Debunking the Laffer Curve

[hfojvt]

Giuliani and Romney are still pushing the idea that tax cuts will increase revenue. Apparently they are unaware of the historical record of Reagan and George W. Bush. Or they are just lying to the American people.

So here is Economics 101 on the Laffer Curve.

Here's the best defense of the Laffer curve from, of course, the Cato
Institute. At first it seems pretty strong. The author writes confidently
and takes inflation into account and even looks at income tax revenues. It seems strong, until you pick at it, and then it unravels like a cheap
sweater.


http://www.cato.org/dailys/6-06-97.html


"Are Supply-Siders All Washed Up?
by Stephen Moore

Stephen Moore is director of fiscal policy studies at the Cato Institute.

Washington Post columnist Mark Shields asks pointedly: "Why won't supply
siders just admit they were wrong?"
The question is: Wrong about what?"

*Wrong about the idea that income tax cuts will increase income tax revenue.
That's what.

"The turning point in tax policy was not 1993. Tax rates began to rise in 1990, during the Bush administration. The top income tax rate on earned income rose from 28% to 31% after the 1990 budget deal and then to 42% in 1993 as part of President Clinton's first budget. So we have now had a seven-year experiment with higher income tax rates on the wealthy. From 1990 through the most recent estimates for 1997, total federal tax collections have risen from $1.03 trillion to $1.55 trillion annually. After inflation, this has been a 21.6% rise in federal receipts over seven years.

How does this stack up against the growth of tax payments during the Reagan years, when tax rates fell sharply? From 1982 (the first year of the Reagan tax cut) to 1989, the top tax rate was chopped from 70% to 28%. Despite the deep recession of the early 1980s, federal receipts grew from $618 billion in 1982 to $991 billion in 1989. After inflation, this was a 24.1% increase in tax collections."

*I cannot say this enough. It is dishonest to look at total revenue when it was income tax rates that were cut. Total revenue includes FICA taxes and other social insurance such as unemployment insurance and contributions to railroad retirement funds. Those tax rates were increased in the 1980s, with predictable results. Revenues rose from $201.5 billion in 1982 to 380 billion in 1990. Thus, about $161 billion of the $373 billion gain in revenues came from FICA taxes. That's about 43%.

*"Despite the deep recession of the early 1980s" is also a rhetorical tool that does not fit the facts. Here's GDP in constant (1982) dollars in the 1980s.

1982 - 3,166
1983 - 3,279.1 - 3.6%
1984 - 3,501.4 - 6.8%
1985 - 3,618.7 - 3.4%
1986 - 3,717.9 - 2.7%
1987 - 3,853.7 - 3.7%
1988 - 4,024.4 - 4.4%

*Looks like pretty good growth, except for 1985, which was in the middle of Reagan's terms. Then look at GDP in the early 1990s in constant (1996)
dollars.

1990 - 6,707.9
1991 - 6,676.4 (0.5%)
1992 - 6,880.0 - 3.0%

*The 'deep recession', (so deep that real GDP actually fell!) was in the
early 1990s.

*Also, using 1982 for a starting point is disingenuous at best. Why?
Because it compares an after-tax-cut year to other after-tax-cut years. It conventiently leaves out the drop from before to after. In 1981 income tax revenues were 306.63 billion. After the tax cuts, they fell, in constant dollars, to 297.92 billion.

"Even if we examine the path of only individual income tax collections over the past 15 years, the story is not much different... From 1982 to 1989 income tax receipts climbed from $298 billion to $446 billion--a 50% increase. From 1990 to 1997 the income taxes rose from $467 to an estimated $710 billion--a 52% increase."

*However, if you include "before the tax cuts" in the picture, the difference becomes much larger. Also, since he wrote in 1997, we have the benefit of 3 more years of data. Income tax revenues grew by 91% from 1980 to 1990, but they grew by 115% from 1990 to 2000. If you subtract the inflation rate for the two decades, 58.62% and 31.75% respectively, the difference becomes even larger. For the 1980s a 32.4% growth in income tax revenues and for the 1990s an 83.25% growth. And remember that the 1990s contained two slow growth years under Bush 41, who was continuing Reagan's policies.

*Moore then continues with a paragraph on Capital Gains taxes. It seems
obvious to me that more investors will cash in when the tax rate is lower, but I do not see a social benefit to that. The revenue gains are miniscule compared to the income gains that accrue to the upper class. Moore concludes with this:

"But the most confounding question of all for critics of the supply-side view is this: If tax rate changes don't influence economic behavior, then how did overall tax receipts grow faster in the Reagan years than in the Bush and Clinton years?

Perhaps Mr. Summers could explain that one."

*If Mr. Summers can't, I can, and, in fact, already did. Because Reagan
increased taxes on working people, FICA taxes (which are paid by wage
earners below a cap), at the same time as he was slashing taxes for rich
people. The cap went from 32,400 in 1982 to 48,000 in 1989 and the tax rate went from 6.7% to 7.51%. For the self-employed, the rate went from 9.35 in 1982 to 15.02 in 1989. Whereas under Clinton, the rate was 7.65 in 1990 and 7.65 in 1997. The cap went from 51,300 to 65,400 and was eliminated entirely for medicare taxes. FICA tax revenues grew by 88.6% under Reagan and only by 41.8% under Clinton.

*Mark Shields' question also has a pretty clear answer. "Why won't supply
siders just admit they were wrong?" Likely because rich people who, unlike the rest of the country, benefit from those supply-side tax cuts, are paying them to stay in denial.

[TreasonousBastard]

1. No respectable economist touches the Laffer cureve...

and few ever did. (Assuming "respectable economist is not an oxymoron)

But, it stills sounds great on the stump and guarantees a few votes amongst the economically challenged. What amazed me is with the generally abyssmal ignorance of even the basics of economics beyond the sound bites and labels, most people I run into have manged to figure out that trickle down and other tax cut urban legends are bullshit.

Not to say that a lot of people don't want their bosses to get huge tax cuts because they live in hope that they, too, will once be in that bracket.

[hfojvt]

2. the M$M never reports it as debunked

Then again, people like Chris Matthews and Tim Russert get huge benefits from tax cuts for rich people. Respectable economists do not make enough noise, and a supposedly respectable economist like Greenspan still endorses the Bush tax cuts. He does not endorse the Laffer curve, but he claims that tax increases would slow economic growth, which is half of the Laffer curve argument. Meanwhile he increases interest rates - to slow economic growth.

I think more people just want their $100 and figure that the big guys are gonna get more anyway. Plus, Bush has always sold his BS policies as if they benefitted the working class. I think alot of people have been fooled on that.

[hfojvt]

3. "It was a lie"

http://www.slate.com/id/2059246/

"Third and most important, it's bizarre for Fleischer to deny that the tax cut is going to reduce tax revenues, since that was the point of it: Bush said over and over that "Washington" would spend the surpluses unless they were returned to the people as tax cuts. This contradicts not only what the administration is saying now about the looming deficit but also its case for a second tax cut, the "stimulus bill." That case is essentially the old free lunch: Cutting taxes will increase tax revenues. "Surpluses are returned through strong growth," Fleischer maintains, "In the absence of a stimulus package, there is a strong possibility, according to private sector forecasters, that the economy will come back with only low to perhaps moderate growth." So the previous tax cut was supposedly needed to make the surplus disappear. The next one is needed to bring it back. Whatever."

I was not aware that they started pushing for another tax cut even before December of 2001, the one they did not get until May 2003 and making the same argument for two years - "a tax cut is needed to stimulate the economy"

"But the truth—which subsequent developments now expose—is that Bush always placed his tax cut ahead of debt reduction or the various government policies he endorsed as a "compassionate conservative."

It wasn't just some giant miscalculation. It was a lie."

[hfojvt]

4. Here's Rudy on taxes

"Rudy is the real fiscal conservative in the race. He cut taxes 23 times in New York and turned a $2.3 billion budget deficit into a multi-billion dollar surplus, while balancing the city’s budget. Because he turned his conservative principles into action, New York City taxpayers saved more than $9 billion in taxes and enjoyed their lowest tax burden in decades, while the economy grew and city government saw its revenues increase from the lower tax rates. Rudy Giuliani believes in supply-side economics, because he did it and he saw it work."


Rudy believes in supply-side economics. It has not worked for the nation Rudy. What works for a city, if it indeed did work, does not necessarily work for the nation. Rudy was mayor while Clinton was President and benefitted from the growing US economy which followed the Clinton tax increase of 1994.

Anybody have handy stats on New York City's budget?

[hfojvt]

5. For what it is worth

as I keep the conversation going with myself.

Rudy vs. the truth

Claim
"He cut taxes 23 times in New York and turned a $2.3 billion budget deficit into a multi-billion dollar surplus, while balancing the city’s budget."

Truth - Every budget from 1994-2001 shows as balanced, but I sense accounting tricks because the bottom line shows NYC debt in 1994 - 40.285 billion in 2001 $57.518 billion. Rudy ADDED $17.3 billion to the city's debt. In 1998, for example the city spent 2.337 billion on interest payments compared to 1.053 billion for fire protection. So debt is expensive.

It also seems that Rudy balanced the budget by cutting expenses. Expenses went from $40.85 billion in 1994 to $38.64 billion in 1995 and $38.75 billion in 1996. Cutting expenses is not a bad thing, except Repbulicans have a historical tendency to do it at the expense of the poor.

I am not sure when the tax cuts happened, but tax revenue for NYC was
1993 - 17.7 billion
1994 - 18.09
1995 - 17.79
1996 - 18.18

So tax revenues grew by 2.2% from 1993-94 and by a mere .2% in 1994-96.

The population of NYC grew from 7.322 million in 1990 to 8.008 million in 2000. It is so typical of supply-side liars to use a growing population and a growing economy to create a false growth in revenues.