Thursday, February 19, 2009

Left On Laffer

I'm not going to bring the thunder like JMac regarding state Republican's plan for more tax cuts, but I do have a question.

The majority of modern Republicans are disciples of Arthur Laffer, creator of the above seen Laffer Curve. The central idea is there exists a sweet spot where the level of taxation generates the most revenue. Go to the right of the sweet spot (increase taxes) and the revenue declines. Go to the left of the sweet spot (decrease taxes) and the revenue declines.

The question - is there a Republican out there who will even acknowledge there is a left side of the curve?


Icarus said...

Yes, and I've mentioned it a few times on Peach Pundit. Have been trying to get to this point in my "Icaronomics" series, but have been sidetracked a few times.

Have mentioned it prior here:

scroll down to the comments beginning at 4:21

And here:

Comment @ 1:47 as follows:

“Also, true tax cuts pay for themselves plus some by raising overall revenue.”

Another fact that we all know to be true, except that it isn’t. As we briefly discussed yesterday on an open thread, even Arthur Laffer himself is pointing out that this isn’t true. But we as “conservatives” have accepted it as mantra, and don’t think about the underlying logic behind it anymore. I’ll save repeating myself again, except to say that if it were true, we should cut our taxes to zero, because then revenue would increase to infinity.

So to answer your question, yes. There is still at least one person who still calls himself a Republican who understands the Laffer Curve is in fact a curve.

griftdrift said...

My Icarus snare worked!

Icarus said...

Anything to not have to discuss (AGAIN) why it isn't "conservative" to destroy the fed, paper currency, and fractional reserve banking.

Anonymous said...

It's not just that supply-siders don't recognize the left side of the curve. It's that they always think that we're already right of the sweet spot.

Unknown said...

My question - is there a Republican pol who knows the Laffer Curve exists? How about a Democrat?

Cutting taxes is not always the right thing, nor is it always the wrong thing. When you look at total taxation, we pay high taxes and likely are still to the right of the mean. How far from mean is considered out of the sweet spot and are we there? I don't know.

I just wish we had a code that prohibits pols from modifying behavior and rewarding/punishing people according to PAC's and lobby money.

Icarus said...

While lazermike is essentially correct, I'd like to get a few more of my folks to recognize what a "curve" is before we move on to advanced studies like identifying where we are on it.

Icarus said...

DaleC also makes a valid point. There are still many valid reasons to cut (some) taxes. But automatically assuming that cutting taxes will increase revenue is illogical and foolish.

However, Grift, I think your count is now at "2".

Unknown said...

One of my favorite critiques of the Laffer Curve took existing historical data and tried to reproduce the chart. The results didn't match the curve predicted by Laffer. But as a point of satire, they created a chart that had the two ends of the curve on either side, and a mess of spaghetti (based on the data) in the middle.

I would imagine that the curve is not too far from reality, but that reality is more complicated than the curve leads anyone to believe (It's bad enough to be a myopic partisan to begin with). To be precise, the chart would have to have far more than two dimensions to account for the factors of having various types of taxes and how they're spent.

griftdrift said...

"the chart would have to have far more than two dimensions"

Are we going to talk quantum mechanics now because that would be awesome.

MTHEORY said...

Did someone say 'quantum?'

Grift, I hereby acknowledge the left side of the Laffer curve. (I also admit to being one of those 'myopic partisans' who also thinks that the tax point is usually too far to the right.)

And yes, Icarus, I know it's curve, and I know what a curve is.

You got two free-market Republicans acknowledging. These days, that's a quorum for us.

Pokerista said...

I think many Republicans believe there is no reason why the state/feds should receive the maximum amount of revenue available. Hence, they do not care about finding the sweet spot or sticking to it. They want to find the minimum amount of taxes that we can pay before things go to shit in unacceptable ways (as opposed to acceptable ways like loss of social services.) They use things like the Laffer curve to justify the cuts they want to make as potentially increasing revenue, without really giving a damn about whether it's accurate or where their proposal would fall on such a curve.

Call me cynical...

Unknown said...

Sara - I think you are correct about Conservatives. I don't want to give the government as much as possible. I want to give it what it really needs to do it's Constitutionally mandated job. That amount is less than half my pay and a hell of a lot less that the approx $ 3 Trillion we sent last year.

Unknown said...

I'm still helping that idiot Schroedinger find his cat.

griftdrift said...

A follow question to my Left of the Curve recognizing Republicans. Has there ever been a Republican who stated we were on the left side of the curve?

Icarus said...

Other than me?

griftdrift said...

You have not!


Icarus said...

Here: (though perhaps less definitively than you're looking for.)

Icarus 08.20.08 at 5:34 pm

Many people fail to understand that the Laffer Curve is just that, a curve. I depends on the point you start from as to whether a tax cut will increase, decrease, or not effect revenue.

While the curve is abstract, and thus, we never really know “where” we are on the curve, it is fairly easy to demonstrate that there is a higher liklihood that tax cuts will result in increased revenues when marginal tax rates are extremely high.

As a more real world case in point, (and I’m going to make up approximate numbers here because I’m too lazy to look them up and give a history lesson at the same time), When Reagan and Thatcher cut tax rates, Britian’s top marginal tax rate was 90%. There was clearly no premium to risk capital when the maximum return was only 10% of total return. By cutting the tax rate to 30%, it increased the potential ROI to the investor by a multiple of 7, while cutting the goverment’s share of revenue by 2/3. Thus, an individual or firm with capital to employ suddenly had a 700% incentive to employ more capital. The government only had to have these individuals triple thier income to cover revenues. While tripling income isn’t always easy, there was clearly the incentive for those with capital to make it happen.

And these individuals didn’t have to make up the lost revenue by themselves, as the much maligned “trickle down” effect played a role, as well. As those with excess capital employed their resources, unemployment went from above 10% to under 6%, cutting the number of unemployed in half, and adding new taxpayers to the rolls.

Now let’s assume that income tax rates are at 30%, and they are cut to 20%. The government is giving up 1/3 of it’s potential revenue, acutally less than in the above example. The incentive for the investor, however, is only an increase of 14% over what they were making prior. That’s hardly a game changing amount, compared with the 700% at the other end of the curve.

It is very possible, if not probable, that we are already on the wrong end of the Laffer Curve. Spending cuts are where fiscal policy needs to start now, not tax cuts.

griftdrift said...

We've got to find that third guy.

Icarus said...

He's out there somewhere.

Icarus said...

I've got to admit that I thought that third guy would have shown up by now.