The Laffer Curve in real life

[Hannah Bell]

Ever since the Reagan administration, supply-side economics has been at the core of Republican economic philosophy. Every GOP candidate, at every level of politics, has to swear allegiance to the theory if he or she hopes to retain credibility with the party base...So how do we gauge the effectiveness of supply-side theory in practice?

Private investment:

After the ‘81 Reagan tax cuts, private nonresidential investment over the next seven years grew at an annual rate of 2.8 percent.
After the ‘93 Clinton tax hike, private investment over the next seven years grew annually at 10.2 percent.
After the 2001 Bush tax cut, private investment grew annually at 2.7 percent.
(Data source: CAP/EPI study, Sept. 2008,, based on Bureau of Economic Analysis data.)

Federal revenue:

From 1981-1993, federal revenue increased by 20.7 percent over 12 years.
From 1993-2001, federal revenue grew by 46.6 percent over 8 years.
From 2001-2009, federal revenue decreased by 13.9 percent. (Even if you don’t include the deep recession year of 2009 — you might say we’re invoking the mercy rule — revenue increased just 3.3 percent over the eight years of Bush’s presidency...

(Source: OMB Historical Table 1.2)

....In conclusion, in all three categories central to the claim of supply-side proponents, the economy performed significantly better in the wake of tax increases than it did in the wake of major tax cuts.

http://blogs.ajc.com/jay-bookman-blog/2010/09/15/the-laffer-curve-in-real-life/

[The Magistrate]

1. Everyone But Republicans And Their 'Fakenomics' Claque Knows This, Ma'am

Fact counts for nothing where ideology is concerned.

"It is hard to get a man to understand something when his salary depends on his not understanding it."

[Toots]

11. But there is always someone here to say "You can't raise taxes in a recession"

Even though it was proved demonstrably wrong under Clinton they still prattle the same old canard..

[The Magistrate]

12. Heck ,Ma'am: Did They Not Just Announce The Recession Has Been Over For Months?

[Dawson Leery]

2. k/r

[napi21]

3. Heartmann has a good explaination of this. "When tax rates are at 50% or above, investment

in businesses increase because they would rather expand their business and it's value than pay the high taxes. When tax rates are low, it's more profitable for them to just keep the money." It's such a simple and easy to understand phylosophy I don't know why everyone doesn't know it & understand it. Without saying those same words, my broker told me much the same thing the other day He said businesses were waiting for the outcome of the Nov. elections to see which approach they want to take. If the Pubs win, they know their taxes will remain low or go lower so they'll simply invest in the market to make their money. If the Dems win, they'll assume their taxes will go up & will invest in their businesses to avoid the taxes.

[DCKit]

10. Thanks for that. My explanation wasn't nearly so concise...

so I've forwarded this version to a whole bunch of people.

If it jars just one teabagger back to reality, I'll consider it a huge victory.

[pa28]

4. Yes. The Laffer Curve is in desperate need of debunking.

For the last thirty years our tax policy has been based on this particular piece of economic snake oil and now we're feeling the ill effect. Wealth maldistribution is at historic levels (since the 1920's or the middle ages anyway) and despite moving toward the "favorable" place on the curve our economy has established a declining trend in manufacturing an innovation while tax revenues are tanking.

Laffer never accounted for wealth distribution in his curve. Some people theorize that stepping up progressive taxes in an imbalanced condition like this point excess capital toward job creation and economic development as a way of avoiding tax. That's how higher taxes might work in a constructive way and I wish we would at least consider the possibility now.

[MajorChode]

7. It already has been debunked many times

The Laffer curve never was proved in the first place. It was nothing more than pseudo economic 'theory' to begin with. Real economists called bullshit from the onset. The Raygun years further proved it's failure. Shrub's own administration commissioned a study which determined it was a failure.

[jmowreader]

9. It's nothing more than a neat classroom exercise

Laffer said once you get above the "ideal" rate (whatever in fuck that is), tax evasion becomes more widespread. The problem with this half-ass theory is, if someone is going to evade taxes because the rate is too high, they would consider one percent to be too high.

The one thing that dooms the Laffer Curve to the status of a "what if?" exercise is it assumes there's such a thing as one tax rate. In reality, because of the way deductions, credits and marginal rates work, there is a different effective tax rate (if you were to take all the "this amount of money is taxed at R1, this amount at R2 and this amount not at all) for every taxpayer. If I (with no children, no house, no medical expenses) make $100,000, and the woman who sits at the other end of this workbench (two kids, house, double-income couple, plenty of medical expenses) also makes $100,000, we will pay a different amount of tax. Divide taxes into income, and you've got the effective rate.

[pnorman]

5. Thanks for those hard numbers!

I'll be citing them elsewhere!

[snot]

6. I happened to just be checking the Wikipedia article on Reagan, to get an idea

of how long it's been that the very wealthy have been benefitting from excessive tax cuts, and noticed that the article does a very poor job of bringing home how damaging the cuts were.

[jmowreader]

8. The Laffer Curve DOES work, just not like the Republicans think it does

The Laughable Curve theory says, there is one ideal rate of taxation. If the current rate is below the ideal rate, you are leaving money on the table; if it's above it, tax avoidance will result--either tax evasion or disincentivization of work.

This is how we can tell it works: when the Republicans lower tax rates, tax revenues go down. When the Democrats raise them, tax revenues go up. We can therefore deduce that we are on the "too low" side of the Laffer "ideal rate" line, and that raising tax rates further will therefore cause tax revenues to also rise.

Hence, when some Repuke goes on about supply side economics, whip him out a Laffer Curve (draw an upside-down U or V, and split it in half with a vertical line) then draw an arrow pointing at the left side of the ideal rate line and label it "we're somewhere in here."