WSJ: Real Tax Cuts Have Curves -- George Bush proves Art Laffer right -- again.

As legend has it the famous Laffer Curve was first drawn by economist Arthur Laffer in 1974 on a cocktail napkin during a small dinner meeting... attended by the late Wall Street Journal editor Robert Bartley and such high-powered policy makers as Dick Cheney and Donald Rumsfeld. The Laffer Curve helped launch the Reaganomics Revolution here at home and a frenzy of tax rate cutting around the globe....

The theory is really one of the simplest concepts in economics. Yet its logic continues to elude the class-warfare lobby whose disbelief is unburdened by the multiple real-life examples which validate its conclusions. The idea is that lowering the tax rate on production, work, investment, and risk-taking will spur more of these activities and thereby will often lead to more tax revenue collections for the government rather than less....

Last week the Congressional Budget Office released its latest report on tax revenue collections. The numbers are an eye-popping vindication of the Laffer Curve and the Bush tax cut's real economic value. Federal tax revenues have surged in the first eight months of this fiscal year by $187 billion. This represents a 15.4% rise in federal tax receipts over 2004. Individual and corporate income tax receipts have exploded like a cap let off a geyser, up 30% in the two years since the tax cut. Once again, tax rate cuts have created a virtuous chain reaction of higher economic growth, more jobs, higher corporate profits, and finally more tax receipts.

This Laffer Curve effect has also created a revenue windfall for states and cities. As the economic expansion has plowed forward, and in some regions of the country accelerated, state tax receipts have climbed 7.5% this year already.... New York City... finds itself more than $3 billion IN SURPLUS....

The basic premise of the Laffer Curve is correct, but the numbers posted here represent a disingenuous argument in favor of lower tax rates. This is because they don't take two critical points into account: 1) the impact on gross tax receipts of the ever-increasing number of filers who are subject to the alternative minimum tax (who can't take advantage of the lower income tax rates), and 2) the "positive" impact of massive deficit spending on both corporate and individual income tax receipts.

I agree. The basic premise that revenues approach zero as the tax rate approaches the extremes (zero and 100 percent) is correct. Of course, it's very doubtful that the relationship is a nice, symmetrical curve as pictured above. In addition, there are many other factors that affect revenues. Finally, every credible study that I've seen suggests that tax rates are on the low side of that rate that would bring in the highest revenues. For example, in the article, Moore states:

In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion.

What Moore doesn't mention is that revenues have likewise doubled (or better) during EVERY SINGLE DECADE SINCE THE GREAT DEPRESSION! They went up 502.4% during the 40's, 134.5% during the 50's, 108.5% during the 60's, and 168.2% during the 70's. At 96.2 percent, they nearly doubled in the 90s as well. Hence, claiming that the Reagan tax cuts caused the doubling of revenues is like a rooster claiming credit for the dawn.

Furthermore, the receipts from individual income taxes (the only receipts directly affected by the tax cuts) went up only 91.3 percent during the 80's. Meanwhile, receipts from Social Insurance, which is directly affected by the FICA tax rate, went up 140.8 percent. This large increase was largely due to the fact that the FICA tax rate went up 25% from 6.13 to 7.65 percent of payroll. Hence, the claim that the doubling of TOTAL revenues proves the effectiveness of tax cuts is including revenues which resulted from a tax hike to prove the effectiveness of a tax cut. This seems like the height of hypocrisy. For a further discussion of Reagan tax cuts, see that analysis at http://home.att.net/~rdavis2/taxcuts.html.

Regarding the Bush tax cuts, the following graph shows the 3-month trailing averages for receipts, outlays, and deficits since 1998:

The numbers and sources can be seen at http://home.att.net/~rdavis2/mts.html. As can be seen, revenues from individual income tax receipts dropped sharply following the 2001 tax cut. Oddly, Moore and all other supply-siders appear to have lost all memory of this tax cut. Revenues do appear to have started a recovery in late 2003 or early 2004. To what degree this recovery is due to the 2003 dividend tax cut and to what degree it is just the normal recovery from a recession is debatable. In any event, this says absolutely nothing about the merit in cutting the marginal tax rate.

The fact that we are below the tax rate that will bring in maximum revenues is NOT an argument for raising taxes. However, we need to get away from these free-lunch schemes that are rampant in the world of politics.

What Moore doesn't mention is that revenues have likewise doubled (or better) during EVERY SINGLE DECADE SINCE THE GREAT DEPRESSION!

Thank you for that. I also read somewhere that 22 millions jobs were created in the much-maligned 1970s, which is actually more than in the celebrated 1980s.

You're correct that more jobs were created during the much-maligned 1970s than during 1980s. The following graph shows the number of people employed and in the labor force since 1950:

The graph shows that, except for recessions, the number of jobs has closely followed the size of the labor force which itself has increased at a fairly steady rate. The purple line shows the 4-year trailing average of the annual percent growth in total employed. As can be seen, it was noticeably higher in the 1970s than it was during most of the 1980s.

The numbers and sources can be found at http://home.att.net/~rdavis2/employ1.html. Looking at the actual numbers, the increase in jobs was 20.625 million (99.303 - 78.678) during the 70s and 19.49 million (118.793 - 99.303) during the 80s. These numbers come from the so-called household survey. Looking at the payroll survey, the increase jobs was 19.624 million (90.8 - 7.1176) during the 70s and 18.344 (109.144 - 90.8) during the 80s. Hence, by either survey, there were more than a million more jobs created during the 70s than during the 80s.

The numbers are no better if you look at Presidential terms of office. Following are the jobs created under every president since Roosevelt's last term:

TOTAL NONFARM EMPLOYMENT BY PRESIDENTIAL TERM (in thousands)

                          Total            No. of  Monthly
President     Mo  Year  nonfarm   Change   Months  Average
-----------  ---  ----  -------  -------  -------  -------
Roosevelt    Jan  1941    34480     7423       48    154.6
Truman       Jan  1945    41903     2772       48     57.8
  "          Jan  1949    44675     5470       48    114.0
Eisenhower   Jan  1953    50145     2743       48     57.1
  "          Jan  1957    52888      795       48     16.6
Kennedy      Jan  1961    53683     5900       48    122.9
Johnson      Jan  1965    59583     9855       48    205.3
Nixon        Jan  1969    69438     6182       48    128.8
Nixon/Ford   Jan  1973    75620     5072       48    105.7
Carter       Jan  1977    80692    10339       48    215.4
Reagan       Jan  1981    91031     5322       48    110.9
  "          Jan  1985    96353    10780       48    224.6
G.H. Bush    Jan  1989   107133     2592       48     54.0
Clinton      Jan  1993   109725    11507       48    239.7
  "          Jan  1997   121232    11222       48    233.8
G.W. Bush    Jan  2001   132454      893       52     17.2
             May  2005   133347

Total from Kennedy to Clinton      78771      480    164.1
Total from Kennedy to G.W. Bush    79664      532    149.7

Source: Bureau of Labor Statistics series at http://data.bls.gov/cgi-bin/surveymost?ce

Looking at their entire 4 or 8-year terms, the highest growth in jobs occurred under Clinton, Carter, Johnson, and Reagan, in that order. This is true even if the end of Kennedy's term which Johnson served out is included.

The fact is, if you're able to separate out the issue of taxes and revenues, conservatives are correct and taxes should be decreased.

Everything you've brought up here to challenge the issue is very heavily impacted by other factors to the extent that your graphs tell us *nothing* about the impact of tax cuts or tax increases on the economy.

It's easy to lie with statistics.

It's more difficult to identify the lies in statistics, but not impossible.

That said, Bush is a fink for refusing to cut spending, and I'm extremely unhappy with his peformance in domestic economics. If he was attempting to achieve a "new tone" by given Democrats what they wanted economically here at home, hopefully, by now, he's understood that they are going to hate him no matter what he does because of those 3 characters after his name and title (R).

Everything you've brought up here to challenge the issue is very heavily impacted by other factors to the extent that your graphs tell us *nothing* about the impact of tax cuts or tax increases on the economy.

The issue addressed by the lead article in this thread is the impact of tax cuts on revenues. And, according to the administration's own budget documents, the tax cuts have led to LOWER revenues. For example Table 7 in the 2005 Mid-Session Review breaks down the increase of over $2 trillion in the deficit since the 2002 Budget. It states that 49 percent of this swing was due to reestimates, 29 percent was due to tax relief, and the remaining 22 percent was due to the war, homeland, and other spending.

Then, in Table S-7 of the just-released 2006 Mid-Session Review, the administration projects that extending the marginal individual income tax rate reductions from 2011 to 2015 will cost about half a trillion dollars and repeal of the estate tax for those years will cost about a quarter of a trillion dollars.

Every budget document and credible economic study that I have ever seen states that tax cuts of any significance lead to lower revenues, at least in the short and medium term (the very long term is difficult, if not impossible, to measure). If you have ever seen a budget document or credible economic study that says otherwise, please post it.

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