Learning The Laffer Curve
By Pejman Yousefzadeh Posted in Economy | The Laffer Curve — Comments (7) / Email this page » / Leave a comment »
Remember Part I of the Laffer Curve Instructional? In the event that you want to see it again, it is here:
And now, Dan Mitchell of the Cato Institute informs me via e-mail that Part II is available as well. Behold:
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Learning The Laffer Curve 7 Comments (0 topical, 7 editorial, 0 hidden) Post a comment »
Great videos ... watched the first a while back.
The only thing I didn't like about the 1986 Reagan tax cuts was that I suddenly found out I was rich! So, my tax bill went UP more than my salary (as a percentage).
But the commentator is right ... many truly rich people lost deductions, but declared more earnings, thereby paying more taxes (net) at a lower rate (percentage, again).
The problem is ... Congress, especially our Republicans that came up for reelection in 2000 (one Senate term or three House terms after the revolution of 1994) managed to increase spending faster than revenue increased. Even in the latter Reagan years, a Democrat Congress spent $1.81 for every $1.00 in "new" revenue.
is the assumption that we are on the right hand side of the curve. Personally my own observation seems to point to about 33% total taxation as the equilibrium point. (I'm sure it varies according to other factors). Right now, the investor class, ie. rich people, pay way more than one third of their total wealth in total taxation.
Marginal rates are important, but the total amount the government takes is also important in spurring or retarding growth.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
Actually, marginal rates are precisely what matter for the laffer curve because decisions are made at the margins. That is the whole point of the curve and the argument for lowering top marginal rates - total tax rate doesn't matter in the least in this model.
As for what rich people pay in taxes - I am in that class that there is certainly no way I pay 33% of my wealth a year in taxes - think about what that would require for a minute, I'd have to pay hundreds of thousands of dollars a year because of my house alone to come anywhere near that figure. I'm fairly certain I don't even pay 33% of my total income in taxes but I've never calculated it inclusive of property tax and sales tax I pay throughout the year.
One thing that I've never really seen discussed in great detail is where the peak of the Laffer curve is. In fact, most economists will tell you that they don't know exactly where the peak (point B in the first video) lies and they can't tell us if we're on the right or left side of the peak. Kyle8 mentions 33% as his estimate of point B, but I'd make a different argument.
I don't think there is a fixed peak for the Laffer curve. I believe that point B will shift over time as the economy adjusts to the current tax rates and other economic factors. IE, there is a limit to how fast a change in tax rates can effect the economy and as people adjust to the new rates and rules, it will take time for them to feel the need to find ways of sheltering income. A second cut in rates near the first will have little effect. If the effects of the rate cuts are given time to work themselves through the economy, the second cut will have a larger feedback as people will have incentive to bring money out of their shelters and put the money to work.
I'm not sure how fast or how far the peak shifts and the curve changes shape, but I'm pretty sure the it does happen.
Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.
I (was) with Fred!
but I also don't think it's a smooth curve either - it may have some local max/min (kinda like an "M").
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Both you and Darin are right - the curve itself is an aggregate of indiviudal perceptions and that is certainly impacted by local situation like culture, expectations and current environment (much like the specter of inflation begets more inflation). There is no one point that is the peak and the true peak can only really be measured retrospectively making policy prescriptions off of it sketchy (as is the case in most macroeconomic concepts).