Laffer Curve Works Again

HUMAN EVENTS ^ | Dec 28, 2005 | Jerry Bowyer

[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.

[presidio9]

OK, did you see "Ferris Bueller's Day Off," or are we having a failure to communicate?

[inquest]

I should have used "Chinese moonshine" or saki or maybe Bombay gin so as not to be misunderstood.

It still wouldn't make for a comparison to the Whiskey Rebellion. It wasn't the consumers of the whiskey who were up in arms, but the producers, because it was their livelihood that was being put in the vise.

[fallujah-nuker]

It still wouldn't make for a comparison to the Whiskey Rebellion. It wasn't the consumers of the whiskey who were up in arms, but the producers, because it was their livelihood that was being put in the vise.

Very true, they were on the far side of the Alleghenies and the cost of transport was very high in the days before canals and rail. Producing whiskey was the best way of adding maximum value to their corn to bring the best price in the eastern markets.

[satchmodog9]

Roger had him on. Good interview.

[Ghost of Philip Marlowe]

You're allusion to the span of 18th-20th century history is so sweeping as to be ambiguous at best and pointless at worst. It is also anachronistic and the stats you vaguely refer to are incorrect. The tariffs imposed in the 19th century were modest compared to what is being imposed today. The tariffs you Buachananites want to impose in order to restrict trade will be exponential compared to those of the 19th century.

And saying that to extend what was minimal then by leaps and bounds today is like saying Jesus instructed his people to pay Rome's taxes, so therefore we shouldn't be concerned with a tax burden that is some ten times higher. Few conservatives would argue that today's tax burden is a non-issue and that paying more will help all Americans. A tariff is just another hidden tax on the consumer.

The point is that the US and the UK flourished best when we reduced the regulatory burden. This in spite of some governmental regulation. Friedman in "Free to Choose" clearly illustrates the direct ratio between less governmental regulation and economic benefit. The 19th century is what made our two nations economic giants and it was largely because of free trade. Hong Kong and Japan, hardly hotbeds of natural resources, have very limited governmental regulation and have flourished magnificently because of it.

Lumping our country's history post-FDR in with that of the 19th century is another ambiguous and illogical reference. What he did to socialize our economy was a disgrace. While it may have inched toward his changes since Lincoln, he proceeded by bounds toward Socialism, as did most of Western Europe, the results of which have been well documented in Hayek's "Road to Serfdom."

To try to argue that restricting trade through high tariffs and by so doing forcing people to work only within the "American" economy is somehow more free than being able to trade with other countries is patently absurd. It is Statist. No more, no less. It sounds like you would feel all safe and warm if the iron fist of the American government would clamp down around us and hammer out any other non-American economic opportunities. I don't. I believe that government is best which governs least. And that includes 'governing' the economy. And, as I said, I'm no free traitor. I think part of the dark side of Capitalism is that it is a respecter of no borders. The only line it respects is the bottom line. I think NAFTA was a waste and I don't support CAFTA. I even support restricting the number of offshore workers an American-based company can use. But I don't think isolationism is at all realistic, and I do believe that getting in a tariff war with our trading partners would be cutting off our nose to spite our face.

[Uncle Vlad]

The Federal government's powers should be confined to those enumerated in the Constitution. They should collect enough revenue to run the government, provide for the common defense, etc., and not a penny more. Period.

[kenavi]

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?

Europe uses the VAT. It is a hidden tax, because businesses must include it in the price they charge the consumer. With VAT, taxpayers have less of an idea of the tax burden, which increases the likelihood that taxes will remain high.

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.

Laffer regularly surveys the tax burdens imposed by the 50 states, which includes sales taxes as well as state income taxes. I've never seen him boost sales taxes as a better alternative than income taxes. IMO, people who boost sales taxes do it as a means of social control (e.g. gas taxes, alcohol excise taxes, cigarette taxes).

General sales taxes can be regressive, that is they tax the poor at a higher percent of their incomes than the wealthy, since the poor have to spend a higher percent of their incomes to buy the necessities of life.

[Smokin' Joe]

Practically speaking, the tax rate should vary and not be a fixed value, but here is how it should work.

Actually, I am a fan of downsizing Government and spending less. Period.

[Simo Hayha]

LOL. When I said "a kind of Whiskey Rebellion" in the "frontier" I was alluding to the fine citizens who would be affected by higher tariffs in those places, i.e. India, China, Japan, anyplace but the USA. And who are the "producers" in those countries?

[LibertarianInExile]

I wish I could recall the U.S. Supreme Court decision that first established that anyone arguing a Congressional or Executive action was unConstitutional had the burden on them.

Just changing THAT alone would put the feds in a world of hurt.

[Paloma_55]

I agree with you.

The discussion of how to optimize the tax rate is different from whether the government should spend so much of the money it already takes from us.

I am a proponent of moving all social spending to the local government, letting the states handle large infrastructure projects, and letting the federal govt provide for the national defense, interstate commerce, and international treaties.

[neutronsgalore]

"The tariffs imposed in the 19th century were modest compared to what is being imposed today."

Non-sense! The tariffs imposed in the 18th and 19th centuries insured that the foreign imports were more expensive. Proportionally speaking they were higher. The tariffs in effect now don't even make up for a fraction of just the labor cost differences.

"Few conservatives would argue that today's tax burden is a non-issue and that paying more will help all Americans."

Most of today's tax burden is in the Fed & State income taxes, where it should be most addressed. Reductions there will easily outmatch any increases on mostly consumer goods.

"A tariff is just another hidden tax on the consumer."

It's a tax on the foreign companies, properly paying for their PRIVILEDGE of selling in the US market. They would have to pay the tariff up-front. They don't get any refunds if their products don't sell.

"The point is that the US and the UK flourished best when we reduced the regulatory burden."

Any nation flourishes when it's regulatory & domestic tax burden is low, protectionist or not. That's why this nation saw such an unprecedented skyrocketing in industry, wages, standard of living, and the growth of the middle class in the protectionist years prior to the Civil War. Most people are still ignorant of the fact that slavery was only a side-issue in the Civil War. It was the very real danger that a Confederacy, with it's huge border, would be smuggling central for bypassing the tariffs placed on imported goods. This would have resulted in the stagnation and eventual collapse of industrial development in the North. The United States would've never become the world leader it is today. It essentially became a war between Protectionist North, and Free Trade South. With the inevitable result that he who has the most industry wins.

"Hong Kong and Japan, hardly hotbeds of natural resources, have very limited governmental regulation and have flourished magnificently because of it."

Hong Kong and Japan flourished magnificently mainly off the massive profit margins they earned in US markets due to our free trade policies. Had they been tariffed even just enough to compensate for differences in labor costs and currency exchange rates, so that their profit margins were no better than their American competitors they would've never surpassed us in much of anything.

"To try to argue that restricting trade through high tariffs and by so doing forcing people to work only within the "American" economy is somehow more free than being able to trade with other countries is patently absurd."

Sorry, but that's exactly what was done through most of America's history. The overwhelming majority of foreign imports were more expensive than competing domestic products because of tariffs. The American economy, especially in heavy industry, flourished and grew at levels unachievable by any other method. That's why China encourages free trade abroad, while practicing protectionism at home. The result has been the massive increase in their industry, while sapping away the war-usable industry of their future enemy, the United States.

"But I don't think isolationism is at all realistic,..."

Protectionism and isolationism are seperate entities. They can and have been used together, but the USA has been extensively involved in the international arena even during it's protectionist years.

"...and I do believe that getting in a tariff war with our trading partners would be cutting off our nose to spite our face."

Which shows your complete ignorance in the amount of irresponsibly unused leverage the United States holds. The overwhelming majority of trade war threats by other nations are pure bluff. They know we can damage them far more than they can damage us at this point and all it takes is a Presidency and Congress with BALLS to use that leverage.

[Starboard]

If the feds collect enough money to fund pork barrel projects then they have collected too much.

Believe me, aside from all the pork, there is plenty of money left over to fund all kinds of waste in DC. If only the taxpayers could see what really goes on everyday. In DC, the waste is monumental (pun intended).

[Natural Law]

Why do you assume that the government should be able to take as much from the economy as it can without doing damage? Why shouldn't the government be limited to only taking as much as is needed to perform necessary functions?

[neutronsgalore]

""In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the... Anyone? Anyone?... the Great Depression, passed the... Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act? Which, anyone? Raised or lowered?... raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression. Today we have a similar debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen this before?"

Which shows the ignorance (if not historical revisionism) of those who placed it in the movie. The Smoot-Hawley Tariff Act was in the works before the Great Depression. It was not created & passed because if it, or as a remedy for it. We probably would've even suffered slightly more economic damage had it not been passed.

[kenavi]

Practically speaking, the tax rate should vary and not be a fixed value, but here is how it should work.

The aim of the Laffer Curve was not to maximize gov't revenue from taxes, but for the Federal government to work from the recognition that people change their economic behavior in response to taxes, and that the biggest danger of taxes is that it depresses economic activity.

In that spirit, gov't should not be trying to fine tune the economy by constantly jiggering the tax rate, but rather to set as low a tax rate as possible just as long it collects enough money to carry out its essential functions, and set as simple a structure as possible so as not to try to favor one economic activity over another. Let the people decide.

Ultimately, IMO, the gov't could borrow all the money it needs to operate, and tax just enough to service its debt.

[inquest]

When I said "a kind of Whiskey Rebellion" in the "frontier" I was alluding to the fine citizens who would be affected by higher tariffs in those places, i.e. India, China, Japan, anyplace but the USA.

So? Let 'em rebel. They'd still have less cause for doing so than the farmers of 1794, though, because they'd only get taxed on their exports to the U.S. The Pennsylvania distillers got taxed regardless.

[presidio9]

We probably would've even suffered slightly more economic damage had it not been passed.

Please elaborate.

[neutronsgalore]

"Please elaborate."

Only slightly at most because, not being designed to deal with the Depression, it's effects would be mostly overwhelmed. Like dropping one sandbag on a busted dike. The difference between 1000 gallons a second streaming through without it, and 999 with it.

[presidio9]

So can I safely assume that you would have responded to the Depression with more fiscal spending?