Obama’s main goal in the fiscal cliff negotiations is to impose a class-warfare tax hike.
He presumably thinks this will give the government more money to spend, but recent evidence from the United Kingdom suggests that he won’t get nearly as much money as he thinks.
Why? Because there’s this thing called the Laffer Curve. It shows that it is naive to believe that there is a linear relationship between tax rates and tax revenue. To accurately predict what will happen to revenues when there is a change in tax policy, you also have to estimate what will happen to taxable income.
And when you’re trying to stick it to the “rich,” you need to understand that they have tremendous control over the timing, level, and composition of their income. So unlike the rest of us, they can respond very easily when the government goes after them.
The Wall Street Journal opines on what recently happened across the Atlantic.
A funny thing often happens on the way to soaking the rich: They don’t stick around for the bath. Take Britain, where Her Majesty’s Revenue and Customs service reports that the number of taxpayers declaring £1 million a year in income fell by more than 60% in fiscal 2010-2011 from the year before. That was the year that millionaires became liable for the 50% income-tax rate that Gordon Brown’s government introduced in its final days in 2010, up from the previous 40% rate. Lo, the total number of millionaire tax filers plunged to 6,000 in 2010-2011, from 16,000 in 2009-2010. The new tax was meant to raise about £2.5 billion more revenue. So much for that. In 2009-2010 British millionaires contributed about £13.4 billion to the public coffers, or just under 9% of the total tax liability of all taxpayers that year. At the 50% rate, the shrunken pool yielded £6.5 billion, or about 4.4%.
In case you think this is just a special case, the United States conducted a similar experiment in the 1980s, except we lowered tax rates instead of raising them. And as you can see in this “lesson” post I wrote for the President, we got the same results as the United Kingdom, except in reverse. More rich people, more taxable income, and more tax revenue.
Here’s a chart showing what happened in the U.K. It shows tax revenue for the 2009-2010 fiscal year, followed by a projection for 2010-2011, and then the real-world numbers.
Now time for some important caveats. There are lots of things that determine taxable income for the rich, so we have no way of precisely knowing the extent to which the higher tax rate caused taxable income – and therefore tax revenue – to fall. The economy’s weak performance may have played a role, though the recession in the U.K. occurred in 2008 and 2009, so you would expect taxable income to climb for the 2010-2011 fiscal year.
It’s also possible that some of the revenue loss was the result of income shifting rather than a genuine decline in the amount of economic activity.
But we do know that the same pattern keeps appearing in nation after nation, whether we’re looking at Italy, France, or Spain. Or states such as Illinois, Oregon, Florida, Maryland, and New York.
You mess with the Laffer Curve and it will get its revenge.
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] It raised its top rate by 10 percentage points, but then cut the rate by 5 percentage points after it became apparent that the higher rate wasn’t collecting any additional […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] He then asserts that tax cuts never pay for themselves. I would have agreed if he wrote “almost never,” or if he wrote that the new GOP package won’t pay for itself. But his doctrinaire statement is belied by data from the United States, Canada, and United Kingdom. […]
[…] He then asserts that tax cuts never pay for themselves. I would have agreed if he wrote “almost never,” or if he wrote that the new GOP package won’t pay for itself. But his doctrinaire statement is belied by data from the United States, Canada, and United Kingdom. […]
[…] government will be starved of revenue. Yet they have no answer when I show them this IRS data. Or this data from the United Kingdom. Or this data from […]
[…] previously had decided not to impose the higher tax rate because revenues would fall (just as receipts dropped in the U.K.when the 50 percent rate was […]
[…] Party previously had decided not to impose the higher tax rate because revenues would fall(just as receipts dropped in the U.K. when the 50 percent rate was […]
[…] Party previously had decided not to impose the higher tax rate because revenues would fall (just as receipts dropped in the U.K. when the 50 percent rate was […]
[…] when governments reduce marginal tax rates on productive activity. I’m equally interested in real-world results when governments do the wrong thing and increase tax burdens on work, saving, investment, and entrepreneurship (and, sadly, these […]
[…] I’m equally interested in real-world results when governments do the wrong thing and increase tax burdens on work, saving, investment, and entrepreneurship (and, sadly, these […]
[…] raised the top tax rate from 40 percent to 50 percent near the end of last decade and there’s very strong evidence that this tax hike failed to raise any revenue. In all likelihood, the then-Prime Minister, Gordon Brown, imposed the class-warfare policy in […]
[…] don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] Yet is anybody surprised that we haven’t seen much – if any – growth in tax-happy nations such as Greece, Portugal, Italy, Ireland, Spain, and the United Kingdom? […]
[…] Yet is anybody surprised that we haven’t seen much – if any – growth in tax-happy nations such as Greece, Portugal, Italy, Ireland, Spain, and the United Kingdom? […]
[…] Yet is anybody surprised that we haven’t seen much – if any – growth in tax-happy nations such as Greece, Portugal, Italy, Ireland, Spain, and the United Kingdom? […]
[…] They also get a healthcare system that seemingly prides itself on maltreatment, and a tax system that is more designed to be punitive rather than to generate revenue. […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
[…] For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other […]
[…] when it happens to Italian politicians. I’m glad when it happens to Illinois politicians. And British politicians. And Spanish politicians. And Maryland politicians. I could continue, but I think you get the […]
Anyone seen this, yet? “Obama Could Mint $1 Trillion Platinum Coins to Avoid Debt Ceiling”
http://www.breitbart.com/Big-Journalism/2012/12/08/WaPo-Print-$1T-coins
Question # 1: in the last 60 +years, in what decade did we see the lowest marginal tax rate:
Question # 2: in the last 60+ years, in what decade did we see the highest job growth rate and real income the bottom 80% of taxpayers
Question #3: In the last 60+ years, in what decade did we see the highest marginal tax rate?
Question # 4: In the last 60+ years, in what decade did we see the lowest job rate growth and real income decline in bottom 80% of tax payers?
Now,if you are able to answer all four questions, correctly; please explain trickle down economices to me on more time.
Phoebus Rising
@heftyjo, 1997 and 2005 were not different. In both years, GDP was at potential. In 1997, there was a dot-com bubble and in 2005 there was a housing bubble. There is no reason for the discrepancy in tax revenues as a percent of GDP between those two years other than the Bush tax cuts.
Yes, tax cuts are stimulative, but they do not pay for themselves.
? He DID learn the lesson. Making the country broke and broken so he can “save” it is the plan.
@Michael “Revenues increased between 2003 and 2007 because of the recovery – not because of the Bush tax cuts.”
Tax cuts are a form of stimulus. If the tax cuts didn’t have anything to do with the recovery following the Dotcom bust then Obama had no business continuing them following the mortgage meltdown and adding an additional trillion dollars in stimulus spending on top of that. But by your logic that fact that Obama wants to keep the Bush tax cuts in place for 98% for American means that his economic policies are no better than Bush’s.
But back in reality the Bush tax cuts didn’t fully go into effect until 2005 — right when revenues started to shoot up. If you look at 2007 we were on a projected path to surplus. The CBO even released a report at the time that at current growth rates in spending and revenue we’d achieve a surplus by 2016. And I’ll also point out that you are in fact not making an apples to apples comparison from ’97 to ’05. A lot of the revenues pulled in from ’97 were from the creation of a new digital marketplace called ‘The Internet’. And it looks like your making the common mistake of confusing the percentage of tax RATES versus GDP and actual tax revenues in terms of dollars and cents. In 1997 total revenues were 1.86 trillion dollars and in 2005 2.1 trillion dollars. And by 2007 when the economic policies of Bush had time to take their effect on the economy as a whole the revenues peaked to 2.4 trillion.
The mortgage meltdown hit and revenues understandingly dropped off following a recession just like they did in 2003. But by this point at the end of Obama’s first term we should see revenues returning back to 2007 levels and GDP and revenues growing at traditional post recessionary rates. But the economy is stagnating because of the high degree of uncertainty the Obama regime has injected into the marketplace. It keeps printing money but then pays the banks to sit on the cash to keep inflation under control which also has the effect of limiting capital investment since no one is lending. It fails to pass a budget and let spending spiral out of control. It grows the size of the federal government to the point where the D.C. area saw a 40% increase in median income while the rest of the nation saw a drop in median income to 1967 levels. It introduced a massive overhaul of the healthcare industry that burdens businesses with enormous costs just to hire someone full time. Its created an entitlement culture where it pays single mothers making less than 29,000 a year 59,000 in entitlement benefits. He’s done all these things AND kept the Bush tax rates in place which again by your logic is bad bad bad.
Revenues increased between 2003 and 2007 because of the recovery – not because of the Bush tax cuts. In both 1997 and 2005, GDP was at potential. However, in 1997 revenues were at 20% of GDP while in 2005 they were only 18% of GDP. That’s an apples-to-apples comparison and demonstrates that those cuts lowered revenues about 10%. That’s why CBO analysis estimates the Bush tax cuts increased the debt by some $3T so far.
This graph shows revenues relative to the strength of the economy. You can see a noticeable drop in revenues in both 2001 and 2003. You can also see the gap closing after the 1997 tax cuts.
http://research.stlouisfed.org/fredgraph.png?g=dv8
The Bush tax cuts took full effect in 2003. From then until 2007, revenue grew an amazing 44%. The result of the Bush tax cuts was a huge increase of revenues, not a decrease. If revenue decreased as a percent of GDP, it is only because GDP grew so rapidly. And that is a good thing isn’t it?
If you look at revenue as a percent of GDP, it’s been noticeably lower since the Bush tax cuts. That seems to be pretty clear evidence that we are on the left side of the Laffer Curve at the moment.
http://research.stlouisfed.org/fredgraph.png?g=du2
The inflection point on the Laffer Curve is at 19%, ceteris paribum or whatever you goddamned eggheads say.
Always has been. See Hauser’s Law.
Obama won’t learn the lesson. It’s more important that the American people learn the lesson. Republicans should state loudly and clearly that it won’t work, but they will give Obama what he wants – with a 2-year expiration – and at the end of each year they will say, “We told you so.”
It will be an expensive lesson but probably worthwhile in the long run. The Republicans will cave eventually, might as well teach an important lesson on the way.
Just to be clear, the Bush tax cuts weren’t merely for “the rich”. They eliminated the marriage penalty (which will be coming back) and threw a lot of lower-income people off the tax rolls altogether.
In any case, this is easy-peasy for Obama. He lets the Bush tax cuts expire, then pushes for tax cuts on everyone except his “rich” Americans. At that point, what are the Repubilcans going to do. . .refuse tax breaks for the middle class and everyone else?
If they were smart, they would do exactly that, but they won’t.
News alert: Obama doesn’t give a damn about economic reality. He is an ideologue.
Sorry, the link seems to work and then it doesn’t. Not sure what’s going on there…..
For those who want the entire WSJ article (the link above leads to a paywall), you can go here: http://online.wsj.com/article/SB10001424127887323751104578148820012847656.html?mod=googlenews_wsj
Its not that long, but its more than the preview provides.
“Financial Cliff” Deal = compromise
No Deal = tax rate increase across the board, military cuts, entitlement cuts
… followed by immediate legislation to put taxes back at the current (or even slightly higher) rate for the bottom 50/75/90/whatever percent (yea! Obama is cutting the taxes those evil Republicans raised!) and increases to the entitlements back to the current (or more likely higher) level (yea! Obama is saving the poor from the Social Security/Medicare/whatever cuts the evil Republicans caused!)
Net Result of No Deal =
1) Tax increases on the rich
2) Defense cuts (without even needing a potentially embarrassing vote)
3) Increases in entitlements
4) Obama gets credit for cutting taxes on the middle class
5) Obama gets credit for “saving” Social Security
6) Republicans get blamed for trying to increase taxes on the middle class
7) Republicans get blamed for trying to kill poor people
8) Reduced revenue (via Laffer curve) leads to calls for higher taxes and more stimulus
So… I wonder how hard Obama is going to work to reach a deal???
@Brandon: There’s been a good deal of empircal research. It looks like the top of the curve is in the 20%-30% range.
Raising revenue is not Obama’s goal. Making Republicans pay more to buy votes for Democrats is.
What Dick said. President Obama has publicly stated that he doesn’t care if raising taxes raises or lowers government revenue. He wants to raises taxes on “the rich” because it’s “fair.”
Who remembers this exchange from the April 2008 debate?
GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, “I certainly would not go above what existed under Bill Clinton,” which was 28 percent. It’s now 15 percent. That’s almost a doubling, if you went to 28 percent.
But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.
OBAMA: Right.
GIBSON: And George Bush has taken it down to 15 percent.
OBAMA: Right.
GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.
So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?
OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.
We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year — $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.
And what I want is not oppressive taxation. I want businesses to thrive, and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don’t have it and that we’re able to invest in our infrastructure and invest in our schools.
And you can’t do that for free.
Paging California. You have an important message. California please pick up the courtesy telephone.
And, if we go over the cliff, expect Him to raise the bar – His new asking price will be much higher tax rates than He is currently seeking, on all types of income. Make a note of this post and revisit it in January.
“He presumably thinks this will give the government more money to spend.”
That thought has not entered his mind. His objective is simply to recapture money that the wealthy stole from the workers. He doesn’t really even care where he spends it; simply confiscating that money is its own reward.
Aren’t you making an assumption on where the inflection point on the curve is and the overall shape of the curve? Could be that, instead of the left-skewed curve you show, it’s actually right-skewed and we’re below both maximal revenue and maximal growth. Piketty and Saez argue for a considerably higher top taxation rate.
All this is much ado about nothing. Unfortunately the presidents in a win/win. He does not have to broker a deal because the tax cuts expire. It was a bad deal by republicans in 2010 to have thresh expire now. They will be blamed for the recession caused by higher taxes if they do not cut a deal. The GOP has been outmaunuvered once again. The country will pay the economic price.