Post by DrGadget on Aug 8, 2008 7:49:41 GMT -5
The Laffer Curve is the model behind supply-side tax cuts.
www.opinionjournal.com/extra/?id=110006842
In 1974, economist Arthur Laffer made a simple taxation model that factors in human behavior. The reasoning is that if the government taxed your income at 100%, there would be no point in going to work. Income tax revenue would drop to zero as a result, assuming there was no armed uprising. Likewise if the tax rate was 0%, there would be zero revenue. Somewhere in the middle, taxes come in.
The point “T” is where the tax rate generates the highest possible revenue (blue line) for the federal government. Anything below this would produce less. Anything above this would also produce less. When President Reagan cut the tax rates, revenue went up. This proves we were to the right of the red line, or T. When President Bush cut the tax rates, revenue went up again. Therefore, we were still to the right of T.
Don’t let the shape of the bell curve fool you. The red line is not at exactly 50%. This is just the picture drawn by Arthur Laffer in the mid-70’s when the upper tax rate was above 50%. Since the tax rate is already below 50% and we’re still to the right of T, the bell curve must be slanted to the left. Therefore, the true Laffer curve must look something more like this.
Whenever the tax rate is to the right of T, it has a dual effect. It overly burdens the economy while bringing in less revenue from taxation. This is the worst of both worlds. The only “good” that comes from being to the right of T is to crush someone economically whom you feel doesn’t deserve to have money (like Bill Gates). But remember, the government isn’t getting rich off of Bill Gates. The government is actually losing revenue by going after Bill Gates.
If the federal deficit really is a big problem (it is), then paying it down should be a priority. We should find the tax rate T and set it there for everyone. This will increase federal revenues. Then simultaneously, we should slow, freeze, or reduce federal spending. As we saw in the Reagan years, once all these extra dollars rolled in, Congress was more than willing to spend them. We were deeper in debt after Reagan’s departure than we were before. But it wasn’t because of the tax cuts. It was because Congress couldn’t control spending.
Once the federal deficit is paid off, then we must ask ourselves why the government needs so much money in the first place. Just because the tax rate is lower than what it was, this doesn’t mean it’s as low as it should be. If we are at point A today on the Laffer Curve, there must be a corresponding point B on the left side (see green line). We could cut the tax rate to B today and the government would get exactly the same revenue as it would have gotten at point A. Once the federal deficit is paid off, we don’t really need to maximize the government coffers. Why does the government need all that money anyway? They could just as well give the money to me. I could show you a model where it would maximize my personal revenue, but that doesn’t explain why I deserve your money.
As the graph indicates, you could cut the tax rate MUCH LOWER from the vertical purple line A (where we are today) to the vertical purple line B and still generate the same tax revenue. However, the percentage tax burden on the economy would be so light that the economy would improve amazingly. Where exactly are these points? It is unknown since nobody I know of has tried to find them. The points on this curve are completely uncharted. I propose we find Point T since it generates the most revenue. Is it 25%? Is it 20%? Is it 10%? We need to know. If we cut taxes and revenue keeps going up, then we haven’t found it yet. Everything above T (where we are now) can remain uncharted, because it is useless. Then we can begin charting the graph to the left of T and find a nice place to keep the tax rate fixed.
Update: It has since come to my attention that the Laffer Peak (Point T on the graphs) is projected to be around 18.5%. We should set the rate there immediately for everyone and eliminate the tax brackets.
If there was a genuine debate in Washington as to what the tax rate should be, the most likely rates would be T or B. Tax rate T would generate more revenue (to pay down the deficit), while B would allow people to keep more of their hard-earned income. Anything above T is out of the question and does a disservice to the American people.
We are currently above T.
www.opinionjournal.com/extra/?id=110006842
In 1974, economist Arthur Laffer made a simple taxation model that factors in human behavior. The reasoning is that if the government taxed your income at 100%, there would be no point in going to work. Income tax revenue would drop to zero as a result, assuming there was no armed uprising. Likewise if the tax rate was 0%, there would be zero revenue. Somewhere in the middle, taxes come in.
The point “T” is where the tax rate generates the highest possible revenue (blue line) for the federal government. Anything below this would produce less. Anything above this would also produce less. When President Reagan cut the tax rates, revenue went up. This proves we were to the right of the red line, or T. When President Bush cut the tax rates, revenue went up again. Therefore, we were still to the right of T.
Don’t let the shape of the bell curve fool you. The red line is not at exactly 50%. This is just the picture drawn by Arthur Laffer in the mid-70’s when the upper tax rate was above 50%. Since the tax rate is already below 50% and we’re still to the right of T, the bell curve must be slanted to the left. Therefore, the true Laffer curve must look something more like this.
Whenever the tax rate is to the right of T, it has a dual effect. It overly burdens the economy while bringing in less revenue from taxation. This is the worst of both worlds. The only “good” that comes from being to the right of T is to crush someone economically whom you feel doesn’t deserve to have money (like Bill Gates). But remember, the government isn’t getting rich off of Bill Gates. The government is actually losing revenue by going after Bill Gates.
If the federal deficit really is a big problem (it is), then paying it down should be a priority. We should find the tax rate T and set it there for everyone. This will increase federal revenues. Then simultaneously, we should slow, freeze, or reduce federal spending. As we saw in the Reagan years, once all these extra dollars rolled in, Congress was more than willing to spend them. We were deeper in debt after Reagan’s departure than we were before. But it wasn’t because of the tax cuts. It was because Congress couldn’t control spending.
Once the federal deficit is paid off, then we must ask ourselves why the government needs so much money in the first place. Just because the tax rate is lower than what it was, this doesn’t mean it’s as low as it should be. If we are at point A today on the Laffer Curve, there must be a corresponding point B on the left side (see green line). We could cut the tax rate to B today and the government would get exactly the same revenue as it would have gotten at point A. Once the federal deficit is paid off, we don’t really need to maximize the government coffers. Why does the government need all that money anyway? They could just as well give the money to me. I could show you a model where it would maximize my personal revenue, but that doesn’t explain why I deserve your money.
As the graph indicates, you could cut the tax rate MUCH LOWER from the vertical purple line A (where we are today) to the vertical purple line B and still generate the same tax revenue. However, the percentage tax burden on the economy would be so light that the economy would improve amazingly. Where exactly are these points? It is unknown since nobody I know of has tried to find them. The points on this curve are completely uncharted. I propose we find Point T since it generates the most revenue. Is it 25%? Is it 20%? Is it 10%? We need to know. If we cut taxes and revenue keeps going up, then we haven’t found it yet. Everything above T (where we are now) can remain uncharted, because it is useless. Then we can begin charting the graph to the left of T and find a nice place to keep the tax rate fixed.
Update: It has since come to my attention that the Laffer Peak (Point T on the graphs) is projected to be around 18.5%. We should set the rate there immediately for everyone and eliminate the tax brackets.
If there was a genuine debate in Washington as to what the tax rate should be, the most likely rates would be T or B. Tax rate T would generate more revenue (to pay down the deficit), while B would allow people to keep more of their hard-earned income. Anything above T is out of the question and does a disservice to the American people.
We are currently above T.
