years has been driven by excessive cheap liquidity and war spending. Tax revenues will go up with enough asset price inflation (sales of assets, home equity withdrawals, etc…. and subsequent consumer spending) caused by excess cheap liquidity. I just don’t buy the argument that dropping marginal tax rates from already low rates will induce enough economic activity to cover the cost of the revenue loss, unless masked by central bank activity.

  27. Morgan says:

    Brendon,

    Please point to Mankiw’s “solution”.

    Craig:

    “…I want to plug in actual numbers, not the numbers government ‘economists’ pull from their posteriors.”

    No disagreement there.

  28. JoshK says:

    “According to conservatives arithmatic is liberal.”

    Exactly. And GW is a puppet of Halliburton. And Bush lied, people died. And no blood for oil!

    The depth of leftist thought is awe-inspiring.

  29. Craig says:

    Well, Ken nails this and so much more succinctly that I do.

    I can live without the labels and name calling these days, it’s so counter productive to a real discussion.

    Politics is left and right, economics isn’t either. That doesn’t mean the political budget process isn’t seriously flawed, because it is as noted above, but the way to fix that is not to annihilate your personal and physical infrastructure by neglect due to cutting, but to keep your congressperson on a tight leash.

    If the US were a publically traded company, you all would RUN from it like Vonage the rabid dog.

    Rising future expenses, debt, falling income, no free cash flow. It’s bankruptcy no matter if it’s a company, a person or a government. (which is the sum of the whole).

    Now, just wait until he writes about the Dems….everyone gets to be right for a bit.

  30. ilsm says:

    All you righties,

    What was the general fund deficit (leave out the SS surpluses) in 2003 and 2004?

    Were the deficits much more than the increase in tax receipts you site.

    You cannot ignore the spending side when you claim tax activity affects revenue.

    Lefty

  31. Supply side economics coupled with interest rates being too low too long has caused America to be overbuilt with regard to houses. This could cause a major bubble burst and a serious recession. It is one thing to try supply side when the economy is burdened with high taxes, but quite another when rates are already low for the investor classes and when interest rates are low. Speculation then becomes the only game in town.

  32. joan says:

    Europe has had much less population growth than US . If you look at the following table it is much harder to make the argument that tax rates are that important for long term growth.

    Real Gross Domestic Product Growth rate 1980 – 2005 per Employed Person

    United States 1.7
    Canada 1.2
    Australia 1.4
    Republic of Korea 4.6
    Austria 1.8
    Belgium 1.6
    Denmark 1.8
    France 1.7
    Germany 1.5
    Italy 1.2
    Netherlands 0.8
    Norway 2.2
    Sweden 2.0
    United Kingdom 2.0

  33. Spending is pleasurable. Saving is deferred spending; not so pleasurable. So…. pick your poison from the offered options: tax and spend or borrow and spend.

    When consumption exceeds production the source tapped first is savings, then capital. Supply side theory has enabled us to begin eating our seed corn by transferring trillions overseas and failing to renew infrastructure. And, have the folks who are engineering this (Congress, White House, FED and Wall Street) to call it growth.

    Makes perfect sense to me… Yeah, right.

  34. Estragon says:

    Surely a discussion of the recovery of tax cuts has to be done in the context of where the economy is in terms of the business cycle. An economy operating at near full employment and growing at close to the maximum sustainable rate won’t likely recover nearly as much of a tax cut as one operating with lots of slack.

  35. JoshK says:

    “Supply side economics coupled with interest rates being too low too long has caused America to be overbuilt with regard to houses.”

    I don’t think that is a fair analysis. We have a strange tax policy that encourages spending on homes and a fed that printed a lot of dollars. The two are a deadly combination, and not related one way or another to supply side economics.

    You could make a better argument saying that supply side economics would reduce the likelyhood of such a bubble as when tax rates are lower the deductability is less of an incentive.

    The best argument out of this would be for a flat (or no-deduction) tax code.

  36. dryfly says:

    >>The Laffer Curve works. ‘Nough said.<<

    Laffer works in the same way roosters crowing makes the sun rise.

    Now I can hardly wait until Wheelan rips into the ‘left leaning’ sacred cow… not like there isn’t target rich territoty over their too. I can only guess what his No 1 bitch there might be. Social expenditures as ‘investments’ maybe?

  37. dave l says:

    Wow, the poetry of wishful thinking is not dead…

    Let’s say we cut the top rate to 8%, and growth rises from 3% to 7.75%. With the right discount rate, the loss in NPV terms can be shown to be trivial! Besides, “it’s my family I care about more than anyone elses.”

    I think the clearest lesson to be drawn from these empty debates is that it is always better to begin by deciding how much we want to spend on government, and only then figuring out the best way to pay for it. A small, efficient government is an excellent goal, but recent history is pretty clear that awarding ourselves a big tax cut is the wrong way to start.

    Posted by: Dave L at Jul 6, 2006 12:47:11 PM

  38. jw says:

    sheesh.

    no matter your political bias there’s a giant pink elephant in the room that nobody ever talks about when these tax policy debates get rolling along:

    Witness: Fed, State, and Local spending have increased faster than revenues– FOR YEARS AND YEARS AND YEARS.

    And what about those “[insert president name here] tax cuts”?

    Bull hockey. Cutting a marginal rate while you legislate away a plethora of credits and schedule A allowances (and increase fees) is “revenue neutral”– and in some cases they were tax increases!

    In fact, there has also been numerous cases where Federal laws REQUIRED increased spending by State and Local governments, while making it look as though Fed programs had been cut.

    Meanwhile, “off-budget spending” AND “off-balance sheet liabilities” have soared.

    Those are the uncomfortable facts covering decades of every economic theory and political party.

    But don’t take it from me, just google “Comptroller General of the United States” and/or “David M. Walker” and you can find the speeches and articles of our current “Bean Counter in Chief”. This man is worried sick to death about the massive explosion in spending/debt we are facing in this country.

    Knowlegdeable folks in the trenches of our tax and accounting system (public and private) crack up when they hear all this wonky crap, because ain’t none of it ever been, or will ever be, applied (by the time the budget process shreds whatever someone thought they were doing in the first place).

  39. mike says:

    flat tax please, w/ no deductions, & cut gov’t spending. hey, was that a pig that just flew out of my butt?

  40. JoshK says:

    Speaking of government spending, we’re doing pretty well w/NJ’s shut down. Maybe 5% tax rate isn’t such an unreasonable goal for one day.

  41. Morgan says:

    ilsm:

    “You cannot ignore the spending side when you claim tax activity affects revenue.”

    Huh? Revenue is what comes in. Spending is what goes out – the two are independent quantities (or they would be if our political class didn’t see increased revenue as de facto justification for more spending, so maybe they aren’t stochastically independent).

    If your point is that the government spends more than it takes in, you’re right. Not a controversial point. So spending is presumptively too high, or tax revenue is too low.

    But the question is whether reductions in tax rates lead to increased growth and, hence, increased tax revenue – above what it would have been if tax rates had not changed. If it does, then you haven’t reduced your ability to pay for spending (in the long run) – you’ve increased it.

    Note “in the long run” – pointing to a reduction in revenues in the first few years after a tax cut as evidence that tax cuts do not increase revenue is dishonest or, at least, unconsidered. No one should expect today’s tax cuts to lead to increased revenue tomorrow – look many years down the road for that.

    The increase in revenue we’re seeing now is not primarily the result of increased growth, it’s largely bracket creep (if revenues increased by 14%, while the nominal economy grew by 7%, what we saw is a tax cut followed by a de facto tax increase). So it’s also dishonest or unconsidered to point to that as evidence that tax cuts do create more tax revenue.

    Still, I fundamentally disagree that maximizing tax revenue is a proper function of government. We should decide as a nation that x% of GDP is an appropriate amount to tax in light of growth expectations and what we want government to do, and limit long term spending to roughly that amount (consistent deficits don’t concern me if they are in line with maintaining a debt/gdp ratio of 0.5 or so).

    Estragon:

    I think the argument would be that sustainable growth would be higher at any point in the cycle, though that’s another unknown to add to the pile on which the entire debate is held.

    Joan:

    I’d be interested to see how those countries’ tax rates have changed over time – my impression is that in Europe, at least, the tax burden has been rising. Certainly over the last decade the relatively low-tax US has outperformed most developed high-tax nations. Still, let’s make sure that unknown is in the pile as well.

  42. Andy says:

    DryFly:

    If you follow the link at the top, he spent his June column on picking apart the “left’s” desire to think of “lumps of labor” where protecting jobs actually helps keep jobs and expand the economy. The example is the unemployment mess in France. Also insightful.

    AZChartist:

    You’re still not accounting for the over $1 TRILLION in bills yet to come due. Cutting revenue and borrowing to make up the difference is not a sane way to run a government.

    And ChadK:

    If you wait long enough, the stopped clock will be right twice a day. Doesn’t mean the clock works. In those 20 years while you wait for revenues to catch up to what you cut, what did you live on and are you assuming that the same growth in expenses didn’t somehow happen?

  43. MDDwave says:

    Unless there is good fiscal government management (balanced budget) with Laffer tax cuts, it seems that Laffer Tax cuts is another expression for “government deficit spending” to generate growth. Selling it as tax cut only is a political trick. The voters will get more “take home” pay through the tax cut, but it will be payed by government debt.

  44. wcw says:

    Those here who actually are interested in more than political posturing should indeed do a little reading, and stop scribbling on cocktail napkins. A nice recent study was released by the CBO, here: http://www.cbo.gov/showdoc.cfm?index=6908

    “This brief..analyzes the macroeconomic effects of a simple tax policy: a 10 percent reduction in all federal tax rates on individual income. …CBO estimated effects on output ranging from.. a decrease of 0.1 percent to an increase of 1.1 percent over the second five years. The budgetary impact of the economic changes was estimated to.. add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.”

    There you go: a large decrease in tax rates might — under the most optimistic models extant — increase growth as much as 1% and offset as much as a third of the revenue lost. It might, on the other hand, *decrease* long-run growth and add to revenue losses.

    While this is not generally the place for political squabbles, I can’t resist noting that the distrubution of the GWB tax cuts by income strata are hardly a mystery. Do your own Googling. You trade on the margins, so you need to know the marginal effects of big policy changes like these.

  45. true blue repuiblican says:

    Josh you’re my boy!

    When those terrorist loving liberal traitors point out that almost al the tax cuts go to the rich that’s class war.

    It’s not class war when they point out that Republicans want to trash the fed money owed to social security saying that unlike other bonds they’re just breakable promises. Because making those duds who work for a living pay to the general fund which benefits true Americans like Paris Hilton (who we Republicans believe should never pay a dime in taxes because just be existing she creates wealth) is not class war, it’s the wonwership society.

    We need a negative tax where people who make a certain amount get payed by the government. Something like our economic plan in Iraq where we took 20 billion kin Iraqi money and gave it to decent American corporations who lost 20 billion of it which cut tax rates and grew the economy.

  46. Morgan` says:

    wcw:

    “…a large decrease in tax rates…”

    A shift from 25% to 22.5% on only federal income taxes is not particularly large (call it a 5% tax cutr overall) – so I was surprised to see that the estimated increase in growth was so strong – in the unlimited foresight case where taxes do not subsequently rise, a 0.7% increase above baseline – apparently in perpetuity.

    In which case (if growth goes from 2% to 2.7%) breakeven on annual revenue collected occurs in year 9, cumulative revenue in year 16.

    Chalk one up for the cocktail napkins.

  47. George N. Miller says:

    The actual supply-side argument as advanced by the late Jude Wanniski as well as Robert Bartley is a little more subtle than Mr. Wheelan would have us believe. Neither of them would argue that there is a dollar-for-dollar offset in the form of greater tax revenue at lower rates. Their claim is that as long as the increase in total economic output attributable to lowered tax rates is sufficient to service any debt incurred to make up foregone tax revenues that those tax cuts are, in fact, self-financing.

  48. Rick DeMent says:

    One other thing no one has mentioned is the effect of dumping (up to a half a trillion) borrowed dollars into the economy. There are two effects one is that a portion of that money, the portion that is spent on war equipment, services, Homeland security jobs and the salaries of government employees in general is returned to the treasury as taxes on salaries and capital gains.

    The second is the amount of spending that is devoted to debt service, since interest rates are low, this that had a positive effect, as they go up this trend will reveres. As I understand it, the Laffer curve is all about huge cuts in marginal rates, we have already went to that well and future cuts are unlikely to return any significant increases and will never cover the deficit spending we have been on for the last 5 years.

    As for Social Security remember that the payroll tax serpluse has been masking the true size of the deficit since the Vietnam war. It’s funny that payroll tax is always included as revenue, yet the future liabilities are simply not discussed.

  49. Bonddad says:

    For those of you who are arguing for the Laffer Curve, look at this information from the CBO

    http://www.cbo.gov/budget/historical.pdf

    2001 tax revenue from individuals = 994 billion/9.9%GDP
    2005 tax revenue from individuals = 927 billion/7.5% GDP

    2001 Total national debt = 5.6 trillion
    Now = 8.3 trillion

    1981 tax revenue from individuals = 285 billion/9.3% GDO
    1984 revenues from individuals = 292 billion/7.8% GDP

    Reagan raised taxes at least 7 times during his presidency.

    Total national debt 1981 900 billion
    total national debt 1988 2.7 trillion

  50. wcw says:

    Hey, thanks for clicking through. Most people don’t. How do you see the rosy scenario as a possible future? Have you looked at the federal budget lately, or seen any good analysis that demonstrates foresight in practice?

    Links to peer-reviewed studies, please, if you have ‘em. The “chalk them up” comment would tend to indicate you haven’t read the literature, but I’d like to see what’s guiding your thinking if you have.

  51. Estragon says:

    Morgan – the sustainable rate of growth may or may not be increased by tax cuts at any point in the economic cycle, but that wasn’t my point. There’s simply more scope to generate incremental taxable events more quickly in an economy with lots of slack than there is in an economy that’s near full employment.

  52. Norman says:

    A plea to economists and the media: When tax rates are cut or increased call it exactly that do not call it a tax cut or a tax increase because as we have seen in the last few years with regard to investment taxes a tax rate cut can raise the taxes paid. There is a rate that this doesn’t happen, ie the peak in the Laffer Curve, and Mr. Wheelan should concentrate on finding this point on the curve rather than blathering.

  53. muckdog says:

    Democrats believe in wealth redistribution. Plain and simple. I think the Democrats just like raising taxes and letting those who are “wiser than you” decide what to do with your money for the “greater good.” Of course, they declare themselves the “wiser” and they get to define the “greater good.”

    Of course, today’s Republicans are quite liberal, too. Instead of taxing, they borrow money to spend on the “greater good.” George Bush has never vetoed any spending item and created another huge social program in his prescriptions for seniors plan.

  54. Craig says:

    Muck,
    Instead of trying to frame a statement for someone else, could you please state yours.

    I’m liberal on some issues and quite conservative on others. I’m tired of being called names and having my POV poorly illustrated by people who have nothing more than bad manners as an arguement.

    Without mentioning liberals, Democrats, Republican or conservative, or without trying to describe another person’s POV, can you state your views?

    I don’t know if it’s “liberal” or not to think of people as part of a business, as infrastructure or living equipment, but if they are, and I think people are investments for business, then spending money to educate and maintain their good health is not wealth distribution, it is in fact investment and maintenance.

    The ONLY thing that matters in business is the quality of people you employ. Now some may argue that technology, patents, various competitive advantages and moats are more important, but PEOPLE made all those possible, so we are back to people and human resources in the end.

    You have to change the oil on people or they break down and don’t give you good mileage.

    Not all of them are capable of deciding some of this stuff by themselves and others are.

    Try thinking about it this way. The average IQ is 100.
    Around 135-140 up is “gifted” and 70 cannot really understand the ins and outs of organized civilization.

    Most of you are 100 and above. Does it seem likely that you will be able to imagine the capabilities or limits of a person with a 70 IQ?

    Judging by this blog, even perfectly functional people have enough trouble keeping their money! Imagin not being able to understand even the most basic premise like addition and subtraction.

    That’s for natural or organic issues. Imagine how many functional illiterates we’re producing by not investing in our human resource.

    The result? Ironic.

    Remember that gigantic So. California fire that wiped out millions in real estate, due to a guy thrown out of a mental institution under the Reagan admin lighting a fire to keep warm?

    Extreme example, but it fits like a glove. The point is, there is a cost to not maintaining infrastructure, whether it is people or actual hard equipment.

    In the real world it doesn’t matter whether it’s the truck, the highway or the driver that breakdown, they all cost money, are infrastructure, and need maintenance.

    If there is only one way to pay for the maintenance, then I would rather pay cash than borrow to do it.

    There is also a curve that will illustrate the exact point where the equipment is scrap due to lack of maintenence. I’m not laffering either.

    So how stupid and unhealthy can we get before we are scrap compared to our competitors, who are investing in their infrastructure big time?

    Say goodnight. We are the Mr. Softy of countries.

  55. trader75 says:

    Consider this:

    If the USG wanted to, they could cut the tax rate to zero and still keep rolling along. How, you ask? By just printing the money they need to conduct business. Deliberate debasement of the money supply is a form of taxation in itself.

    So why doesn’t we do it this way? Because in a system that transparent, the link between inflation and taxation would be all too obvious. And there wouldn’t be a complexity-induced network of juicy loopholes for politicians and special interests to exploit.

    So: if inflationary government spending is indeed a tax–a hidden tax, and a very effective one–then the current administration has not actually cut taxes at all.

    Furthermore, if deliberately inflationary policies wind up goosing the asset markets, then such policies can be seen as a subsidy to those players best positioned to benefit from a rise in paper assets. Goldman Sachs and the like may well get far more indirect subsidy from Uncle Sam, via exploitable asset inflation, than the taxes they pay in.

    It’s all sleight of hand. And it’s all our fault. By ‘our’ meaning you and me on the grand scale, because we let it happen.

  56. Morgan says:

    wcw:

    You’re absolutely right that I haven’t read the literature, I’m just running the numbers given in the piece you linked. If growth goes from 2% annual to 2.7% annual (as suggested by one of the more optimistic scenarios in the report), while total tax burden (percent of economic activity collected as tax) falls from by 5% (from 36% to 36%*0.95), everything you need to figure it out is defined – that’s just the way the revenues project into the future.

    Please don’t get the impression that I have any confidence things would really work out that way. I mentioned a pile of unknowns above, and still count the increase in the rate of growth of the economy due to a tax cut among them, despite the CBO’s attempts to pin things down.

    Estragon:

    There’s certainly more room to create employed persons who can be taxed, and probably more unprofitable companies that can start turning a profit – I suppose a case could be made for follow-on impacts as well. Point taken (unless I’m still missing it, which is, of course, a possibility).

  57. McSwiggen says:

    When money is deposited with the government it disapears and reapears in the form of government fiat.

    When money is deposited with the taxpayers it “spreads as a stone hits the middle of a pond”

    Government spends and our tax dollar is the accelerant which creates inflation which sucks the vary life out of the $’s from our savings account.

  58. Mike G says:

    Lets assume an economy that grows at 0% and is taxed at a 35% rate. If the tax is cut to 25% lets assume the econony grows at a 2% rate. (not unreasonable in my opinion). Now after 30 years the economy will be 1.8 times the size of the original. 1.8 x 0.25 = .45 which is bigger than if the econmy stayed at 1.0 x 0.35 = .35.

    Cutting the tax rate from 30% to 25% would add a full 2% to the growth rate every year for the next 30 years? This seems a mite optimistic. Unfortunately I doubt you would get that much even in the first year, when the cut is getting everyone’s attention.

    That flies in the face of the Dem argument repeated ad nauseuem in the times that tax cuts only benefit “the rich”. funny how they then go on to call for “fixing” the AMT.

    Nice straw man you’ve built there, Mr. Deliberately Obtuse.

  59. groucho says:

    “If the USG wanted to, they could cut the tax rate to zero and still keep rolling along. How, you ask? By just printing the money they need to conduct business. Deliberate debasement of the money supply is a form of taxation in itself.”

    trader75, this is very true. The tax system at the national level is really just a political redistribution scheme. It can also act as a “brake” on govt spending, unless you elect someone like Cheney. And then of course “deficits don’t matter”. So, print and borrow till asia pukes.

  60. Kaleberg says:

    I still don’t understand why people say that cutting taxes stimulates the economy when historical data show us that raising taxes stimulates the economy. The Civil War income tax led to the boom of the 1870s; the Great War income tax led to the roaring 20s, which ended with a tax cut and then the Great Depression. Tax increases in the 1930s and 1940s, the latter for WWII, led to major economic growth and the creation of the American middle class of the 50s and 60s. Even Clinton’s piddling tax increases in the 1990s led to economic growth in that decade.

    People sometimes wonder why wars stimulate the economy. It’s because taxes go up.

    Of course, there is a down side to tax driven economic growth. A lot of that growth goes to the wrong people, particularly the middle class and those who would like to be. For most Americans, economic growth stopped in 2000, and I doubt that 95% of the country even realized that they had been given a tax cut.

    My father always told me to watch the tax policy because it drives the economy, but that the steering wheel doesn’t work the way that most people think.

  61. Ralph says:

    Supply side economics – the closest thing to a free lunch that the “dismal science” has ever thought of.

  62. rob says:

    My quick analysis – Assume a cut in the tax rate from 30% to 25%. The resulting impact on the economy is an expanded growth rate of 2%. It will take 20 years before the government would recoup the loss in tax revenues from the increase in economic growth applied against the lower tax rate.

    And what’s overlooked by the Supply Siders is that in the 11th year of the analysis, the public defecit would have increased by $3 trillion! Does anyone here believe that a $3 trillion defecit wouldn’t have a major (negative) impact on that 2% growth rate. The public need for funding would drive rates through the roof and reduce funds available for the private sector. The resulting reduction in the growth rate would actually prolong that break-even point by dozens of years (if ever.)

    Supply Side economics is a political tool. It deflects the long-term cost of a program for a short-term political boost.

    The other fundamental flaw is that it assumes that a dollar taken out of the tax revenue is only spent by the tax payer. In reality, you’re simply moving the tax dollar from being spent by the government to being spent by the tax payer. I know government isn’t very good at spending money, but it’s not a full dollar impact on the economy. That dollar saved in taxes would have been spent by the government.

    As noted above, in the end you still have to run a balanced budget.

  63. Eye Doc says:

    The budget deficit is falling quite rapidly, even with Congress refusing to cut their spending. The federal budget deficit isn’t the main problem. The problem is the several trillion dollars in unfunded liability in Medicare and Social Security which Congress refuses to even accept is a problem. The only way to possibly ameliorate that if Congress keeps sitting on their hands is to grow the economy as much as possible without igniting a serious inflation problem. And, that requires low taxes.

  64. rob says:

    Eye Doc:

    Can you please point to a document that shows the “budget defecit is falling quite rapidly?”

    Here’s a link from the US Treasury department that shows the opposite:
    http://www.publicdebt.treas.gov/opd/opdpenny.htm

    And can you back up your statement that “growing the economy…requires low taxes”? I’m all for lower taxes, but I think your statement needs a factual basis.

    Side note: I’ve also thought it was humorous that all Presidential administrations like to take credit for lowering the defecit but blame Congress when the defecit increases. I thought Congress always had the “power of the purse.”

  65. fred c. dobbs says:

    Barry: Where did you get so many stupid readers?

  66. Eye Doc says:

    You can look up the deficit numbers. I’ll see if I can find you a link if I get a chance. The tax rate thing is just obvious. the more you take out of people’s pockets the less they can spend, and the worse the economy does. Money spent by the taxpayers is spent more efficiently than money spent by the government, and will thus stimulate the economy more than government spending does.

    It’s amazing to me how many people on this board think we need to raise taxes, or don’t understand how bad it is to do so. Why should we allow the government to take more of our hard earned money to piss it away on pork?

  67. jkw says:

    Sorry, some of us have studied history and therefore don’t blindly believe that “Money spent by the taxpayers is spent more efficiently than money spent by the government, and will thus stimulate the economy more than government spending does.” If that were the case, raising taxes and government spending for WWII would have made the great depression worse rather than making it go away. Also, the correlation between taxes and government spending is negative. In other words, when the government cuts taxes it generally increases spending faster than when it leaves them alone or raises them. Politicians that raise taxes seem to be more responsible with the public funds. Politicians that lower taxes don’t seem to care.

    The optimal level of taxes and government spending is a complicated matter. Sometimes it is better to lower taxes and sometimes it is better to raise taxes. Sometimes the government has to spend money because private companies and individuals are unwilling to. Sometimes the government should cut spending because the economic stimulus isn’t necessary and the government is just wasting money. Sometimes the private sector is more efficient and sometimes the government is more efficient.

    Right now, US taxes are low enough that it makes little sense to argue for lowering them. The Republicans have proven that they aren’t interested in government efficiency, but would rather give money to various special interests. There is a lot of infrastructure investment the government should be doing now, but the Republicans aren’t interested in using public funds to invest in the country’s future. When congress declares that they have cut the budget as much as they can (which the Republicans did this past winter) and we still have huge deficits when the economy is doing well, it means it is time to raise taxes. It looks like a recession is coming. How fast do you think the deficit will grow when the economy stops booming? Do you think we can hit $1T/year? Do you really want to find out what happens if we do?

  68. JRG says:

    Thank you Mr. George Miller – for adding a bit of factual truth to this surprisingly emotional and often confused discussion.
    Your comments were also appreciated eye doc.
    For those of you who would like to understand how and why the ‘real’ supply side economic policies work – I suggest you check out the lessons at wanniski.com.
    Here is this weeks:
    http://wanniski.com/

    Further, if you really want to understand what is going on with the $ (and gold) and many other important key concepts such as which type of tax cuts engender growth, etc – check out the archives of Jude Wanniski’s lessons over the last 10 years. There is a wealth of information here that will change your life if you take the time to read and understand it:
    http://wanniski.com/archive.asp?Heading=Supply-Side+University

  69. VJ says:

    ‘muckdog’ posted:

    “Democrats believe in wealth redistribution.”

    The RightWing believes in redistributing wealth from the Middle-class and Working Poor UP to the wealthy. The Democrats just want to undo that redistribution.
    .

  70. VJ says:

    ‘ArizonaChartist’ posted:

    “If the Laffer Curve doesn’t work then how come Federal Tax revenue increased in fiscal year 2005 by $275 billion, a 14.6 percent increase over 2004″

    Because a tax cut EXPIRED. Therefore there was an INCREASE in taxation, which thereby INCREASED tax revenue.
    .

  71. EyeDoc says:

    Here we go again:

    http://news.yahoo.com/s/afp/20060709/bs_afp/useconomybudget_060709151810

    Those terrible tax cuts are coming back to haunt us again!

  72. Phil says:

    Just read your comments from the bigpicture

    ——————————————
    Muck,
    Instead of trying to frame a statement for someone else, could you please state yours.
    I’m liberal on some issues and quite conservative on others. I’m tired of being called names and having my POV poorly illustrated by people who have nothing more than bad manners as an arguement.
    Without mentioning liberals, Democrats, Republican or conservative, or without trying to describe another person’s POV, can you state your views?
    I don’t know if it’s “liberal” or not to think of people as part of a business, as infrastructure or living equipment, but if they are, and I think people are investments for business, then spending money to educate and maintain their good health is not wealth distribution, it is in fact investment and maintenance.
    The ONLY thing that matters in business is the quality of people you employ. Now some may argue that technology, patents, various competitive advantages and moats are more important, but PEOPLE made all those possible, so we are back to people and human resources in the end.
    You have to change the oil on people or they break down and don’t give you good mileage.
    Not all of them are capable of deciding some of this stuff by themselves and others are.
    Try thinking about it this way. The average IQ is 100.
    Around 135-140 up is “gifted” and 70 cannot really understand the ins and outs of organized civilization.
    Most of you are 100 and above. Does it seem likely that you will be able to imagine the capabilities or limits of a person with a 70 IQ?
    Judging by this blog, even perfectly functional people have enough trouble keeping their money! Imagin not being able to understand even the most basic premise like addition and subtraction.
    That’s for natural or organic issues. Imagine how many functional illiterates we’re producing by not investing in our human resource.
    The result? Ironic.
    Remember that gigantic So. California fire that wiped out millions in real estate, due to a guy thrown out of a mental institution under the Reagan admin lighting a fire to keep warm?
    Extreme example, but it fits like a glove. The point is, there is a cost to not maintaining infrastructure, whether it is people or actual hard equipment.
    In the real world it doesn’t matter whether it’s the truck, the highway or the driver that breakdown, they all cost money, are infrastructure, and need maintenance.
    If there is only one way to pay for the maintenance, then I would rather pay cash than borrow to do it.
    There is also a curve that will illustrate the exact point where the equipment is scrap due to lack of maintenence. I’m not laffering either.
    So how stupid and unhealthy can we get before we are scrap compared to our competitors, who are investing in their infrastructure big time?
    Say goodnight. We are the Mr. Softy of countries.

    ——————————————

    I think if you are going to tout the equivalent of economic Darwinism as your solution, you must then get out of the way and let nature take her course. Most of the people above the average of 100 displace those below 100. As IQ is more a measure of capability of understanding than an indicator of the quality of public education I would say the “maintenance” is less relevant than postulated. So to align this anecdote more with business processes and Darwin, the resources (people) below an IQ of 70 would not need “maintenance” as they would not be employed, they would not live long enough.

    Nature, as Darwin noted, is a truly perfect market and all resources are allocated effectively. As the U.S. employment market is a fairly effective, but a far from perfect market, the crème does in general tend to rise to the top. Given this is the case then the best and brightest would have no interest in politics or government service as it is doubtful they would be will to take the pay cut. (Jack Welch never left GE to run for president).

    So extending the reasoning we are left with the “also rans” governing the best of us, and to exacerbate the problem we refuse to enforce term limits (you would consider this “maintenance”) to at least provide an opportunity for intellectual capital to flow freely. In keeping with the anecdote consider this alternative. Perhaps if we had not created a situation where everyone in the family did not have to work to pay for the “maintenance” the families could care for those like the guy in So. California. Not one of the taxes listed below existed 100 years ago, and our nation was the most prosperous in the world. We had absolutely no national debt, had the largest middle class in the world.

    Accounts Receivable Tax
    Building Permit Tax
    CDL license Tax
    Cigarette Tax
    Corporate Income Tax
    Dog License Tax
    Federal Income Tax
    Federal Unemployment Tax (FUTA)
    Fishing License Tax
    Food License Tax,
    Fuel permit tax
    Gasoline Tax (40+ cents per gallon)
    Hunting License Tax
    Inheritance Tax
    Interest expense Tax
    Inventory tax
    IRS Interest Charges
    IRS Penalties (tax on top of tax)
    Liquor Tax
    Luxury Taxes
    Marriage License Tax
    Medicare Tax
    Property Tax
    Real Estate Tax
    Recreational Vehicle Tax
    Road usage taxes
    Sales Tax
    School Tax
    Service charge taxes
    Social Security Tax
    State Income Tax
    State Unemployment Tax (SUTA)
    Vehicle License Registration Tax
    Vehicle Sales Tax
    Watercraft registration Tax
    Well Permit Tax
    Workers Compensation Tax

    So Do we continue to tax, or do we let nature take her course?

  73. Jasper says:

    It’s amazing that people cite the receipts of the 2000s as “proof” that tax cuts caused a revenue boom and never mention the Fed – which lowered rates from 6% to 1% on June 25 2003. The same interest rate changes also occurred with Reagan’s “boom”.

    Any serious discussion of tax rates and tax revenue at least has to acknowledge that many factors other than tax rates affect economic growth, and government receipts. And the list would also include population growth, the business cycle, exchange rates, world economy, competing countries’ rates, etc.

    A decent guess is an econometric analysis that includes only marginal tax rates as right hand independent variables, with revenues on the left, would have very low explanatory power. The other omitted variables are what’s missing from the WSJ, IBD and other “Laffer” (Laugher?) curve analyses.

    FWIW, the studies that I’ve seen that have tried to estimate the top of the Laffer curve put the rate at something like 50-80%, depending on the analysis. Every rate to the left of (lower than) that point behaves just like we’d expect – tax cuts decrease revenues.