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.
