The Fox Butterfield Effect and the Laffer Curve
by Dan MitchellA former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.
We now have a version of the Butterfield Effect in tax policy. Recent IRS data show that rich people earned a record amount of income in 2007 and also faced their lowest effective tax rate in almost two decades. Proponents of soak-the-rich tax policy complain about these developments, but they seem oblivious to the Laffer Curve insight that rich people earned more income in part because tax rates were lower. This video explains how the Laffer Curve works.
Liberals don’t understand that if they penalize the rich with higher tax rates, as President Obama is proposing, they will be disappointed to discover that they collect considerably less revenue than predicted for the simple reason that wealthy taxpayers will respond by earning less taxable income. This Bloomberg excerpt is a good example. The leftist quoted in the article assumes that income is a fixed variable and successful taxpayers will passively endure higher taxes.
The 400 highest-earning U.S. households reported an average of $345 million in income in 2007, up 31 percent from a year earlier, IRS statistics show. The average tax rate for the households fell to the lowest in almost 20 years. …The statistics underscore “two long-term trends: that income at the very top has exploded and their taxes have been cut dramatically,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a Washington-based research group that supports increasing taxes on high-income individuals.
As an aside, it’s also worth noting that the IRS tax-rate numbers in the Bloomberg article are very misleading. The tax burden on the rich has dropped largely because of lower tax rates on dividends and capital gains. But when the IRS says upper-income taxpayers had an average tax rate of 16.6 percent, this does not include the other layers of tax that are imposed.
The corporate income tax is 35 percent (just counting the federal level), for instance, so the actual average tax rate on these forms of income is far higher. Double taxation is counterproductive to growth and competitiveness, though, which is why the correct tax rate on dividends and capital gains is zero.
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72 Comments
As Carlos Mencia would say…. dee dee dee…
If the Progressives ever had a "Golden Goose" they would definitely kill it.
Progressivism is a mental disorder, of the highest order. ;^)
,,,,,,,,,,,,,,,,,,,,,,,,,,,Hanzo
you can only make logical connections when your head is not up your posterior…
And Progressives have had that affliction for so long, down is starting to look 'up' to them. Like Pelosi, who, stunningly, gave her self an 'A' for her leadership in the House, facts mean little.
It's how you FEEL. And they still 'feel' they're right, no matter what the facts on the gound prove again and again.
They even say they are willing to 'sacrifice' Congress to get their agenda done.
Funny, the onlyh ones saying that are in safe seats. Or so they think, anyway. Wonder what the vulnerable ones think about being 'volunteered' for extinction…
A flat tax rate with no exceptions ends this nonsense. Of course it ends Congress' ability to pick winners and losers as well.
The Laffer Curve, the IRS, Tax Rates.
They would all be considered mathematical formulae, eh?
Apparently, all things mathematical have now been bent into new formula's, called AlGoreRhythms. That is applicable to both math, and science………..
The Laffer Curve has been debunked many times , such as here : http://finance.yahoo.com/expert/article/economist...
I noted the same effect in a response to a recent Center on Budget and Policy Priorities (CBPP) study with the incendiary title "Tax Rate for Richest 400 Taxpayers Plummeted in Recent Decades, Even as Their Pre-Tax Incomes Skyrocketed.' Read my response on why having 0.00033% of all taxpayers pay an average of $57,000,000 in taxes while half of all taxpayers paid just $460 on average is probably anti-democratic.
"The Rich Don't Pay Taxes" Lie: Purposely Deceptive, Or Backed Up by Data?
http://soquelbythecreek.blogspot.com/2010/02/rich...
Data sources and spreadsheets also included for independent review.
It is impossible to tax fairly when federal spending is skyrocketing. It's time to take back the credit card and severely penalize the gladhanders.
Thats it Cowboy!!!!
Now I can make sense out of the jobs saved or created formula explenation we were given last year. Dam not sure why I didn't see this, I would have thought my degree in nuclear chemistry would have given me better math skills. Thanks for the tip! … ok lets see 2+2+AlGore = x, where x is what ever the hell I want it to be… sweet, math just got easy!
Recent IRS data show that rich people earned a record amount of income in 2007 and also faced their lowest effective tax rate in almost two decades. Proponents of soak-the-rich tax policy complain about these developments, but they seem oblivious to the Laffer Curve insight that rich people earned more income in part because tax rates were lower.
I'm not sure that's accurate. I would posit that they know EXACTLY why the "wealthy" earned more – lower taxation – and that's why they want higher taxation. Envy.
Remember back to the Gore-Bush election? When Algore was talking about the infamous "Lock Box" for Social Security, and the "Fuzzy Math"?
Yep, you guessed it, AlGoreRhythm's………
Eliminating poverty by taxing the rich has always been a goal in all civilized societies,…. unfortunately…it is a goal similar to……
a dog chasing his tail.
And, that's just the way that it is!
Actually they would redefine killing their golden goose to say they were exercising "A Choice" and if you criticized them for killing their goose they would deamonize you as being anti-choice.
Nope! Only if you attempt to make the case of short-term gains & losses. Using your article's example, but fixing it:
Economy of $10 Trillion with a 30% tax rate = $3 Trillion in taxes.
Drop rate to 25% and have a 10% expansion because of the cuts (to $11 Trillion economy) = $2.75 Trillion in taxes
Tax revenue was lost, oh the poor Fed… BUT, that was year 1. What happens with the same growth continuing?
Yr 2 Economy $12.1 Trillion = $3.025 Trillion in Taxes. Thus, revenue has returned 100% and change.
Yr 3 Economy $13.3 Trillion = $3.3 Trillion in Taxes
Yr 10 Economy $25.9 Trillion = $6.484 Trillion in Taxes (Revenue has more than doubled. What a great ROI!)
Yr 15 Economy $41.8 Trillion = $10.443 Trillion in Taxes (Revenue has more than tripled. What a great ROI!)
Yr 20 Economy $67.3 Trillion = $16.818 Trillion in Taxes (Revenue has more than quintupled. What a great ROI!)
This all assumes the same rate of growth. You see that as long as there contiues to be growth, even less than this, tax revenues increase. And that is an increase above and beyond what would have been accomplished without the tax breaks.
The progressives won't be disappointed and actually don't care if they collect less taxes, their goal is to gain more government power and control. The more people that need government assistance, the more control they will assume.
Hey! My favorite Uriah Heep song! ;^) ,,,,,,,,,,,,,,,,,,,,,,,Hanzo
FAIR TAX OR AN EQUIVALENT FEDERAL SALES TAX………..
CATCHES ALL THE OFF THE BOOKS WORKERS………..
DAY LABORERS, "TIPPED" EMPLOYEES, ILLEGAL ENTERPRISES, AND ILLEGALS IMMIGRANTS.
I couldn't help but laugh when she gave herself an "A" for effort. She gave herself, in effect, a trophy for participation!
And AlGoreRhythm would then explain (smacking forehead) the monetary dust left in the national Social Security Trust Fund….ZERO (after Congressional pilferage and application of the new math AlGoreRhythm. ZOUNDS ! EUREKA ! This is astounding ! Cowboy for "Mathematician of the Year" award. /sarc (for those in Rio Lindo).
The one line in that article that was vaguely interesting. You know, the one that said "You can't lose weight by eating more"? I'd say that is a very apt description of "spending our way out of debt".
Comment?
Make sense now?
In the future, whenever there is an unexplained phenomenon, it can simply be explained away with a wave of the hand as an "AlGoreRhythm"…….
Dam, I bet Cowboy could get the Nobel Peace Prize in mathematics with this discovery!
you are assuming a 10% growth rate for every year going forward? THat seems pretty optimistic. Are you cutting taxes every year to generate that growth? At that rate you will be at 0 taxes in 5 years.
only to the satisafction of Keynesian dinosaurs whose walnut-sized brains haven't cottoned to the fact that they're extinct.
Like Paul "Scandinavian-Socialists'-Fuck-America-Prize Laureate" Krugman.
The problem with all of this is that, yes even as the rich pay more, and approximately 40,000,000 on the lower end of the economic scale pay nothing at all, the amount of money paid to our government is never enough to meet its needs, which leads to excessive governement borrowing. The government borrowing is then placed squarely on the back of all of the taxpayers, without any relief in sight. It is too bad that the government does not measure the increase in wages/productive, against the ever increasing burden of taxation, borrowing and public debt which must be paid for by the Amerinca People. No matter how much wages/productivity increases, these increases will not offset the burdens of tax and spend which our "elected representatives" and our government continue to impose upon us. We already have trillions of dollars of unfunded liabilities which cannot be paid for. Ultimately, all of us will have to pay this staggering growing burden of debt, and our government is in the process of devising even more ways to extract our monies for spending that We the People cannot possibly afford.
Wait a minute…. I think I found a glitch in the AlGoreRyhthm math calc… If AlGoreRyhthm works on phenomena….then how do you explain his receiving the Nobel Peace Prize ? Isn't this award presented based on FACTS AND SCIENCE ? HHmmmmmmmm….rubbing chin and thinking….
AlGoreRhythm would explain why in childrens sports that ALL kids get a medal at the end of the season for STAR performance where some kids perform like natural wonders and other kids are just plain shitty at sports ! I am beginning to understand…..
Doncha just know that Algore is the reason everyone gets the prize, the medal, the trophy? In Gore World, everyone is a winner, and nobody is a looser. It is because when young Al was a boy in school, he was always the fat kid who came in last. The kid who couldn't run, couldn't swing a bat, or pass a football. Al was last in all the races, behind all the Special Olympians. Consequently, he set out to change the world, and the rules, with new AlGoreRhythm's….
"Liberals don’t understand that if they penalize the rich with higher tax rates, as President Obama is proposing, they will be disappointed to discover that they collect considerably less revenue than predicted for the simple reason that wealthy taxpayers will respond by earning less taxable income"
You fail economics 101. All the Laffer curve states is that there is an optimal taxation rate X%. if you tax less than X%, you loose revenue becuase you under tax. If you tax more than X% rate there is no longer sufficient economic reward for the individual or business to invest or work becasue the government is taking almost all you produce, so in effect "why bother" Problem is that in the real world that optimal tax rate is very very high, probably upwards of 80-90% (think about it, 10-20% of something is better than nothing) so it has very little constructive to say in the debate of wether or not the top bracket should be 38 or 35 %
It's also worht noting that from 1951-1963 the top Tax Rate was 91% and there were plenty of people who made enough to pay it ,and the economy boomed. I'm not saying higher taxes are good, there are plenty of reasons to be against them, but this continued use of Laffer as a justification for lower taxes just isn't correct.
A flat tax around 20% or less for all individual and corporate income would be a nice band-aid till we can repeal the federal income tax laws. Even Clinton could recognize that the world was changing the rules and that lower taxes were the new norm, even in old Europe and Russia (Russia has a flat tax of i think 15%.)
as said, it's all about 'me me me'- and how we feel…
She apparently feels good about herself; considering her lack of mental acuity one can see how little she considers anything. No matter- the real test will be in November to see if Californians want to continue a suicidal path- Pelosi's path- or return to some form of reality.
If she was to lose her seat as well- then watch out…
The only way for your logic to be logical is if the rich could only remain in the US, City, or State and had no other choice for their investments. Now if they could move their wealth to some other place at say 10% tax rate then I wonder how much US taxable income they would have? I think ZERO!
Facts and Science?
We don't need no steenking Facts and Science. We deal in Hope and Change and Hyperbole!
Painless:
You are correct. Taxes were high, and people were paying them. In most of those years, corporate taxes were over 50% as well. But, this is not an apples-to-apples comparison. The world was extremely different when it came to competitive markets in the 1950’s and today. If we tried to have a 90% tax bracket and 50% corporate tax bracket today, you would have a whole bunch of migration. You can live and work out of Australia and still have as almost as much access to US markets as you would if you were based out of Chicago or LA, especially if you are not some kind of manufacturer. But if I was a manufacturer, and the US started taxing half of my income, I would open a plant in Mexico without a second thought…
True, but good luck finding an economically & politically stable 1st world nation with a 10% tax rate. Plus money isn't as fluid as people like to make it out to be. Where you choose to live has as much impact on your tax rate as where your money is. Sure could some Billionare X renounce their US citizenship move to Bermuda and lower their tax liability, sure but that's not what happens, even in high tax countries in Europe. German tax rates are higher than the US, personal tops at 45% and their corporate taxes are higher as well, but yet they export more than we do, their unemployment rate is lower than ours. They balanced a budget as recently as 2007… if it were all about taxes there should be a great sucking sound of german jobs and assets moving to the US…
Do you understand the concept of a maximization curve? Sheesh.
Of course not. Victimhood Studies majors don't take math. Or econ.
Uh… I've read this three times, and I don't know what you're trying to say, but if it's what I think you're trying to say, you're not supporting your argument. People do not elect to make less money simply to avoid paying higher taxes, that doesn't make any sense. They may end up paying less in taxes as a group because overall there are fewer rich people, and less economic activity, but that's not what you're arguing.
You're overlooking the fact that once you pass about 26-28%, individuals and businesses start making decisions based primarily on tax reasons, not business reasons: the tax system is distorting the market allocation of resources.
Um, no, it would be a one-time permanent tax cut. And everyone that takes Econ 101 knows that tax cuts fuel private sector growth due to the fact that businesses have more money to invest in themselves, growing the business, hiring additional employees, because Uncle Sam is taking less of their money.
Also, in economics, we are taught a little concept called "ceteris paribus", which means, "all else equal". This simple model does not take a lot of things into account. What it is intended to do is examine the effect of a single action on an economy. Even if 10% growth is optimistic, the underlying trend can not be denied – tax cuts, while initially losing revenue, more than make up for what you lose in the first year(s) over the long term.
That's an interesting "fact." What makes you so confident it's a "fact?"
The progressive mind functions with less acuity because their sphincter muscle restricts blood flow to the brain, starving it of required nutrients.
well, as taxes increase I'd agree that business is more inclined to frame business decisions in the context of minimizing tax exposure, but look, Laffer is an arc. There is only 1 number that maximizes total revenue. what percentage is that% you really think 10% corporate rate is the top of the curve? I'd argue the top is a much higher %. You drop someones taxes from 90% to 80% and you've doubled their income and I'd argue that that the psychology of that is going to have a much bigger effect on business decisions than going from 20% to 10%. Laffer just doesn't work as a justification to reduce taxes at this point. People just need to be honest and say "I want lower taxes because I don't want the gov. spending my money" That's fine, just don't twist an economic theory into knots in an attempt to justify it.
You are correct in saying that there would not be a continuous 10% economic growth each year (the economic growth would be a smaller GROWTH (but still a growth) each successive year until a new equilibrium is met), but you are wrong to imply that an additional 5% tax reduction would be required to sustain this growth. I read the article that you linked and it does not disprove Laffer; it confirms the curve. Keep in mind that Laffer was referring to the 70% tax rate that the rich were paying and that proponents of the Laffer curve are saying it is a bad idea to raise taxes of the wealthy (that could already be paying 50-60% in corporate income tax). With these things in mind read your article again and watch the above video, and then maybe we can have a little more intelligent exchange on the topic.
You’re on the right track, but remember, things in economics do not follow linear paths (supply curve, demand curve, maximization of profit curve … etc.). You do have a point though. We will see a break even point and potential increase in revenues; just not as quick as the linear math shows.
Please don’t infer that I am some Lib. trying to refute you (you are right); I am just pointing out that the effect is not as pronounced or continuous in growth.
We are a family of three. My wife a two years ago decided no more overtime simply beacuse with fed income tax, state income tax, and social security income taxes she took home less than half of what she made.The story is the same with myself and I dumped my time consuming extra paid assignments five years ago Three years ago our single 27 year old son whose tax situation is even more onerous because he can't sherlter his $85,000 a year income and decided no more overtime.
Liberal and progressive morons economic ignorance, hypocrisy and envy leaves them unable to see that when the tax burden rises above 30% a whole lot of us decide it "ain't" worth the effort to make more money or to invest.
Obama doesn't care if higher tax rates result in lower tax revenues. Remember, during his debate with Hillary, he said higher taxes should be imposed on "the rich" because of "fairness" – even if tax revenues decreased.
Tax the rich at 90 percent like we did under FDR. Nobody needs to make more than $100,000.
Thanks Dan.You did it all without using Algorerhythms!Genius!You actually used logical, rational, TRUE Math, not the "fuzzy" kind! ;^) ,,,,,,,,,,,,,,,,,,,,,,,,,,,Hanzo
Progressivism = Malignant Liberalism
Every time you see one of them, they have feathers sticking out of their mouths.
Actually, yes it does make sense, but perhaps not always in the "straight up" manner you're assuming: For example, After Bill Clinton was elected (November, 1992), his wife Hillary changed her partnership-bonus arrangement with Rose Law Firm so that she collected a substantial amount of money in December, 1992 instead of the standing January (in this case, 1993) disribution. It was widely assumed (no doubt accurately) that her switch was due to her inside knowledge that the effective tax rate for 1993 would be both considerably higher, and retroactive to January 1.
Many people who work under atypical compensation arrangements similarly "fiddle" with normal payment dates to take advantage of business expenses, pending write-offs, charitable donations, etc., to offset taxes, take an end-of-year hiatus (sometimes in late summer/early fall) when their income reaches the high end of a tax bracket, and many others send their money off-shore — investing domestically when it's advantageous tax-wise but otherwise depriving the US economy of the investments and job-growth their money could provide.
Whoops, there goes another HuffPo…..
Whoops, there goes another HuffPo troll…….
What a great bumper sticker that quote would be….
I have news for you. The tax the rich crusade from the liberals is a red herring. Simply put, the liberal elite are rich and figure out how to avoid those taxes too. But like any good street magician, they wave the soak the rich flag in one hand while quietly sticking their hand in the pockets of the middle class and the poor. Wise up, its a ruse. The rich WILL get richer. All of them left or right. The middle class will bear the brunt of the taxes that aren't up front income tax increases while the poor will be punished by the taxes on gasoline, electricity, sales taxes etc. If you believe otherwise, you're crazy. They know where the money is and by holding down the poor, they make them slaves and all the while tell them its the rich man's fault.
I just finished my preparing my 2009 1040. I get to pay the IRS this year. This is the first time since Carter was president I have had to pay more. I have had no significant change in earnings and I didn't change the number of deductions I claim. Normally I overpay by about $2000.00 dollars. Thanks to the president and the congress. I won't forget when it is time to vote in November.
During this time, I'm curious what the effective tax rate on the bottom 50% was. According to IRS stats, the effective rate for the bottom 50% from 1991 to 2007 was between 2.99% and 4.62% and dropping. The average tax bill for the bottom 50% was just $470 while those in the top 10% paid 430 TIMES MORE for the same ineffective government, or an average of over $20,000. And the rate for the top earners is currently much less than 91% (about 20%). One problem as I see it is that a majority of the population does not have to pay their fair share of operating the government.
http://www.taxfoundation.org/news/show/250.html
Why do governments go after the top earners? For the same reason Willie Sutton robbed banks. That's where the money is.
who gave you the right to decide what people need to make. with 90% taxes, people wont work as much. its like shooting both personal financial freedom and the economy in the foot
Steve,………ever worked for a poor man?……….I have, didn't work out too well for me when my pay
checks began to bounce.
Yes, because the economy was so wonderful under FDR.
thanks for the scientific take, there, Doc…
Steve, there is a pervasive but false belief that the rich don't pay their fair share. However, based on actual IRS data, top wage earners pay more as a percentage of their income, pay more in absolute dollars, and pay a greater share of taxes than their share of income. The government is already soaking the rich.
Here are a few links that show you the evidence, including links to the source data so that you can verify it yourself. I know that this may come as a shock, but some politicians are lying to you about the rich "not paying their share" in order to create class envy to win votes.
"The Rich Don't Pay Taxes" Lie: Purposely Deceptive, Or Backed Up by Data?
http://soquelbythecreek.blogspot.com/2010/02/rich...
The Oppressive Progressive Income Tax: California Edition
soquelbythecreek.blogspot.com/2009/07/oppressive-progressive-income-tax.html
[...] taxable income. This should be an uncontroversial proposition, and was explained in the video from this post. But since many comments and emails expressed disbelief, this video looks at the real world [...]
Well… no. Wheelan and Mitchell agree. Mitchell's main point was that there is a lot of mythology out there about the Laffer curve and what it shows. But if you go and read Wheelan's article (instead of, say, Googling 'laffer curve debunked') you'll see that he also admits to limited use of the curve.
Care to view and comment on your blog? you opinion matters!
http://www.freedomandprosperity.org/videos/laffer...
[...] Go here to see the original: » The Fox Butterfield Effect and the Laffer Curve – Big Government [...]
[...] The Fox Butterfield Effect and the Laffer Curve by Dan Mitchell [...]
[...] by governments. The chart below shows the Laffer Curve: The curve suggests that, as taxes incrLaffer Curve – Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue [...]
The so called Laffer Curve was never credible and its proposition that lower tax rates results in more taxes collected has been disowned by all of the major economists who supported the notion that lower tax rates would actually increase amount of tax collected – albeit unwillingly and in the face of the uncontrovertible evidence of the "Bush" experience in which huge tax cuts to the rich resulted not in increased government income from taxes – but far less, as simple common sense would tell everyone except the most ardent right agenda ideologues who despite real evidence that the Laffer Curve is nothing but bad policy based on presumptions and naked greed. This huge error has resulted in record government deficits which now will have to be paid by a quickly shrinking middle class, the class being unemployed by the off-shoring of jobs by corporations who front for the wealthy elites.
Leaving the government penniless, in debt to wealthy elites and unable to balance its books.
It is not your so called "progressives" that are the problem it is the "regressives" who pine for the days of mercantilism and slavery and poverty for the majority of workers.
It is the "regressives" who need to visit the doctor and have their heads removed from their asses!
so you say…
Which economists? Galbratith and other statists? Arthur Laffer was right about most of his positions, and revenues DID increase.
Spending, unfortunately, did as well. So, we utterly reject your post as blather. The 'greed' here is poor policy emanating from a corrupt government. All of your Progressive heroes are guilty of being bought dogs of corrupt enterprises- and then just making it worse by spending like drunken sailors.
With apology to the sailors of the world…
Related……
[...]just beneath, are numerous totally not related sites to ours, however, they are surely worth going over[...]……
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