Posted on 03/14/2010 9:06:14 AM PDT by WOBBLY BOB
Self-paying tax cuts are a popular delusion, except among economists.
University of Michigan economist Joel Slemrod is adamant on one of the key economic issues of our day: 'Tax cuts don't pay for themselves! Period!'
Hardly any economist would disagree. This is true for Republicans as well as Democrats. It is also true regardless of whether they describe themselves as NeoClassical, New Classical, Rational Expectations, Monetarist, Keynesian, Austrian or New Institutional economists.
Yet, for a substantial portion of the general public, the idea that cutting tax rates will increase tax revenues has become an article of faith. The following anonymous comment to an online Associated Press story is typical: "The only way our government can create jobs is to cut taxes. It's been proven over and over again. Cutting taxes also increases government revenue."
(Excerpt) Read more at twincities.com ...
The argument is BOGUS as your Laffer curve diagram indicates.
If tax rate is at point A a tax increase will increase Revenue. At “Equilibrium?” or any tax rate higher an increase in rates will DECREASE total tax Revenue. This means it’s STUPID even for Big Govt Supporters to have a rate higher than this, UNLESS they wish themselves and US ILL.
However, the objective is NOT to Maximize Government revenue but to Maximize Personal Freedom so rates should be Much Lower than “Equilibrium?”.
This is like saying gun free zone signs reduce the occurance of gun violence. Raising taxes just causing money to find a more efficient venue other than expansion. Federal coffers do not fill faster with more money, it’s a lose-lose situation. Taxes on income are a tax on productivity.
If you want less of something tax it, if you want more of something subsidize it, if you want to kill it regulate it out of existence.
Slemrod? Is he related to Axlerod?
No doubt that Lotterman is an advocate of Keynesian economics.....
Less money to the government means more in my pocket which means more of my money in the pocket of businessmen which means more money to the government because of more spending.
Dropping prices doesn’t increase sales either. Just ask Walmart. Seriously. Well maybe not.
I have seen numerous people sneer at the Laffer Curve. I have never heard one of them attempt to demonstrate why it is not true.
Of course, one can claim that we are presently on the left side of the curve. If so, cutting rates will indeed result in a decrease in revenue.
I’ve also never seen any logical explanation of how to determine where we are on the curve.
First of all who would listen to any economist from Michigan? If they were right then their state wouldn’t be 50th out of 50 in unemployment. DUH
Are these the same economist that predicted the financial debacle we are entrenched in?
It’s not about taxes, it’s about SPENDING.
You can tax to 100% if you like, but if you overspend, the entire thing is a fiasco.
Exhibit A: California
As a CPA, I have pondered this question often. I believe that somewhere around 6-8% is the point where most people do not change their behavior, meaning most will pay the tax rather than worry about ways to avoid it. interestingly this is the amount of most sales tax or commissions on large purchases etc.
After that, for larger transactions I would see my clients wanting to take tax avoidance steps to about 15% and avoid taxes on any transactions beyond 15%.
At about 30% or more, most clients would be willing to consider deferring a transaction or giving up control in order to avoid or delay a tax.
In excess of 50%, most clients become very risk adverse and will avoid investing in profit making activities if they have sufficient income to meet their needs.
At 60-70%, most clients would rather give the money to their employees, charity or in bad investments rather than pay the tax.
Thanks for the interesting information.
So what would you consider the marginal tax rate that would bring in the greatest amount of revenue?
25%? 40%?
The problem is, it's not a static curve.
See, let's say that in theory, present revenues could be maximized with a 30% Tax. Well, that's true enough for today; but what if a 25% Tax would result in higher GDP growth over time (ceteris paribus, it would), thus resulting in a larger GDP and a larger total haul of tax revenues over ten years time? But then you could make the same argument for a 20% tax -- even greater GDP growth than with a 25% Tax, thus resulting in an even larger haul of tax revenues over ten years time?
Since one can theoretically forecast higher GDP future growth for each percentage point of lower taxation, there's virtually no limit to just "how low you can go" with long-term forecasts of higher revenues from lower tax rates -- at least until you get down to such a low level of tax rates that the basic functions of Government break down, creating disorder in the economy.
Since there's no way (IMHO) to "scientifically" forecast just exactly what Tax Rate would be the "optimal" revenue-generating Laffer Tax over ten years, or twenty years, or a hundred years -- I say we throw pragmatic econometric forecasting out the window, and just go back to the Bible.
Specifically, 1 Samuel 8:17 -- ANY Government Taxation over and above the 10% which God requires for His Tithe, is Biblically defined as Tyranny. (Which government should be cut back down to size; or in extreme circumstances, "it is the Right of the People to alter or to abolish it".)
Look, it even makes a handy tagline:
"Taxation over Ten is Tyranny!"
My best guess is not to 8% over the long term. That is one of the reasons I think the proposed flat taxes and fair taxes will become just as complex over time. Higher rates will cause tax avoidance steps which will then require regulations.
not to exceed 8%
Between your #52 (behavioral economics, facts and evidence) and my #54 (slavish devotion to Old Testament law), we pretty much ended up about at the same place. Heh. I find that gratifying.
I think you're falling into a fallacy here. A 5% decrease in tax rates will indeed create more economic activity, but not necessarily enough more to create more revenue.
At some point diminishing returns kicks in. I think that's what the LC is trying to show. There is an optimum tax rate. For revenue generation, not necessarily for economic activity. In fact, I think it is fair to assume the optimum rate for revenue is always higher than the optimum rate for economic growth.
You’d have to actually analyze it. And it is different in each case but all economics can be summed up with the term equilibrium point. There is an equilibrium point in everything and in a free market without controls the idea is that equlibrium is always reached for maximum efficiency.
Of course this doesn’t change the fact that we’ve had irresponsible financial management in this country for years. Bush pursued the LBJ strategy of cutting rates, fighting a war, and not really cutting domestic spending. It’s why were are in the situation we’re in now.
I hate taxes but I also grew up as the son of parents who grew up during WWII. Back then they had rationing. Back then they had all sorts of economic controls. The same was true for WWI and the Late Unpleasantness.
The idea that we could fight a war and not ask anything of the American people of it was retarded. It’s one comment my father has always made on Bush and Johnson. Neither of them ever asked the American people to sacrifice for the war “apart from the draft.” No one asked for anyone to be involved. That was a problem.
A war is a war and if you are going to fight a long term war then your economy has to be geared towards fighting a long term war. It was in WWI. It was in WWII. It wasn’t in Vietnam. It wasn’t for Iraq. It’s why WWI and WWII presaged periods of prosperity and its why Vietnam and Iraq both helped set the state for economic problems.
It’s also why the American people turned against both wars. Because nothing was ever asked of them it freed them up to view both wars as “not a national imperative” and rather as wastes of money and all else.
And that’s the thing, as long as we are going to be engaged in these long term military operations we will have to configure our economy to meet the obligations or else we’ll soon go broke just as every other country that led it’s defense spending go out of whack with its economy. Its what did in Rome. It’s what did in the Soviet Union. Don’t think it can’t do is us.
That is the long term vs short term question. A small change in the economic growth rate will create very large changes compounded over a long term. For example a 2% increase each year would be a doubling in about 35 years. A relatively short time for a nation.
On the micro scale, a business faced with a one time rate of 15% is very different than one faced with a constant 15% rate. The latter will over time find ways that will lower the base on which the rate is based and these changes will accumulate while the business grows.
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