willbeurdaddy
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quote:
ORIGINAL: DarkSteven
Done. The first article Google turned up was this Wikipedia article. A few snips from it:
"Laffer also emphasized the main utility of the curve is as a pedagogical device." exactly, and what does that pedagogical device say?
"The curve is primarily used by advocates who want government to reduce tax rates (such as those on capital gains) and believe that the optimum tax rate is below the current tax rate. In that case, a reduction in tax rates will actually increase government revenue and not need to be offset by decreased government spending or increased borrowing." Its use or misuse does not alter what it says
"The Laffer curve and supply side economics inspired the Kemp-Roth Tax Cut of 1981. Supply-side advocates of tax cuts claimed that lower tax rates would generate more tax revenue because the United States government's marginal income tax rates prior to the legislation were on the right-hand side of the curve. Tax revenue increases slowed after the change[7], contrary to the acceleration predicted by the curve."
"
ditto
David Stockman, President Ronald Reagan's budget director during his first administration and one of the early proponents of supply-side economics, maintained that the Laffer curve was not to be taken literally — at least not in the economic environment of the 1980s United States. In The Triumph of Politics, he writes: [T]he whole California gang had taken [the Laffer curve] literally (and primitively). The way they talked, they seemed to expect that once the supply-side tax cut was in effect, additional revenue would start to fall, manna-like, from the heavens. Since January, I had been explaining that there is no literal Laffer curve.""
Im not sure what that means. Of course there is a "literal Laffer curve"
Questionable assumptions The Laffer Curve assumes that the Government will collect no tax at a 100% tax rate because there would be no incentive to earn income. However some economists question whether this assumption is correct. Actually that is not the assumption. The assumption is that at 100% tax rate there would be minimum collections, not zero collections. However for all intents and purposes that minimum is zero. A 100% tax rate implies that all proceeds of any economic activity are turned over to the government. Therefore everyone would starve to death except the government, because raising food is an economic activity which would have to be fully turned over to the government.
They argue, for example, that in the Soviet Union there was an effective 100% tax rate and yet, while the Soviets were not known for their efficiency, the government still managed to fund a very large and highly dispersed military while at the same time creating a highly advanced space program.[19]"
lAn "effective 100% tax rate" was obviously not an actual 100% tax rate.
"In 1924, Secretary of Treasury Andrew Mellon wrote, "It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates." Exercising his understanding that "73% of nothing is nothing" he pushed for the reduction of the top income tax bracket from 73% to an eventual 24% (as well as tax breaks for lower brackets). Personal income-tax receipts rose from $719 million in 1921 to over $1 billion in 1929, which supporters attribute to the rate cut. [3] During both Ronald Reagan's and George W. Bush's presidencies, White House budget staff cited in the Laffer Curve a forecast that tax rate cuts would increase overall tax revenues, but instead tax revenue increases slowed[4], requiring large debt increases to cover Reagan's and Bush's large spending increases." (Emphasis mine.) see comments on misuse of the Laffer curve
Translation:
1. Cutting tax rates by 2/3 in a huge 1920s boom economy resulted in an increase of approximately 40% over eight years. It may have been the tax cuts.
2. Under Reagan and Bush, the Laffer curve was used to justify tax cuts, and the deficit swelled because the revenue increases never happened.
I still don't see it as hard fact. It's a theory, and it has yet to be proven in the actual world. To be fair, there are too many variables in the real world aside from tax rates to definitively say that it works or doesn't.
You seem to have made a fair attempt so I'll explain the very simple and truthful statements that compose the Laffer Curve.
1. 0 tax revenues at a 0% tax rate
2. Minimum and effectively 0 tax revenues at a 100% tax rate (see comment above)
3. Maximum tax revenues must exist somewhere between 0% and 100% tax rates
4. A curve can be drawn from 0 to maximum and back to minimum.
Thats it, its not a theory, its 4 very simple facts and there is no statement that can be "debunked". The Laffer curve says nothing more, and in fact it is very clear from the Laffer curve that decreasing tax rates may increase or decrease revenues. The fact that politicians have created their own Laffer curve strawmen for their opponents to knock down doesnt make knocking them down a "debunking" of the LC.
Further, "supply side economics" is often thought of as identical to the LC, when in fact the LC only a symptom of SS economics, not the foundation for it. Supply side economics simply says that enabling the formation of capital is essential to and the most effective way to grow an economy. (not that "supplying goods creates demand", as some economic nitwit stated in another thread).
The reason there is a peak in the LC is because at some critical tax rate (which varies from venture to venture) the formation of capital for a risky venture no longer makes sense because the probability of net after tax profits times those net after tax profits is less than the risk free rate of return. Thats not "theory" thats the basis for every business decision.
The LC is simply the sum of the potential tax revenues over all of those risky ventures at each tax rate.
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