President Obama is proposing a series of major tax increases. His budget envisions higher tax rates on personal income, increased double taxation of dividends and capital gains, and a big increase in the death tax. And his health care plan includes significant tax hikes, including perhaps the imposition of the Medicare payroll tax on capital income – thus exacerbating the tax code’s bias against saving and investment. It is unclear why the White House is pursuing these punitive policies. The President said during the 2008 campaign that he favored soak-the-rich taxes even if they did not raise revenue, but his budget predicts the proposals will raise lots of money.
Because of the Laffer Curve, it is highly unlikely that all of this additional revenue will materialize if the President’s budget is approved. The core insight of the Laffer Curve is not that all tax increases lose money and that all tax cuts raise revenues. That only happens in rare circumstances. Instead, the Laffer Curve simply reveals that higher tax rates will lead to less taxable income (or that lower tax rates will lead to more taxable income) and that it is an empirical matter to figure out the degree to which the change in tax revenue resulting from the shift in the tax rate is offset by the change in tax revenue caused by the shift in the other direction for taxable income. This should be an uncontroversial proposition, and these three videos explain Laffer Curve theory, evidence, and revenue-estimating issues. Richard Rahn also gives a good explanation in a recent Washington Times column.
Interestingly, the DC government (which certainly is not a bastion of free-market thinking) has just acknowledged the Laffer Curve. As the excerpt below illustrates, an increase in the cigarette tax did not raise the amount of revenue that local politicians expected. The evidence is so strong that the city’s budget experts warn that a further increase will reduce revenue:
One of the gap-closing measures for the FY 2010 budget was an increase in the excise tax on cigarettes from $2.00 to $2.50 per pack. The 50 cent increase in the cigarette tax rate was projected to increase revenue but also reduce volume. Collections year-to-date point to a more severe drop in volumes than projected. Anecdotal evidence suggests that Maryland smokers who were purchasing in DC in FY 2008, because the tax rate in the District was less than the tax rate in Maryland, have shifted purchases back to Maryland now that the tax rate in the District is higher. Virginia analyzed the impact of demand when the federal rate went up by $0.61 in April and has been surprised that demand is much stronger than they had projected–raising the possibility that purchasing in DC has moved across the river. Whatever the actual cause, because of the lower than anticipated collections, the estimate for cigarette tax revenue is revised downwards by $15.4 million in FY 2010 and $15.2 million in FY 2011. Given that cigarette tax rates in neighboring jurisdictions are now lower than that of the District, future increases in the tax rate will likely generate less revenue rather than more.
[…] We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, […]
[…] seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, […]
[…] I’ve already written about massive Laffer Curve effects from excessive tobacco taxation in Michigan, Ireland, Bulgaria, and Quebec, and Washington. […]
[…] I’ve already written about massive Laffer Curve effects from excessive tobacco taxation in Michigan, Ireland, Bulgaria, and Quebec, and Washington. […]
[…] saw this in Bulgaria and Romania. We saw in in Quebec and Michigan. And we saw it in Ireland and Washington, DC. As I explained a couple of years ago, “In many countries, a substantial share of cigarettes […]
[…] saw this in Bulgaria and Romania. We saw in in Quebec and Michigan. And we saw it in Ireland and Washington, DC. As I explained a couple of years ago, “In many countries, a substantial share of cigarettes […]
[…] as well as Bulgaria and Romania. Or states such as Illinois, Oregon, Florida, Maryland, Washington, DC, and New […]
[…] That happens with cigarettes, for instance, and we examples of excessive taxation causing less revenue from Bulgaria, Romania, and Ireland. And we’ve even seen this Laffer Curve effect in Washington, DC. […]
[…] We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, […]
[…] Before a income tax, politicians had no approach to financial vast government. Their usually poignant pre-1913 sources of income were tariffs and dig taxes, and they couldn’t lift those taxation rates too high since of Laffer Curve effects (something that modern-day politicians sometimes still discover). […]
[…] Before the income tax, politicians had no way to finance big government. Their only significant pre-1913 sources of revenue were tariffs and excise taxes, and they couldn’t raise those tax rates too high because of Laffer Curve effects (something that modern-day politicians sometimes still discover). […]
[…] Before the income tax, politicians had no way to finance big government. Their only significant pre-1913 sources of revenue were tariffs and excise taxes, and they couldn’t raise those tax rates too high because of Laffer Curve effects (something that modern-day politicians sometimes still discover). […]
[…] We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, and […]
[…] We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, and […]
[…] that projected revenues don’t materialize. We’ve seen this in Bulgaria and Romania, and in Washington, DC, and Michigan. Even the Government Accountability Office has found big Laffer Curve effects from […]
[…] Spain, as well as Bulgaria and Romania. Or states such as Illinois, Oregon, Florida, Maryland, Washington, DC, and New […]
[…] Spain, as well as Bulgaria and Romania. Or states such as Illinois, Oregon, Florida, Maryland, Washington, DC, and New […]
[…] We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, and […]
[…] We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, and […]
[…] This creates a huge bias against good tax policy, yet JCT is impervious to evidence that its approach is wildly flawed. And don’t forget that CBO and JCT both bear responsibility for Obamacare since they cranked […]
The American people better wake up and examine what has kept them most prosperous people in the world for nearly 100 years (Hint. It was not the big government model that the rest of the world was following)
Two billion people in the Far East are growing at 5-8% by slowly abandoning the collectivist/socialist model. Meanwhile the less than one billion people of the West are moving towards the collectivist/socialist model and, not coincidentally, growing at 2.5% (in good times that is). Convergence will come much sooner than I once thought.
The point where the Laffer curve turns flat, is where government revenue starts to decease. But that is not the optimal point for prosperity, that point is being surpassed much earlier.
The United States will loose its “most prosperous nation in the world” status way before it gets to the flat point of the Laffer Curve.