Ridiculing Laffer
There is no more amusing form of liberal than a liberal economist (except perhaps one that wears a Che shirt). Case in point, Charles Wheelan provides us with a real hoot of a piece regarding the Laffer curve theory.
In his article, Wheelan doesn’t seem to wish to argue whether or not spending cuts are important, useful, good or bad. In this instance, his argument is with the basic premise of the Laffer Curve that beyond a certain point, it is worthwhile to expect you can increase revenues if you cut the tax rate. Notice, if you will, that this refers to a Curve and not a linear progression or anything of that nature. Now, I had only the requisite year in Econ in high school like everyone else, but I did take trigonometry and especially liked working with parabolic arcs and the like. They look and act quite differently than a straight line.
We know that if you regulate and tax the economy, you will reap a certain amount of dollars from that, but as regulation and taxation becomes more onerous, industry can no longer absorb the burden and thus becomes less efficient as it has less capital to work with. If you back off the tax rate, the Laffer principle goes, you could reach a point of greater returns because business has more capital to build the economy and thus is more productive. Obviously, being a curve, there’ll be a point where if you back off any further, enough revenue is lost that even large gains in the economy will not make up for the shortfall. Where that number lies is a bit of a crap shoot, economically speaking. How much of a tax rate is too much? Well, back it off a little and let’s see.
After Bush’s tax cuts, just as with Reagan’s, we saw an increase in revenue into the federal coffers from the increasing economy. That shows we’re on the leeward of the Laffer Curve and that the rate could likely be backed up even more. However, Wheelan doesn’t see it that way. He sees only his theoretical when there is a practical already in place.
...Think about a simple numerical example: Assume you've got a $10 trillion economy and an average tax rate of 30 percent. So the government takes $3 trillion.
Let's cut the average tax rate to 25 percent and, for the sake of example, assume that it generates $1 trillion in new economic growth (a Herculean assumption, by the way). So now, what does Uncle Sam get? One quarter of $11 trillion is only $2.75 trillion. The economy grows, government revenues shrink.
He then goes on to speak, incorrectly, of reduced revenues after both cuts. I’m not sure where he got his numbers, because anyone actually looking at the data sees there was a reported revenue increase. Is the Treasury lying and does only Wheelan has the facts? Not likely. The reality, it seems, is that it has happened, but again, why deal with reality?
Lastly, and you really have to savor this one, he produces an interesting paragraph that’s supposed to put the kibosh on the whole theory.
"In fact, you can disregard every other argument in this column and think about one thing: If Laffer were right, lower taxes would never require any spending sacrifice. We could pay a mere one percent of our income in taxes and still fund all of our government spending -- and maybe more! Do you think that's really possible?"
Remember the whole curve idea we talked about? Such a low percent would fall on the windward side of the curve and thus, would represent likely a big drop in revenue, but again can we trouble such a noted economist not to know the difference between a flat line and a curve? Don’t bother such noted intellectuals with the facts. Their theories should be good enough for you and if they say they don’t work, well, who are we to argue?
I would tack on the small extra that I’d appreciate the lower spending to go right alongside lower tax rates, but that’s off-subject. What is noteworthy is how you get to see theory fail in the face of reality and still be defended. To such individuals, this is not so much political theory, but a religion in its own right. The true liberal economist, not that far from the true Marxist or communist or neo-whatever they’re calling themselves this year, does not live on bread alone, but the unwavering belief that if their ideas are implemented fully, there will be no need for facts or competing theory or reality for that matter. Faith sustains, doesn’t it?
There is no more amusing form of liberal than a liberal economist (except perhaps one that wears a Che shirt). Case in point, Charles Wheelan provides us with a real hoot of a piece regarding the Laffer curve theory.
In his article, Wheelan doesn’t seem to wish to argue whether or not spending cuts are important, useful, good or bad. In this instance, his argument is with the basic premise of the Laffer Curve that beyond a certain point, it is worthwhile to expect you can increase revenues if you cut the tax rate. Notice, if you will, that this refers to a Curve and not a linear progression or anything of that nature. Now, I had only the requisite year in Econ in high school like everyone else, but I did take trigonometry and especially liked working with parabolic arcs and the like. They look and act quite differently than a straight line.
We know that if you regulate and tax the economy, you will reap a certain amount of dollars from that, but as regulation and taxation becomes more onerous, industry can no longer absorb the burden and thus becomes less efficient as it has less capital to work with. If you back off the tax rate, the Laffer principle goes, you could reach a point of greater returns because business has more capital to build the economy and thus is more productive. Obviously, being a curve, there’ll be a point where if you back off any further, enough revenue is lost that even large gains in the economy will not make up for the shortfall. Where that number lies is a bit of a crap shoot, economically speaking. How much of a tax rate is too much? Well, back it off a little and let’s see.
After Bush’s tax cuts, just as with Reagan’s, we saw an increase in revenue into the federal coffers from the increasing economy. That shows we’re on the leeward of the Laffer Curve and that the rate could likely be backed up even more. However, Wheelan doesn’t see it that way. He sees only his theoretical when there is a practical already in place.
...Think about a simple numerical example: Assume you've got a $10 trillion economy and an average tax rate of 30 percent. So the government takes $3 trillion.
Let's cut the average tax rate to 25 percent and, for the sake of example, assume that it generates $1 trillion in new economic growth (a Herculean assumption, by the way). So now, what does Uncle Sam get? One quarter of $11 trillion is only $2.75 trillion. The economy grows, government revenues shrink.
He then goes on to speak, incorrectly, of reduced revenues after both cuts. I’m not sure where he got his numbers, because anyone actually looking at the data sees there was a reported revenue increase. Is the Treasury lying and does only Wheelan has the facts? Not likely. The reality, it seems, is that it has happened, but again, why deal with reality?
Lastly, and you really have to savor this one, he produces an interesting paragraph that’s supposed to put the kibosh on the whole theory.
"In fact, you can disregard every other argument in this column and think about one thing: If Laffer were right, lower taxes would never require any spending sacrifice. We could pay a mere one percent of our income in taxes and still fund all of our government spending -- and maybe more! Do you think that's really possible?"
Remember the whole curve idea we talked about? Such a low percent would fall on the windward side of the curve and thus, would represent likely a big drop in revenue, but again can we trouble such a noted economist not to know the difference between a flat line and a curve? Don’t bother such noted intellectuals with the facts. Their theories should be good enough for you and if they say they don’t work, well, who are we to argue?
I would tack on the small extra that I’d appreciate the lower spending to go right alongside lower tax rates, but that’s off-subject. What is noteworthy is how you get to see theory fail in the face of reality and still be defended. To such individuals, this is not so much political theory, but a religion in its own right. The true liberal economist, not that far from the true Marxist or communist or neo-whatever they’re calling themselves this year, does not live on bread alone, but the unwavering belief that if their ideas are implemented fully, there will be no need for facts or competing theory or reality for that matter. Faith sustains, doesn’t it?
posted by Rob Beck | 8:07 PM
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