Posted on 12/31/2005 8:45:33 AM PST by george76
Ronald Reagan once said an economist is someone who sees something that works in practice and wonders if it would work in theory.
So why is it that when confronted with a concept that works in both practice and theory, so many people refuse to believe it?
The Laffer Curve, popularized by economist Arthur Laffer, says the government can maximize tax revenue by setting the tax rate at ...
The logic is obvious on the ends of the spectrum: if the tax rate is 0%, the government collects no money.
If it is 100%, people have no reason to earn, and the government still collects no money.
Federal tax receipts for October and November (the first two months of fiscal 2006) were $288 billion. This is up from the first two months of fiscal 2005 ...
Despite cutting tax rates in May 2003, tax receipts for this two-month period have risen for three consecutive years.
We were on the wrong side of the curve (and may still be):
Tax rates were too high.
(Excerpt) Read more at humaneventsonline.com ...
Practically speaking, the tax rate should vary and not be a fixed value, but here is how it should work.
When the economy is good, the tax rate should slowly increase until the economy starts to slow down at which point it should start to slowly drop.
Higher taxes during a good economy will increase revenue, but increasing them without concern for the impact on the economy (as Clinton did) will result in a huge gap when the economy starts to fail and taxes continue to rise.
Much like Greenspan uses interest rate to drive the economy and inflation, tax rate could be used. It just has to be understood that lowering taxes stimulates the economy and raising taxes can slow the economy from overheating.
Unfortunately, the optimum point on the Laffer curve can only be found by trial and error.
The tax rate should be fixed. It should be set at a flat 20% rate.
Yes, it is true that Income Taxes are too high.
But we are too low on the Laffer Curve for tariffs.
We should be shifting our tax policy to lower the income tax by increasing the tax on imports.
The First Federal Revenue Law
On April 8, James Madison, once again a congressman from Virginia, addressed the House. He went right to the point. Congress, he said, must "remedy the evil" of "the deficiency in our Treasury." He argued that "[a] national revenue must be obtained," but not in a way "oppressive to our constituents." He then proposed that the House adopt legislation, virtually identical to the unimplemented Confederation tariff, imposing a five-percent tariff on all imports....
...A single, uniform tariff, he insisted, had two advantages. First, it could be imposed quickly, which was important because "the prospect of our harvest from the Spring importations is daily vanishing." Second, it was consistent with the principles of free trade ("commercial shackles," he said, "are generally unjust, oppressive, and impolitic")
If the feds collect enough money to fund pork barrel projects then they have collected too much. THe less money they have the better. I would love to be able to direct my tax money to the budget items I care about; 50% military and national security and 50% to lock down the borders.
I remember skunks Clinton and Gore calling the Laffer curver the laughing stock. Laffer has been amazingly accurate with his prediction model. Much more so than clintopervert and goofus.
I agree but it doesn't really need to be optimum all the time.
The hard part is that Republicans won't admit that sometimes raising taxes is a good thing. When the economy is going nuts, raise taxes...not a lot, but enough to slow it down and increase revenues like the dickens. When the economy starts to slow, lower taxes. Depending on how fast you can respond to the economic news, it could be a controlling function.
Of course, Greenspan figured out that interest rates ARE a controlling function if used properly. I am gonna miss that man.
I might agree with you on the premise that interest rates have proven to be a good controlling function for the economy. I was arguing that tax rates *could be* but the hard part is admitting that raising taxes in a hot economic time is a good thing. (to prevent over-capitalization and the resultant reduction in profits when the market slows down).
(See the tech bubble, real-estate bubble, etc)
Laffer was on Rush last week, a guest with Roger Hedgecock or Mark Billings, I forget which.
It can't be optimum all the time because it is constantly moving.
Economics: An impractical science with a trivial theory.
President Reagan actually had a degree in economics.
bttt
Shortly after my last post, I sorta realized that.
Another shortcoming of we Republicans is that we talk about cutting programs, but never really do it.
If I were making the rules, we would cut the federal government in half, increase the state by 10% and increase the city/and/or/county by 50%. We would come out ahead on taxes, but get better service.
The problem is, nobody at the local level ever wants to fund those holes created by a federal funding cut.
zaactly...
IMHO, "optimum" is not "on the spot" but the average distance from the spot is minimal.
I'd always use a little exercise to teach my kids about this phenomenon. I'd ask them how much tax they would pay if their yearly earnings were $100 and the tax rate were 10 percent. Of course they'd say it would be $10. Then I'd ask them how much tax they'd pay if the rate were 30 percent, 40 percent, and so on. When we got to 100 percent, they'd invariably say it would be one hundred dollars. To which I'd respond by asking whether they would be content to work for no pay. The point was always driven home.
The problem is that political power with high tax receipts is like an alcoholic inheriting a liquor store. If the money was used to pay a deficit great, but in reality it is seen as an opportunity to spend, spend, spend.
"The tax rate should be fixed. It should be set at a flat 20% rate"
I call that bet and lower you by half and half again and half again.
Privatize anything you can't afford. If private business can privatize, so can gummit.
Our federal budget has almost one trillion dollars in "entitlement" spending programmed into it this year, {medicare, medicade and SS} with more coming each year. Lowering the tax rates does increase tax revenues {that is a fact that cannot be disputed}. However, the changing demographics {America is getting older} mean that we cannot tax ourselves out of the coming fiscal real crisis.
President Bush tried for most of 2005 to make the Country aware of the coming problem. He was derided by both the media and the demonRATS {same thing} and ignored by the pubbie congresscritters.
If the programs are not changed, the clock will eventually force changes. The laws of supply and demand cannot be ignored. I'm old enough {and have enough of my own money} that I won't be effected, but my children and certainly my grandchildren will be. I hope that the politicos will see the train coming down the track, and do the right thing, but I doubt it.
Talk about hitting the nail right on the head. When cutting the amount of growth is seen as a slash, real cutting isn't going to be easy. I recommend starting small. First off get rid of congression raises. They should have to vote a raise in by 75% of the full house and full senate.
You can't eat an elephant all at once. You have to do it one bite at a time.
Gimme a 12-15% flat rate, and I'll be satisfied.
I'd say 10%. If 10% is good enough for the Lord, it ought to be good enough for the government.
"I agree but it doesn't really need to be optimum all the time. "
Excellent point! This is often overlooked.
Analagously, I don't need to optimize my income (hours worked vs. money earned). If I make enough to live well and save for my retirement and I'm happy with what I have, I shouldn't need to work more hours or push for a raise, should I? Similarly, if the government has enough to operate on, it shouldn't always be looking for the next buck.
The Laffer Curve theory has proven itself in real-world economics. What I find inexplicable is why we always think of it in terms of optimizing revenue for the government!
I believe that all levels of government should be kept on an almost starvation revenue. Where is it established that government must be insulated from the economic realities "We, The People" face every day?
True government functions are limited and should only be a mild burden on the taxpayer. This is only possible if the taxpayer is able to place limits on governments' ability to tax and spend.
I believe a more appropriate use of the Laffer Curve is that of a check on the upper effective limit of taxes, not as a means to maximize government revenue. By determining this upper limit the "starvation" limit could then be estabished for tax revenues to the government.
Of course, this "starvation" limit would vary with economic conditions. Too bad. Government should not be insulated from reality. Right now it is. And we have runaway spending. Time to rein government in using the purse strings.
Again, the Laffer Curve works. It is time to make it work for the good of the country, not the government.
re:pork barrel
I think too much tax revenue in the hands of politicians is like a lottery windfall in the hands of a moron. Think about the stories you've read about how too much money has destroyed a person and/or his family. Too much money can lead to drugs, alcohol, excessive partying. How many rock stars, actors, etc., does this describe? Sure, I'd like their money, but I wouldn't trade for their quality of life.
Same with the government. Too much money and you end up with pork, with special programs that are not only non-productive but anti-productive, new entitlements that we are then forced to fund from now till forever, and political squabbling over power and control of the money.
That is a fabulous idea. Seriously. The next step in democratizing the budget process.
What value would there be to a public program, if the taxpayer didn't care to fund it?
It would eliminate so much irritation, on both sides of the partisan divide. If liberal taxpayers want to fund the NEA, fine. If we want a fence over the boarder, fine. I'd allocate my taxes 50% to national defense, 20% to roads and highways, 20 percent to the National Park Service, and 10% to personal pork.
I'd allocate nothing to the Departments of HHS, Education, or the UN.
"What I find inexplicable is why we always think of it in terms of optimizing revenue for the government! "
What's inexplicable is that we let totalitarians dressed in economist or politician clothing have any chance at implementing their audacities upon us, while on our payroll!
The problem comes in with getting ANYONE to cut taxes.
How does a sales tax (or VAT, whatever it is called in its discussion mode carnation here) figure in---in lieu of income tax or in addition to very very modest income tax rates?
Doesn't that seem to be about the only way to "raise" taxes when the economy is good and "automatically" "lower" taxes when the economy starts slowing?
Does Laffer address this type of tax? I don't know much about tax policy, but it seems like this is a way to build the Laffer curve into tax policy.
Another reason why I asked the question about moving from income tax to a VAT tax---or to a VAT + a very modest income tax rate.
A VAT would "freely" change with the economy---not rates, per se, but revenue taken from the market---with no new compliance charges or individual reliance problems.
Maybe another Laffer Curve where we adjust the tariffs up or down to balance imports and exports.
The optimum point on the Laffer Curve is also dynamic:
The optimum income for the government is not were we should operate. Rather, we should operate on the low tax rate end, because too much government income leads to too much government spending.
Limited government~! Limited income, limited spending, limited powers, and limited terms of office.
There should be no pension for civil servants. That encourages them to get off the government tit, and get a real productive job. If they don't then civil servants become civil masters.
Please advise HOW to post things like the laffer curve...I tried copying and pasting the labor supply curve without success...
This is only true if your objective is to maximize returns to the government, a hideous idea in any context. The government should be put on a strict money diet and deprived of all but truly essential funds. Giving money to the government is like giving whiskey and car keys to a 15 year-old
You are correct.
The Laffer Curve is the first of many steps to try to explain to the DUmmies that higher tax RATES do not automatically mean higher Revenue.
If we can get some of the DUmmies to understand that lower RATES often mean higher REVENUE, then we can move to the second step.
Yup...what's the trick to it???
ping
Yes...
So from now on, I guess I'll just write to you, and YOU can post the illustrations...'cause I can't figger it out!
Start with
<img src="
then the picture location http...(that can be found by right clicking with your mouse and then copying the properties...starting with http)
then with "...
Then finish with the reverse of <
to close the image source.
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