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Thread: Laffer Curve Debunked Again.

  1. #1
    Havakasha is offline

    Laffer Curve Debunked Again.

    Hope you can enjoy this dense material. The beginning is a defense of the laffer curve. Look
    at the asterisks to see why its all wrong.

    Giuliani and Romney are still pushing the idea that tax cuts will increase revenue. Apparently they are unaware of the historical record of Reagan and George W. Bush. Or they are just lying to the American people.

    So here is Economics 101 on the Laffer Curve.

    Here's the best defense of the Laffer curve from, of course, the Cato
    Institute. At first it seems pretty strong. The author writes confidently
    and takes inflation into account and even looks at income tax revenues. It seems strong, until you pick at it, and then it unravels like a cheap
    sweater.


    http://www.cato.org/dailys/6-06-97.html


    "Are Supply-Siders All Washed Up?
    by Stephen

    Stephen Moore is director of Cato institute.

    Washington Post columnist Mark Shields asks pointedly: "Why won't supply
    siders just admit they were wrong?"
    The question is: Wrong about what?"

    *Wrong about the idea that income tax cuts will increase income tax revenue.
    That's what.

    "The turning point in tax policy was not 1993. Tax rates began to rise in 1990, during the Bush administration. The top income tax rate on earned income rose from 28% to 31% after the 1990 budget deal and then to 42% in 1993 as part of President Clinton's first budget. So we have now had a seven-year experiment with higher income tax rates on the wealthy. From 1990 through the most recent estimates for 1997, total federal tax collections have risen from $1.03 trillion to $1.55 trillion annually. After inflation, this has been a 21.6% rise in federal receipts over seven years.

    How does this stack up against the growth of tax payments during the Reagan years, when tax rates fell sharply? From 1982 (the first year of the Reagan tax cut) to 1989, the top tax rate was chopped from 70% to 28%. Despite the deep recession of the early 1980s, federal receipts grew from $618 billion in 1982 to $991 billion in 1989. After inflation, this was a 24.1% increase in tax collections."

    *I cannot say this enough. It is dishonest to look at total revenue when it was income tax rates that were cut. Total revenue includes FICA taxes and other social insurance such as unemployment insurance and contributions to railroad retirement funds. Those tax rates were increased in the 1980s, with predictable results. Revenues rose from $201.5 billion in 1982 to 380 billion in 1990. Thus, about $161 billion of the $373 billion gain in revenues came from FICA taxes. That's about 43%.

    *"Despite the deep recession of the early 1980s" is also a rhetorical tool that does not fit the facts. Here's GDP in constant (1982) dollars in the 1980s.

    1982 - 3,166
    1983 - 3,279.1 - 3.6%
    1984 - 3,501.4 - 6.8%
    1985 - 3,618.7 - 3.4%
    1986 - 3,717.9 - 2.7%
    1987 - 3,853.7 - 3.7%
    1988 - 4,024.4 - 4.4%

    *Looks like pretty good growth, except for 1985, which was in the middle of Reagan's terms. Then look at GDP in the early 1990s in constant (1996)
    dollars.

    1990 - 6,707.9
    1991 - 6,676.4 (0.5%)
    1992 - 6,880.0 - 3.0%

    *The 'deep recession', (so deep that real GDP actually fell!) was in the
    early 1990s.

    *Also, using 1982 for a starting point is disingenuous at best. Why?
    Because it compares an after-tax-cut year to other after-tax-cut years. It conventiently leaves out the drop from before to after. In 1981 income tax revenues were 306.63 billion. After the tax cuts, they fell, in constant dollars, to 297.92 billion.

    "Even if we examine the path of only individual income tax collections over the past 15 years, the story is not much different... From 1982 to 1989 income tax receipts climbed from $298 billion to $446 billion--a 50% increase. From 1990 to 1997 the income taxes rose from $467 to an estimated $710 billion--a 52% increase."

    *However, if you include "before the tax cuts" in the picture, the difference becomes much larger. Also, since he wrote in 1997, we have the benefit of 3 more years of data. Income tax revenues grew by 91% from 1980 to 1990, but they grew by 115% from 1990 to 2000. If you subtract the inflation rate for the two decades, 58.62% and 31.75% respectively, the difference becomes even larger. For the 1980s a 32.4% growth in income tax revenues and for the 1990s an 83.25% growth. And remember that the 1990s contained two slow growth years under Bush 41, who was continuing Reagan's policies.

    *Moore then continues with a paragraph on Capital Gains taxes. It seems
    obvious to me that more investors will cash in when the tax rate is lower, but I do not see a social benefit to that. The revenue gains are miniscule compared to the income gains that accrue to the upper class. Moore concludes with this:

    "But the most confounding question of all for critics of the supply-side view is this: If tax rate changes don't influence economic behavior, then how did overall tax receipts grow faster in the Reagan years than in the Bush and Clinton years?

    Perhaps Mr. Summers could explain that one."

    *If Mr. Summers can't, I can, and, in fact, already did. Because Reagan
    increased taxes on working people, FICA taxes (which are paid by wage
    earners below a cap), at the same time as he was slashing taxes for rich
    people. The cap went from 32,400 in 1982 to 48,000 in 1989 and the tax rate went from 6.7% to 7.51%. For the self-employed, the rate went from 9.35 in 1982 to 15.02 in 1989. Whereas under Clinton, the rate was 7.65 in 1990 and 7.65 in 1997. The cap went from 51,300 to 65,400 and was eliminated entirely for medicare taxes. FICA tax revenues grew by 88.6% under Reagan and only by 41.8% under Clinton.

    *Mark Shields' question also has a pretty clear answer. "Why won't supply
    siders just admit they were wrong?" Likely because rich people who, unlike the rest of the country, benefit from those supply-side tax cuts, are paying them to stay in denial.
    Last edited by Havakasha; 09-02-2010 at 10:55 AM.

  2. #2
    Havakasha is offline
    There is plenty more where that came from John. Dont your worry your decieving little head.

  3. #3
    Havakasha is offline
    Sorry S&L but this debunking of the laffer curve is much more important than
    what you are saying over in the other thread.

  4. #4
    SiriuslyLong is offline
    Guru
    SiriuslyLong's Avatar
    Joined: Jan 2009 Location: Ann Arbor, MI Posts: 3,560
    So Bill Frezza's piece on IRS data adding up in favor of Bush is incorrect?

  5. #5
    Havakasha is offline
    i was talking about your comments on govt in the mr. gross thread.
    I so forgot about Mr. frezza. i quess you want me go back and check it out huh? oh no. lol.

    But this is the Mr. Laffer thread afterall and a pretty good analysis i would say.

  6. #6
    SiriuslyLong is offline
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    SiriuslyLong's Avatar
    Joined: Jan 2009 Location: Ann Arbor, MI Posts: 3,560
    Mr. Frezza was the guy who added up the IRS income tax receipts for 8 years of Clinton and 8 years of Bush, and you know the result.

  7. #7
    Havakasha is offline
    Have to go back and research it next week.


    This is the Laffer thread afterall and since i came to bury Laffer....


    Alternet article re John Williams 5/10 (Williams is an economist)

    One of this era's defining moments occurred on August 28, 2006, when stock broker and UC Berkeley alumnus Peter Schiff appeared on CNBC and proclaimed that by 2008, our addiction to debt-financed consumption and the collapse of the housing bubble would plunge the country into one of the deepest recessions it had ever seen. Squaring off against Schiff was none other than Art Laffer, former economic advisor to Ronald Reagan and the godfather of supply-side economics. "The United States economy has never been in better shape," assured Laffer, who even went so far as to bet Schiff a penny that the economy wouldn't crash. "I'll bet you a lot more than a penny," Schiff retorted.

  8. #8
    SiriuslyLong is offline
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    SiriuslyLong's Avatar
    Joined: Jan 2009 Location: Ann Arbor, MI Posts: 3,560
    Quote Originally Posted by Havakasha View Post
    Have to go back and research it next week.


    This is the Laffer thread afterall and since i came to bury Laffer....


    Alternet article re John Williams 5/10 (Williams is an economist)

    One of this era's defining moments occurred on August 28, 2006, when stock broker and UC Berkeley alumnus Peter Schiff appeared on CNBC and proclaimed that by 2008, our addiction to debt-financed consumption and the collapse of the housing bubble would plunge the country into one of the deepest recessions it had ever seen. Squaring off against Schiff was none other than Art Laffer, former economic advisor to Ronald Reagan and the godfather of supply-side economics. "The United States economy has never been in better shape," assured Laffer, who even went so far as to bet Schiff a penny that the economy wouldn't crash. "I'll bet you a lot more than a penny," Schiff retorted.
    Peter Schiff was right. I believe I shared this with you in the past when you were boasting the Krugman called the recession. Interestingly, Schiff and Krugman couldn't be further apart on economics.

    http://www.youtube.com/watch?v=2I0QN-FYkpw

    I hadn't been paying attn to Laffer, but Schiff sure got the last laugh on this one.

  9. #9
    Havakasha is offline
    In other words, john's economic hero Mr. Laffer is a real joke. Got it completely wrong.

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