A Lesson on the Laffer Curve for Barack Obama
by Dan MitchellOne of my frustrating missions in life is to educate policy makers on the Laffer Curve.
This means teaching folks on the left that tax policy affects incentives to earn and report taxable income. As such, I try to explain, this means it is wrong to assume a simplistic linear relationship between tax rates and tax revenue. If you double tax rates, for instance, you won’t double tax revenue.
But it also means teaching folks on the right that it is wildly wrong to claim that “all tax cuts pay for themselves” or that “tax increases always mean less revenue.” Those results occur in rare circumstances, but the real lesson of the Laffer Curve is that some types of tax policy changes will result in changes to taxable income, and those shifts in taxable income will partially offset the impact of changes in tax rates.
However, even though both sides may need some education, it seems that the folks on the left are harder to teach – probably because the Laffer Curve is more of a threat to their core beliefs.
If you explain to a conservative politician that a goofy tax cut (such as a new loophole to help housing) won’t boost the economy and that the static revenue estimate from the bureaucrats at the Joint Committee on Taxation is probably right, they usually understand.
But liberal politicians get very agitated if you tell them that higher marginal tax rates on investors, entrepreneurs, and small business owners probably won’t generate much tax revenue because of incentives (and ability) to reduce taxable income.
To be fair, though, some folks on the left are open to real-world evidence. And this IRS data from the 1980s is particularly effective at helping them understand the high cost of class-warfare taxation (click to enlarge).
There’s lots of data here, but pay close attention to the columns on the right and see how much income tax was collected from the rich in 1980, when the top tax rate was 70 percent, and how much was collected from the rich in 1988, when the top tax rate was 28 percent.
The key takeaway is that the IRS collected fives times as much income tax from the rich when the tax rate was far lower. This isn’t just an example of the Laffer Curve. It’s the Laffer Curve on steroids and it’s one of those rare examples of a tax cut paying for itself.
Folks on the right, however, should be careful about over-interpreting this data. There were lots of factors that presumably helped generate these results, including inflation, population growth, and some of Reagan’s other policies. So we don’t know whether the lower tax rates on the rich caused revenues to double, triple, or quadruple. Ask five economists and you’ll get nine answers.
But we do know that the rich paid much more when the tax rate was much lower.
This is an important lesson because Obama wants to run this experiment in reverse. He hasn’t proposed to push the top tax rate up to 70 percent, thank goodness, but the combined effect of his class-warfare policies would mean a substantial increase in marginal tax rates.
We don’t know the revenue-maximizing point of the Laffer Curve, but Obama seems determined to push tax rates so high that the government collects less revenue. Not that we should be surprised. During the 2008 campaign, he actually said he would like higher tax rates even if the government collected less revenue.
That’s class warfare on steroids, and it definitely belong on the list of the worst things Obama has ever said.
But I don’t care about the revenue-maximizing point of the Laffer Curve. Policy makers should set tax rates so we’re at the growth-maximizing level instead.
To broaden the understanding of the Laffer Curve, share these three videos with your friends and colleagues.
This first video explains the theory of the Laffer Curve.
This second video reviews some of the real-world evidence.
And this video exposes the biased an inaccurate “static scoring” of the Joint Committee on Taxation.
And once we educate everybody about the Laffer Curve, we can then concentrate on teaching them about the equivalent relationship on the spending side of the fiscal ledger, the Rahn Curve.
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39 Comments
Does anybody really think that Obama can actually learn anything?
You can lead a liberal to knowledge but you can't make them think.
barry is too rigid in his ideology to even entertain embracing anything but his destructive plans. Economics 101 is something he never learned or will ever learn.
Lesson for the "o"…..?
He's incapable of learning anything. His ego is too inflated to let in any knowledge. Besides, his goal is to destroy our economy, create a revolt, call in Martial Law and remove our republic as it stands now.
This does not compute in the bizarro world of Keynesian economics, which isn't REALLY even Keynesian economics anymore, just a form of economics with formulas that bend to suit Marxist ideology.
The fact that liberals do not understand how incentives influence actions is all one needs to know when dealing with liberals. It is what defines them as childish and unintelligent. Frankly the Laffer curve is so obviously predictable that you really would have to be a dunce to not get it. So it's also obvious that Barack Hussein Obama is a dunce and that makes all who think he's smart, small minded, immature, weasels. I believe that some are truly stupid while others are just self absorbed creeps who get off on punishing people who have the audacity to succeed,. And some are both.
The problem is that Obama doesn't care about the factual reality of tax rates and revenue collection. He (and liberals) place a 'value' on something called 'Social Justice' and consider that a cost that is acceptable.
He has made this very clear:
http://www.youtube.com/watch?v=WpSDBu35K-8&fe...
The problem is there are so many progressives and union leaders who have the ear of Obama he is only going to do what they ask; which is line their pockets more and more. These people do not care about the average citizen or their union members they care only for the power and money they can rape from the average citizen.
November 6 2012 will be as an important date in this nations history as July 4, 1776
Instead of quoting the whole thing, let me say:
Dead on. Good post.
Dan…. The first fatal mistake you make is with the assumption that people who are dead set on collapsing the system even give a rats ass about the Laffer Curve.
What I find more interesting about the chart is the rapid escalation of those whose income was over 200K in 1980 in the few short years to 1988.
Were there really that many more new people earning over 200K or were a lot of people in 1980 hiding their income?
If it's the former, that's pretty darn impressive!
It's also interesting that, as a group, despite a huge drop in the rate of taxation, the actual dollars spent on taxes dropped very little. Or are my math skills getting fuzzy in my declining years?
As opposed by the laughable curve.
Problem is Obama and his minions don't care. Soetoro is on record saying that even if raising taxes on the Evil Rich resulted in decreased revenue, he'd do it anyway because it's "fairer."
Mr. Mitchell, this is an excellent post with all the facts. The main problem is not over taxation but is the runaway spending. I, like most Americans, don't mind paying my share, but until Washington D.C. can get a handle on their wild spending it doesn't matter what the tax rate is because the more they get the more they want to spend on their pet projects. At least in these times people are waking up to the need for the tax code and it's numerous tax loopholes from lobbyists and politicians need to be taken out. A flat tax is really one of the best answers out there.
The other, less well known, contribution of Art Laffer (and perhaps it is just a different branch on the supply side tree) is "the wedge model," which encompasses regulatory and monetary policies.
Will the particular policy widen or narrow the wedge between effort and reward?
Speaking of relationships between a specific tax rate and a specific or hoped for revenue number misses that point. The starting point for any policy should always be whether it will widen or narrow the wedge, whether it will encourage or discourage risk taking and thus productivity and production.
As it relates the the possibility of future inflation due to the Fed creating far too much money to chase the existing stock of goods, unless the Fed sells all of its new financial assets (thus absorbing the dollars from circulation), the only policy that will prevent the inflation from emerging is to radically reduce the wedge so that enough goods are produced in order to absorb the dollars needed to buy them.
That was my question, also, Nick. If wealth went up that much, that is impressive.
"And once we educate everybody about the Laffer Curve, we can then concentrate on teaching them about the equivalent relationship on the spending side of the fiscal ledger, the Rahn Curve"
Its always amazes me that the Left always wants to lump the two separate issues of taxes and spending into one issue and will claim that tax rate reductions caused a deficit even when revenue is doubled. If the separate issue of spending is not controlled then any amount of generated revenue will be over spent.
The Left should be calling for the level of tax rates that generate the highest amount of revenue to the treasury and no more. If 28% generates more than 70% they should be crying for no more than the 28% rates (that they don't tells us a lot).
The Right should be calling for controlled spending and a cap on it that allows further reduction from that revenue maximizing rate.
Another good article…thank you!
<a href="http://www.politiseeds.com” target=”_blank”>www.politiseeds.com
All the valid points in the videos are irrelevant to this administration because that's not the kind of fundamental change he was talking about. His history of community organizing foretold of how he'd bring change and the kind of change he wanted and promised us all.
For another great video look up the "eat the rich" video for further indisputable facts.
It's not a tax revenue problem. It's a spending problem! Until that is acknowledged there is no point in arguing or trying to convince otherwise. Organize believers and stop wasting time with useful idiots. There are more of us than them.
Thank you for discussing the important point that the KIND OF TAX CUT is key. Reducing payroll taxes does not do one thing to spur economic growth. It does reduce tax revenues to the govt and bribes people to try and get them to vote for BO again.
The most important tax to cut is the capital gains tax. Actually, many say that the capital gains tax should be zero. That would be the best incentive to take risk and start a business.
Economic growth (grow a larger GNP pie) is the best way to increase tax revenues. Of course the govt needs to greatly reduce spending (stop doing all of this social justice/redistribution and crony give aways, etc, etc)
"A rising tide lifts all boats" is ever so true.
The inflation of the 70's required wages to catch up. A $20,000/yr salary in the 50's was equivalent to a $200,000 salary in the 80's. (we had gone from $35/oz to $350/oz in gold) It took 20+ years for that massive inflation to work it's way through the economy.
I understand the basis for the Laffer Curve and believe it is accurate. HOWEVER.. I had never seen the information on the 200+K 1980 to 1988 before. That is astounding! Also, can you please point me to the sub 200,000 per year information?
During the 2008 democrat election process, it will never be lost on me Obonehead saying in an interview, (paraphrased) 'Raising the cap-gains tax is simply an exercise in "fairness" and bullheadedly not recognizing/admitting lower rates raise revenue!!!' Obuckethead is an economic, sadistic no-nothing intent on "PUNISHING" his ideological opponents and not engendering national prosperity!!!
The biggest problem with the Laffer curve is that it is created to figure out how to maximize theft from citizens to the benefit of the gov't.
The focus should not be how to maximize gov't revenue but to maximize citizens' wealth.
Not really 'on subject, but worth the read!
The IRS sent my Tax Return back! AGAIN!!!
I guess it was because of my response to the question : "List all
dependents?"
I replied –
"12 million illegal immigrants;
"3 million crack heads;
"42 million unemployable people on food stamps,
"2 million people in over 243 prisons;
"Half of Mexico ; and
"535 fools in the U.S. House and Senate.²
Apparently, this was NOT an acceptable answer.
Not counting all the foreign countries the stimulus money went to.
Good post rckmom.
thanks for the laugh, I almost choked on my lunch!
Good one…
)
…it seems that the folks on the left are harder to teach – probably because the Laffer Curve is more of a threat to their core beliefs.
It's about taking, not making. If Democrats were interested in maximizing revenue, they would simply agree to duplicate those conditions in the 80's. No – They simply want to take away from the 'haves' [earners, creators] to give to the 'have-nots'[dependents], regardless of revenue. This is the linear thinking of a child and the spiteful nature of the Leftist. As those of you who are old enough may recall, the lefties were just as shrill in the 80's about tax cuts as they are now. They even went so far as to fiddle with statistics on homelessness, unemployment and heterosexual AIDS deaths in order to blame Reaganomics and demonize Reagan.
This leads to one of my biggest frustrations with liberals. From what I've seen, they are so focused on imposing "fairness", that they don't care about how their quest for "justice" could boomerang bank on themselves, making their own life worse. If you were to accuse them of envy or jealousy, however, they will deny everything. It's kind of sad, but very frustrating because their ideas would take us down with them.
Have you ever seen Owebama throw a baseball ? He wouldnt know Laffer curve from his elbow .
Besides you cant educate the smartest man ever to be president , he knows everything already .
The main reason the Laffer Curve is ignored by the MSM/Eggheads is because it doesn't fit Keynes' Theories.
When I first heard of it in the late 70's I didn't believe it, but from being 4rd in command in a 300+ person business later in life, I learned it's PRACTICAL value.
Those that love Keynes, 'bite the big one' in the words of Beldar Conehead.
Excellent piece as usual, very informative, but come on Mr. Mitchell….I thought everyone knew this simple truth…..
There is no progressive on this planet with the intellectual capacity to comprehend the Laffer Curve….
Period
The writer is almost as dumb as the Laffer curve itself.
This idea has resulted in the biggest disparity between rich – middle class – poor in our history.
nothing trickled down, deficits and debt skyrocketed. Laffer was made a COMPLETE FOOL by peter schiff. the documentary IOUSA exposed Laffer again as an idiot.
the right loves a god idiot and a retarded economic philosophy
Yes great debate skills you have there. You do not produce one actual argument but instead call the writer names.
How about a reasoned discussion on the issue. I for one would love to hear it.
Mom, you are precious! Thank you for the laugh.
I can't take all the credit…a friend sent it to me in e-mail…however, we all need a good laugh once in a while!..:)
What do you want to debate?
That Laffer has been made a fool over and over?
all you need to do is look around and see that trickle down is a farce and serves the rich and helps no one else.
Did you hear laffers prediction on the housing economy?
15 Real Jobs Bills Stalled in the Senate By Julie Borowski on November 01, 2011
http://www.freedomworks.org/blog/jborowski/15-rea...
"The time is near at hand which must determine whether Americans are to be free men or slaves."
George Washington
Why don't liberals get it?
They don't get it because they don't care. It's not about more money. It's about being equal.
Let’s take a look at how the modern liberal thinks versus the modern conservative.
Liberal:
1. All outcome for an individual or nation can be no better or worse than any other.
2. If an outcome is found to be better, then they must have cheated.
3. If an outcome is found to be worse, then they must have been victimized.
4. The amount a victim lashes out is directly proportional to the victimization. It is the cheater that is doing the victimizing.
Conservative:
1. Good behavior leads to a better outcome.
2. Bad behavior leads to a worse outcome.
The liberal drags down the cheater, the successful, and supports the victim, the unsuccessful. Eventually everybody ends up in the middle. The overall process reduces the successful and increases in the unsuccessful. The rise of the unsuccessful will end up crashing society much sooner than necessary.
If everybody is worse off, but about equal, then that works for the liberal.
Why aren’t more politicians pushing for the grand bargain tax reform based on the Simpson-Bowles committee’s suggestions that had been but forth during the debt ceiling debate? http://eng.am/usFAFs
The Simpson-Bowles committee found that by eliminating tax expenditures and lowering marginal tax rates Congress would be able to simplify the tax code, improve fairness, and spur economic growth. http://eng.am/noTDPF
Would you rather wait for Republicans to budge on higher taxes or achieve the grand bargain revenue-neutral tax reform right now?
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