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Wednesday, May 26, 2010

Laffer Curve

see also this

Intro: The "Laffer curve" argument says that if income tax rates are lowered then, paradoxically (because of increased economic activity), the amount of revenue will be increased. You can see the curve at http://en.wikipedia.org/wiki/Laffer_curve . (rates below refer to the highest marginal rate)
After a bit of thought (and looking at the extreme rates of 100% and 0%) the basic idea is credible. If you have a very low rate you can increase revenue by increasing rates and if you are on the high rate side then you can only increase revenue by lowering the rate.
In the media it is usually presented by conservatives as an argument for "cutting taxes". It is frequently accompanied by a reference to the Kennedy tax cuts of the mid sixties and the Reagan tax cuts of the early eighties. It is stated that both worked. The conclusion is then drawn that a tax cut now will also work and that a return to the “high rates” of the nineties would actually reduce revenue.
I wish we had a media which would:
1. Point out that the Kennedy reduction of the top rate was from 91% to 77% and Reagan's was from 70% to 50%.
2. Ask: Why do you think it will work on the current rate which is only 35% or the “high” rates of the nineties (always under 40%)? (http://www.taxfoundation.org/files/fed_individual_rate_history-20091231.pdf)
3. Ask: What is the rate on the curve that would yield the maximum revenue? Do you have any reason to believe that it is lower than 35% or not higher than 40%?
4. Ask: If (as the argument claims) a reduction in the tax rate would increase revenue, then isn't what they are calling a TAX CUT actually a TAX (amount) INCREASE?

5 comments:

  1. It would be interesting to watch Gibbs try to handle those questions.

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  2. Wouldn't the reactions of Hannity or someone else on the right be harder to compose?

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  3. Hannity is perfectly capable of effortlessly blathering on for hours on any topic and would have no problem responding either for or against depending on what suits his argument today. Gibbs on the other hand, torturously parses words so carefully it is often either funny or painful to watch, hence my comment. For example question # 4 with the premise that a tax RATE cut would produce a tax REVENUE increase. It is easy for me to imagine Gibbs trying to defend #4 without ever admitting to a revenue increase (someone might confuse rate with revenue) or if he were attacking #4 he might (probably would) try to do so without ever saying “tax cut” (who wants to be against a tax cut).

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  4. Of course it is the Rs who make the argument for the Laffer Curve.

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  5. Indeed it is the Rs that argue most that, over all, a tax cut can actually produce more revenue for the government by stimulating more commerce. The analogy is less than perfect but the mind set is the same as stimulating more sales by lowering prices and potentially making more money based on volume. Your point that reducing rates from a historical high of 91% to 77% is one thing, while lowering rates from the present level may give entirely different results, is central to the argument. I don’t trust either side to provide unbiased numbers to plug into the calculation.

    Anyway, my comments about Gibbs above were about how he torturously handles heavily nuanced topics vs. the absolute ease of say, Tony Snow.

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