The Laffer Curve Works, Even in France
by Dan MitchellOne year ago, I wrote about how the French government was getting unexpected additional revenues following the implementation of lower tax rates.
This is the Laffer Curve in action, and it’s happening again in France, only this time because the government reduced the wealth tax.
Here’s part of the story at Tax-news.com.
France’s solidarity tax on wealth (l’impôt de solidarité sur la fortune – ISF), which was radically reformed by the government in June last year, has served to yield much greater fiscal revenues for the state than initially predicted. …the government agreed that the solidarity tax on wealth would in future comprise of only two tax brackets: a 0.25% tax rate imposed on individuals with net taxable wealth in excess of EUR1.3m (USD1.7m), and a 0.5% tax rate levied on individuals with net taxable assets above EUR3m. Previously, the entry threshold at which wealth tax was applied was EUR800,000, with the rates varying between 0.55% and 1.8%. To alleviate any threshold effects, a discount mechanism was also instated applicable to wealth of between EUR1.3m and EUR1.4m, as well as to wealth of between EUR3m and EUR3.2m. Although the new provisions provide for lower tax rates and for the abolition of the first tax bracket, effectively exempting around 300,000 taxpayers from the tax, according to latest government figures, the tax yielded around EUR4.3bn in 2011, almost EUR60m more than originally forecast in the collective budget.
This is not to say that France is an example to follow. There shouldn’t be any wealth tax, and income tax rates are still far too high.
And it’s also worth remembering that tax policy is just one of many factors that determine economic performance.
That being said, nations that shift from terrible tax policy to bad tax policy will enjoy better economic performance, just as nations that go from good policy to great policy also will reap benefits.
In other words, incremental changes make a difference. That’s even the case when the politicians impose a “Snooki tax” on indoor tanning services.
The most dramatic Laffer Curve effects, though, occur when there are big changes in policy. This video looks at some of the evidence.
This video is part of a three-part series, by the way. Click here if you want to see the entire set.
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36 Comments
Mitchell, Bringing up the laffer curve in the current climate is irresponsible. Tax revenues are currently on the front side, since we're below 15% of GDP, where at many points in time the US economy has been closer to 20%. We are currently in the zone where taxing less, leads to less.
Yawn. The ceteris isn't paribus in real life.
However, any talk of improving the economy must include mention of reducing government spending…especially on things government has no business or need to be involved in.
So, a stern finger wag to you, Mr. Mitchell!
By your logic, Dan, revenues should have overtaken our deficit long ago. We've been slashing taxes for twenty years now.
By that logic, you can't burn down a forest, because trees grow.
Had spending not outpaced revenues, we would have overtaken not only deficit, but debt itself too.
It is prrety simple really. Spend less than you have coming in and pay down the debt until it is gone.
Alas, like the resident trolls around here, government takes a look at the reality and then says and does exactly the opposite (and then blames anyone and everyone else).
France + Common Sence = Dose not compute!
Did Laffer win a Nobel Prize for his curve? It is a thousand times more worthy of a prize than anything Peter Krugsman ever did.
H.R. 1848, the “One Percent Spending Reduction Act”
http://mack.house.gov/index.cfm?p=Penny-Plan
The Laffer curve is wool over conservatives eyes: It's purpose it to collect MAXIMUM REVENUE, which promotes consistently large government. The money flow doesn't stop. More money is still transferred from taxpayers to the State.
The purpose is to cut taxes AND spending, moreso spending. The Laffer curve promotes a continuation of the same government spending we are supposed to reject. It promotes the idea that the Federal Government deserves your money, and has a right to take your income.
More like the Laugher Curve.
You're half right. There was an op ed in the WSJ back in the 1990s, during the times of Clinton not being able to keep his middle class tax cut, entitled, "A Constant Relationship." It pointed out that regardless of tax rates–91% at the high end and 28% at the low end–federal government income tax revenues were essentially centered around 18% of GDP.
I would argue, thus, that something else is at work in the present circumstance. Perhaps the spectre of ObamaCare hanging over the private sector has kept their investment and hiring on the sidelines, perhaps environmental regulations which keep much of the US's energy resources off limits is contributing to less economic activity and thus lower tax revenues.
The other side of the equation was that government spending was in the 20% range historically (except in times of war); now it is nearing 25% of GDP. That cannot be left out of the discussion; to do so is also irresponsible.
Running two wars you've inherited, the BUSH TARP bailout, and the Medicare Part D giveaway sure got expensive, didn''t they?
The idea behind the Laffer Curve has more to do with maximizing production, its revenue projections or realizations were purely a secondary consideration.
You are correct in the sense that an efficiently designed tax system will encourage ever more effort and production (thus the necessity of a low capital gains tax, to encourage as many risks being taken as possible, some of which will fail but the successful ones will be wildly successful) and by default will throw off ever more revenue to the government.
But having said that, an ever expanding government is sustainable if it remains at a consistent share of GDP and if the government sets budget parameters around what money is coming in instead of setting spending levels and then trying to jigger the tax and regulatory structure to hit that budget.
6 trillion in new debt from Obama, in 3 years, yea we can pay for that, 16 trillion + in debt in 8 years if this bozo gets 4 more sounds real great.
The Bush tax cuts resulted in revenues going up. Unfortunately spending went up faster. Hence the deficit. Look at the whole picture Mr. Quayle. Stop clouding the issue with less than minimal understanding of what the heck is going on.
I advance the LW Curve. You send in your money to Washington they want more. You send in all your money to Washington, they will go to China and panhandle.
"But having said that, an ever expanding government is sustainable if it remains at a consistent share of GDP"
Big 'if'. Also, a growing government becomes ever more veracious for more dollars and influence, which leads to demagogues calling for more money and control and slowly eats away at the productive sector. Its already happened and we see the results.
0% federal income tax. Beats the hell out of any production that would come from the Laffer Curve, and keeps the politicians, lobbyists and power centers at bay.
We have our own a wealth tax – it's called the Fed.
If anything, Jim, I would say the threat of ObamaKare and environmental regs, not necessarily limited to the energy sector, are what is causing a lack of large scale investment. The latter is of particular concern these days as the environazis really have the upper hand what with government support for their lawsuits.
The US has become so litigious and the regs so overwhelming I'm surprised anyone wants to invest!
Milton Friedman stated that if lowering the tax rate increases revenue, the tax rate was too high to begin with.
If one is to believe that there is such economic Kool-Aide as the Laffer Curve, then one must consider where we are on the curve at this point in time. I tend to agree with Cog Wheeler, but after analyzing this post, it is quite apparent that I am a mere peasant among Kings.
YES. 0% Income Tax.
Not just because it will be good for the economy.
Income tax is also IMMORAL.
Mr. Mitchell, nice job as usual, please keep up the good work…..
As soon as I startrd reading this piece. I had to chuckle though as we all know…..no nitwit progressives can comprend the Laffer Curve….
The comments from that ilk as usual have proven my point….
Well then……aren't we being a just little hypocritical for supporting Obama?
moron, we spend too much. Is that really so hard to understand?
If you agree with Cogwheeler, your wheel is missing some cogs.
It's all so simple: cut the spending.
The Laffer curve works in the real world. My wife enjoys using a tanning bed in the winter, she would go to a salon once or twice a week. Now we have a used tanning bed in our basement purchased from the same salon she once tanned at that no longer offers tanning. People across this country have hundreds of millions of examples just like mine.
Air travel is another example, six hours used to be my cutoff for choosing to drive or fly, now it is twelve hours. Taxes, fees and added security time not to mention the stress has changed my behavior. My change in behavior negatively affects the economy and tax revenues.
Twenty years you say? According to the data I'm getting off of the Office of Management and Budget, in 1992 the government spent 1.3815 trillion dollars. That's 1.8579 trillion 2005 dollars.
In 2010 government revenues were 2.1627 trillion dollars. That's 1.919 trillion 2005 dollars.
Government revenues have, adjusted for inflation, overtaken 1992 spending levels every year since 1997. I would say that counts as long ago.
They shouldn't impose a tax on indoor tanning services. If they do, some of you will get burned.
Art laugher was made a fool on a national stage
Look at his predictions on the housing market.
he's a complete fool
HAAAAAAAAA
laffer is a complete joke.
http://www.youtube.com/watch?v=9BND3F1KfZ0
Lets all have a laugh
http://www.youtube.com/watch?v=9BND3F1KfZ0
Cog on this, honey. This whole thread is about The Revenue Side of the equation, and has nothing to do with spending policy. Simply put, some very smart people here are discussing the pros and cons of a certain tax policy that MAY help to stimulate the economy. There are those who are skeptical. I have learned to be cynical.
You buy the progressive baloney if you even willingly discuss the revenue side of the equation without discussing the real problem.
Does Hawkeye transfuse the patient with blood while a transected femoral artery bleeds profusely?
We can extract all the revenue possible from our fellow citizens, from working illegal aliens, and we can take all that China is willing to lend AND STILL OUR SPENDING IS UNSUSTAINABLE.
So get with the program or you're just being ineffective (or worse)
"Hawkeye"? Sweetie, are you old enough to vote?
are you too young to remember MASH in the 1970's?
Your argument of businesses on the sidelines basically comes down to uncertainty over health care and environmental costs. It is a supposition echoed most loudly by those affected by these costs. I'm looking very closely at the EPA regs (MACT/CSAPR/MATS) on utilities, and expect that what I found to be true with Waxman/Markey (C&T) will similarly prove true for mercury, sulfur and nitrogen. They aren't expensive. It's really made me cynical of the machine which, instead of coming clean on the actual cost of technologies that have been around for over 20 years (ACI, SCR), has instead focused upon the sheer profit max and a little ad money to throw words around like "blackouts" and "bankruptcy". They don't quantify a good case, as the Republicans used to do. Frankly, I think if they focused on THAT domain, fiscal responsibility, etc, a whole lot of RINOs would come back. The impression I'm left with is an effort to BS about some disaster, so utilities can recover costs ad infinitum upon their rate base.
If you understand Laffer and economics, maybe you can see how coal utilities that are over 40 years old, would much rather blame the EPA for a rate increase, than the reality that they need to recover costs on new plant construction. State utility commissions generally allow cost recovery for new rules, but plant construction costs are already expected to be built in. So, "its the EPA's fault".
I won't digress further, but think that the Laffer curve gets tougher to plot, as wealth stratifies. What do we define as tax rates when looking at the gap between the 49k median income and Mitt Romney's 20 million? Clinton's "91%" is a perfect example of great fodder for Laffer enthusiasts, but when it could apply above a marginal of ~5mm, or be applicable to only .1% of the tax base, the truthful answer gets lost in the noise.
I couldn't agree more about 25% GDP spending being the central problem. That's why every time I hear about Laffer, I cringe because its the "feel good" gas that lets us cop-out. Stockman, Reagan, Kemp, and even Kemp's protégé, Paul Ryan, have all passed this cool-aide around.
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