Laffer Curve

A Laffer Curve Warning about the Economy and Tax Revenue for President Obama and other Class Warriors

Written by Daniel J. Mitchell, a senior fellow at the Cato Institute. Posted with permission from Cato @ Liberty.

Being a thoughtful and kind person, I offered some advice last year to Barack Obama. I cited some powerful IRS data from the 1980s to demonstrate that there is not a simplistic linear relationship between tax rates and tax revenue.

In other words, just as a restaurant owner knows that a 20-percent increase in prices doesn’t translate into a 20-percent increase in revenue because of lost sales, politicians should understand that higher tax rates don’t mean an automatic and concomitant increase in tax revenue.

This is the infamous Laffer Curve, and it’s simply the common-sense recognition that you should include changes in taxable income in your calculations when trying to measure the impact of higher or lower tax rates on tax revenues.

No, it doesn’t mean lower tax rates “pay for themselves” or that higher tax rates lead to less revenue. That only happens in unusual circumstances. But it does mean that lawmakers should exercise some prudence and judgment when deciding tax policy.

Dan Mitchell on The Laffer Curve, Tax Progressivity, and Government Revenue. Alternate Headline: Why We Like the Flat Tax

This was originally posted at International Liberty. The follow-up, “Now the White House Wants to Raise Taxes without Congressional Approval!?!?” will be posted here tomorrow.

On the issue of so-called progressive taxation, our left-wing friends have conflicting goals. Some of them want to maximize tax revenue in order to finance ever-bigger government.

But others are much more motivated by a desire to punish success. They want high tax rates on the “rich” even if the government collects less revenue.

Some of them simply pretend there isn’t a conflict, as you might imagine. They childishly assert that the Laffer Curve doesn’t exist and that upper-income taxpayers are fiscal pinatas, capable of generating never-ending amounts of tax revenue.

Today in Liberty: Obama ‘extremely troubled’ by VA report, economy contracted in 1Q, Snowden speaks about NSA power

“Every once in a while, somebody has to get the bureaucracy by the neck and shake it loose and say ‘stop doing what you’re doing.’” — Ronald Reagan

Corporate Taxes: Low Rates, High Revenues in Canada

Written by Chris Edwards, Director of Tax Policy Studies at the Cato Institute. Posted with permission from Cato @ Liberty.

Canada’s federal government introduced a budget yesterday that includes new estimates of corporate tax revenues. I’ve discussed how Canada has cut its statutory corporate tax rate to a fraction of the U.S. rate, yet Canada raises more revenue. The new budget shows that the Canadian federal 15 percent tax raised 1.9 percent of GDP in revenue in 2012, while the U.S. federal tax at 35 percent raised just 1.6 percent, per CBO.

U.S. revenues are below normal levels right now, so let’s look further out at the steady-state projections for the two countries. Canada’s budget projection to 2018 shows that corporate tax revenues under the 15 percent rate are expected to stabilize at 1.9 percent of GDP. U.S. projections by the CBO show that corporate tax revenues will rise to 2.6 percent and then fall back to 2.0 percent in the longer-term. So the Canadian corporate tax will raise 95 percent as much as the U.S. tax even though the Canadian rate is just 43 percent of the American rate. The upshot is that worries about proposed U.S. corporate tax cuts reducing revenues are misplaced. If the U.S. federal government chopped its 35 percent rate, the tax base would expand automatically over time and the government would probably lose little if any revenue.

The following charts compare U.S. and Canadian rates and revenues:

Paul Krugman goes off the rails again

Paul Krugman

With the debate over the taxes intensifying between House Republicans and the White House as part of the “fiscal cliff” negotiations, Paul Krugman weighed in yesterday floating the idea raising tax rates to 91%, back to levels seen in the 1950s. His rant is based on digs at conservatives and the same old “fairness” drivel that has been used by the Left since the 2001 and 2003 tax cuts were passed.

Most of us who read Krugman’s missive probably laughed it off. After all, this is the guy who, in the wake of the tsunami in Japan last year, said that the disaster would spur economic growth. He said the same of 9/11 when it occured. Krugman also called for a fake alien invasion to ramp up government spending, which he believed would have helped the economy. This, of course, defies a rule of economics called the “broken window fallacy.” But that’s just an example of Krugman’s crazier side.

Over at Cato @ Liberty, Brink Lindsey took Krugman’s tax idea head on:

For the Sake of Intellectual Integrity, Republicans Should Not Cite the CBO When Arguing against Obama’s Proposed Fiscal-Cliff

Written by Daniel J. Mitchell, a senior fellow at the Cato Institute. Posted with permission from Cato @ Liberty.

I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).

That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.

That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).

Austan Goolsbee: Meet the old boss, same as the new boss

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” - John Maynard Keynes

In case you haven’t heard, President Barack Obama replaced Christina Romer, who recently resigned her position as an economic advisor in the administration, with Austan Goolsbee, an economist from the University of Chicago.

Over at his Reuters blog, James Pethokoukis gives us an idea of what to expect from Goolsbee, which doesn’t like he’ll bring much new to the administration:

Don’t expect him to recommend any big tax cuts. Goolsbee is extremely skeptical of supply-side tax arguments, calling the Laffer Curve a “fleeting figment of economic imagination.” Indeed, he may have influenced Obama himself, who in his 2008 book, “The Audacity of Hope,” says he doesn’t buy the theory that the Reagan tax cuts changed investment or labor incentives. He does, however, think it would not be a bad idea to lower corporate tax rates if there were also fewer credits and deductions.

Biden: Raising Taxes is “Patriotic”

Delaware Senator and Democratic Vice Presidential Candidate Joe Biden said in reference to raising taxes on “the rich” -

“You got it,” he said on ABC’s “Good Morning America” when his interviewer noted that Obama was targeting the affluent. “It’s time (for the well-off) to be patriotic.”


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