My main goal for fiscal policy is shrinking the size and scope of the federal government and lowering the burden of government spending.
But I’m also motivated by a desire for better tax policy, which means lower tax rates, less double taxation, and fewer corrupting loopholes and other distortions.
One of the big obstacles to good tax policy is that many statists think that higher tax rates on the rich are a simple and easy way of financing bigger government.
I’ve tried to explain that soak-the-rich tax policies won’t work because upper-income taxpayers have considerable ability to change the timing, level, and composition of their income. Simply stated, when the tax rate goes up, their taxable income goes down.
And that means it’s not clear whether higher tax rates lead to more revenue or less revenue. This is the underlying principle of the Laffer Curve.
For more information, here’s a video from Prager University, narrated by UCLA Professor of Economics Tim Groseclose.
An excellent job, and I particularly like the data showing that the rich paid more to the IRS following Reagan’s tax cuts.
But I do have one minor complaint.
The video would have been even better if it emphasized that the tax rate shouldn’t be at the top of the “hump.”
Why? Because as tax rates get closer and closer to the revenue-maximizing point, the economic damage becomes very significant. Here’s some of what I wrote about that topic back in 2012.
…labor taxes could be approximately doubled before getting to the downward-sloping portion of the curve. But notice that this means that tax revenues only increase by about 10 percent. …this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue.
The key point to remember is that we want to be at the growth-maximizing point of the Laffer Curve, not the revenue-maximizing point.
P.S. Here’s my video on the Laffer Curve.
Since it was basically a do-it-yourself production, the graphics aren’t as fancy as the ones you find in the Prager University video, but I’m pleased that I emphasized on more than one occasion that it’s bad to be at the revenue-maximizing point on the Laffer Curve.
Not as bad as putting rates even higher, as some envy-motivated leftists would prefer, but still an example of bad tax policy.
P.P.S. Switching to a different topic, it’s been a while since I’ve mocked Sandra Fluke, a real-life Julia.
To fix this oversight, here’s an amusing image based on Ms. Fluke’s apparent interest in becoming a politician.
But she’s apparently reconsidered her plans to run for Congress and instead now intends to seek a seat in the California state legislature.
She’ll fit in perfectly.
If you want to see previous examples of Fluke mockery, check out this great Reason video, this funny cartoon, and four more jokes here.
P.P.P.S. And since I’m making one of left-wing women, we may as well include some humor about Wendy Davis.
Check out this excerpt from a story in the Daily Caller.
A dating service that pairs wealthy “sugar daddies” with “sugar babies” for “mutually beneficial dating arrangements” has endorsed Texas Democratic gubernatorial candidate Wendy Davis. SeekingArrangement.com’s Friday announcement followed a recent report in the Dallas Morning News which detailed a number of discrepancies in Davis’ personal narrative, including that she left a man 13 years her senior the day after he made the last payment for her Harvard Law School education. “Wendy Davis is proof that the sugar lifestyle is empowering,” seeking arrangements founder and CEO Brandon Wade said in his endorsement.
Mr. Wade obviously is a clever marketer, but he may also be a closet libertarian.
After all, he also mocked Obamacare with an ad telling young women to join his site so they could find a sugar daddy to pay for the higher premiums caused by government-run healthcare.
Then again, I’ve also speculated that Jay Leno and Bill Maher may be closet libertarians, so I may be guilty of bending over backwards to find allies.
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[…] And why have revenues been sluggish, generating barely half as much money as the politicians wanted? For the simple reason that Hollande and the other greedy politicians in France failed to properly anticipate that higher tax rates on work, saving, investment, and entrepreneurship would discourage productive behavior and thus lead to less taxable income. […]
[…] A Primer on the Laffer Curve to Help Understand Why Obama's … […]
The problem with the Laffer Curve is that it’s an arc. The statists may, in fact, be looking at the Laffer Curve and making wrong assumptions, because they never really seem to grasp the economic bits about incentives, and voting with your feet. However, being an arc, this simple graph actually depicts two points that will supposedly maximize growth. Drawing a perpendicular line from the Tax Revenue Axis, there is the lower tax burden point (which I prefer), but there is also a point way at the other end, where that line intersects. That point looks to be at about the 75%-80% on the Tax Rate axis.
If I were a statist – France for instance – I would have drawn that line and said, “Hey, look over here! We can go way higher and still maximize revenue growth.”
The unfortunate part is that, until there are far fewer statists in the government, that single point at the top of the arc (Revenue Maximizing Point) might be the only best arguement to make taxes a bit lower, rather than lowering them to the primary Growth Maximizing Point…for now.
Reblogged this on Chowchilla Patriot.
Jay Leno might be a closet libertarian, but I doubt Bill Marr is. He regularly heaps abuse and scorn on libertarians, accusing them of wanting to see the poor eating out of dumpsters. He has complained loudly about his tax rate (50%), but that is typically liberal: complain about your own tax rate while denouncing anyone else who wants to keep their own money as selfish and heartless.
Ed:
I’m afraid I can’t let your comments go unanswered.
The top 10% do not earn 60% of revenues. If you’re going to make up “facts” there is no basis for rational discussion.
Yes, schools and roads are in decline, both mismanaged by government. Markets are there, US businesses have not been able to compete effectively. The reasons for that are too complicated for this blog, but after-tax return on investment is better elsewhere.
I agree that we need to revise the tax code so there is a smooth path out of poverty and those making little have a negative or lower effective tax rate than those at the top; BUT we do need to cap the top marginal rate somewhere below the Romer & Romer 33%.
It is not 2 million people leaving their jobs, it is 2 million full time equivalents, which could be 2 million full, 4 million half time, or 6 million reducing 1/3 of their hours worked. While I strongly support a fluid workforce, where healthcare and pensions travel with the individual and I even support the government paying a sizeable portion of each person’s healthcare bill (as part of a Basic Income fix to the tax code), I can’t support the mal-incentive of encouraging people to decrease their work hours.
Means-tested support of any kind is in effect a negative tax. Loss of that support related to income earned is in effect an added tax. If by earning an additional $1,000 you lose $4,000 in healthcare support that would be a 400% tax added onto normal taxes. This is well to the right of normal the Laffer Curve.
Entrepreneurs would have a better go of it, if they did not have to build in healthcare costs and excessive regulations to their business plans.
I looked at Bagley’s Infographic. I assume it was you voting twice to give it 5 stars. I agree that people should follow their dreams, I have two daughters who are doing just that, but I don’t think they should expect others to pay for it.
We on the right often make the mistake of thinking that the government is just trying to maximize revenues and all we have to do is show them the error of their ways. But it is only secondarily about revenues – it is primarily about control and power. In fact they will chose power over an increase in revenues. The current tax system may or may not result in maximum revenues but it does result in maximum power for the government.
Reblogged this on Dead Citizen's Rights Society.
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The Laffer curve is a useful but vague illustration without a time frame.
The Laffer Curve for tomorrow, is a line. If taxes went to 100% tomorrow, I’d still show up to work for a few days until I realized that the tax folly is for real and here to stay.
In the long term, growth becomes the dominant factor in government revenue (and overall prosperity). In the long term growth dwarfs all other factors. Mathematically speaking, they means that as the time horizon considered lengthens, the Laffer Curve asymptotically becomes the same as the Rahn curve.
If you are in the bottom quintile of a country that grows fast, given enough time, you will eventually surpass the top quintile of a slow growth country. That is regardless of the starting point and is a result of simple compounding arithmetic.
But the crux of the problem is that for the voter-lemming redistribution is rather immediate, while compounding growth has some lag time. Hence, when facing the choices on the ballot, a redistribution dollar today is worth five perpetually compounding dollars in the future — and the dazzling light of serfdom pulls in the voter-lemming moth.
It is extremely rare to get a majority of voters to agree to this great delayed gratification of growth vs the small immediacy of redistribution. Hence the American middle class (ie the top ten percent of wealthiest people on earth) are hurting man! They need immediate redistribution to survive, long term prosperity be damned.
The point of no return has passed.
PS. But I like how the discussion always revolves around future reductions in the supply of productivity. Folks, nobody sees those who have already quit or significantly throttled down, even at current tax rates? Of course you do not see them because they have no intention to rise to levels that would bring prominence. The hundreds of thousands of oligomilionaires will never rise to prominence but are right now fishing in some lake, spending time on a sailboat in the Carribean with their French friends… Etc?
I’m sure these folks can just be substituted like numbered comrades from the tanks of the millions awaiting at the unemployment line. Keep dreaming and one day most of these people will return to their offices, leave their families every morning, drive past the golf course, drive past their friends doing TaiChi in the park, ignore the lake where their friends are fishing… to go close themselves in the four walls of an office to work sixty percent of their day to pay federal taxes, state taxes, sales taxes, and a hefty estate tax to boot when they die. AND, of course, do that with enough residual enthusiasm to outcompete four billion emerging world souls — and make sure to create a job for Ed, doing the same thing that billions of emerging citizens worldwide can do, but pay Ed top ten percent of world American middle class wages.
Reblogged this on JesseGarboden and commented:
Those who don’t understand economic raise taxes to try to help the poor. In fact by having more regulation “red tape”. You make people who want to start a business Like me quit altogether. I would love to have a business Too much red tape and too high of taxes made me say its not worth it. I could not handle even trying to figure out a basic sales tax form. Never made money but lost money. I’m just not a sales type guy. I’m more like a person who like to be in the back ground of everything. This is why i’m building a Social media networks to hopefully find the right people to fill my dreams of building the next big social network. It may never get of the ground. From talking to people I have found Its way to complicated and those who have Had a great Idea failed at it. Online its easier to do things but it doesn’t make it any easier than offline. I still get the same amount of stress. I just can pass it around to more blogs and people.
Reblogged this on News You May Have Missed and commented:
A Primer on the Laffer Curve to Help Understand Why Obama’s Class-Warfare Tax Policy Won’t Work
It also gives ammunition against nitwits who think making America great is “preaching redistribution and class warfare.”
It’s called building America, and your attempts to relabel it as class warfare don’t make it so, and don’t make it a bad idea.
Reblogged this on Public Secrets and commented:
Busy day today, but this should give readers some good ammunition against nitwits preaching redistributionism and class warfare.
More fair taxes on an entire population almost always brings in more revenue. It also increases incomes for the rich, but not their power on the economy.
Free markets shouldn’t be the enemy of the rich, but Laffer assumes they are.
Today the top 10% earn 60% of the total revenue, and pay less than that percentage in taxes.
Our schools are in decline. Our roads are in decline. Many of our markets are in decline. American businesses are foundering from want of markets.
If the tax rates are set in such a way that they steal money from those who work to make businesses go, then all of our nation is threatened.
CBO states 2 million people can quit to pursue their dreams. No surprise that the unrepentant among the Confederate slave holders scream.
Is it a Laffer Curve effect? These people are not cutting income to avoid taxes; they are taking on health care expenses to avoid having to work like slaves.
Laffer didn’t even consider that entrepreneurs might have a better go of it when the playing fields are level?
No, that’s the opposite of Laffer effect.
Did you see Bagley’s Infographic? You can view it here.
Ed:
My numbers may be old, but in 2009 the top 10% earned 32% of total revenue, but paid 59% of tax revenues.
If the tax rate is set in such a way that the top 10% reduce their earnings, it will also have a significant impact on the earnings of the bottom 90%.
In additon, let’s look at the recent CBO report. Loss of medical subsidies is the equivalent of an extremely high tax rate on additional income earned. The CBO states that 2,000,000 full time equivalent jobs will be lost. This is clearly a Laffer Curve effect. If it is not, how do you explain that 4,000,000 people will voluntarily cut their working hours in half?
The Romer and Romer finding of 33% may be accurate for the information plugged into their model, but does not hold if the environment changes, and of course it will.
Let’s consider just four alternative scenarios:
– All States double their tax rates
– Canada or any major global competitor moves to a flat tax rate of 10%.
– We are attacked and 100% of the people support the war effort.
– Previous tax rates were maxed at 20%
Obviously, these are extreme cases, but while 33% may be close to the Laffer optimum for the current environment, there really is no way to tell, since you cannot try multiple tax rates while holding the economy constant, to see which rate generates the most revenue.
[…] A Primer on the Laffer Curve to Help Understand Why Obama’s Class-Warfare Tax Policy Won’t Work […]
To clarify, the revenue maximizing point refers to a single year. The growth maximizing point is the revenue maximizing point in real terms going into the infinite future.
However, since the present value of future revenue streams must be discounted by the cost of borrowing the difference over early years [since revenues will be less at the growth maximizing point] the ideal point on the curve will be somewhere between the growth maximizing point and the top of the Laffer curve, based on the actual discount rate.
Confession is good for the soul.
How about you work instead to make government work, to do what Jefferson said a just government should do?
At least we know you don’t give a damn for the views and higher aspirations of the founders. Nice to have that out on the table.
I guess now we’re just dickering over your price.
There are some problems with the Laffer Curve, most notably that it tends to ignore actual human psychology, and incentives to create things.
Laffer Curve only applies to incomes 40 times the poverty level; to the extent it applies to money actually collected by the taxing entity, it presumes that working people don’t pay any taxes at all.
Consequently, the curve doesn’t apply when discussing policy in free market-oriented nations.