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Captured by Supply Side Mythology
Posted by: Jon Henke on Thursday, October 18, 2007

This represents one of the biggest current problems with the Right...
A conservative publication, which I will not name, just spiked a book review because I said that the Laffer Curve didn't apply at American levels of taxation, even while otherwise expressing my vast displeasure with the (liberal) economic notions of the book I was reviewing. This isn't me looking for an alternative explanation for the spiking of a bad review: the literary editor accepted it, edited it, and then three hours later told me it couldn't be published because it violated their editorial line on taxation.
It's remarkable and embarrassing how captured the Republican Party has become by this dogma; it is sad, because this is so demonstrably false - and yet, large portions of the GOP base and the GOP establishment are utterly convinced of this.

It's one thing to make arguments like that when top marginal tax rates were 70%, and rates were being cut significantly. But now, we're talking about a difference in a top marginal rate of 39.6% VS 35.6%. The inflection point on the Laffer Curve does not lie in that range; it is certainly not lower.

The GOP has been captured by its mythology, and we are fighting a myth that, as Stephen Moore and Bruce Bartlett have pointed out, we never intended to create. Even the Reagan tax cuts were expected to return only about 1/3rd of their static scoring loss. Bruce Bartlett wrote...
Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results. Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn't lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles.

Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior.
Ramesh Ponnuru reinforced this point yesterday... (emphasis added)
I can't think of any serious economist who thinks that [Bush tax cuts raising revenue] happened. The 2003 Economic Report of the President said that "[a]lthough the economy grows in response to tax reductions... it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity." Bush's own Treasury Department has disavowed the view that Bush's tax cuts have raised revenue. Rob Portman and Ed Lazear, while serving in the Bush administration (as head of the OMB and the Council of Economic Advisers, respectively), said that the tax cuts had reduced federal revenue.

I'll give the last word to Alan Viard, an economist who worked at the White House before joining AEI. Last year, the Washington Post quoted him: "Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that."
 
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This represents one of the biggest current problems with the Right...



I understand that this is a myth, and a lot of people in the grassroots of the GOP believe it, but from a libertarian perspective, why is that a problem?

Personally, I wish "The Base" in both parties would fall under the spell of more of these myths that lead them to demand less government.
 
Written By: Aldo
URL: http://
I don’t see where there’s data to say its a myth.

The Curve doesn’t preclude other factors on revenue. So revenues changing in absence of a tax cut is not disproof of the Laffer curve and "GOP" popular thought.

A handful of times that it has been tried to stimulate an economy its appeared to work. Its possible its a coincidence because there are multiple factors, but the empirical evidence is growing. All to slowly though.
 
Written By: jpm100
URL: http://
spiked a book review because I said that the Laffer Curve didn’t apply at American levels of taxation,
What does he mean the Laffer Curve doesn’t apply?

It always applies, regardless of which side of the inflextion point you are on. Increasing taxes always results in diminishing returns (assuming all else is equal).

If I was an editor and someone wrote that Laffer didn’t apply to tax cuts, I’d probably drop his piece too.
 
Written By: Don
URL: http://
Just to be clear: my comment was not meant to be flip. In my view the biggest current problem on the right is that there is no longer a "Barry Goldwater" wing of the Republican party.

I’m guessing that if you and I were to brainstorm up a list of all the "current problems with the right," most of the items on the list would relate to its abandonment of the ideal of limited government. The GOP is increasingly willing to split the difference, or even compete, with the Dems on entitlement growth, and the social conservative wing is just as eager to get the state involved in our lives, if for different reasons.

Therefore, I think it is strange that you would highlight as the biggest problem one of the few countervailing currents in this general drift towards bigger government.
 
Written By: Aldo
URL: http://
Increasing taxes always results in diminishing returns...
The inflection point of the Laffer Curve is actually a peak, Don, so the above is only true if we are on the right side of that peak. If taxes are at 0% and you raise them to 2%, it does not diminish returns.

I may be missing some larger point, but I believe Megan meant that we are currently on the left side of the curve, so the conservative cry of "the Laffer Curve" (which is only ever invoked to call for lowering taxes, as though the left side didn’t exist) is inappropriate at this time. A tax cut now would not pay for itself in economic growth - not at current rates. The fact that I want lower taxes is fine, but the reality is that it will lower government revenues. Without lowering expenditures, that’s a bit of a problem.
 
Written By: Wulf
URL: http://www.atlasblogged.com
Increasing taxes always results in diminishing returns (assuming all else is equal).
Increasing spending almost always results in increasing returns (assuming all else is equal).

 
Written By: unaha-closp
URL: http://warisforwinning.blogspot.com/
I don’t see where there’s data to say its a myth.
Follow the links above. Read the Treasury study. Read the economic research on returns to tax cuts.
I understand that this is a myth, and a lot of people in the grassroots of the GOP believe it, but from a libertarian perspective, why is that a problem?
I said it represented a problem. The problem is that:

(a) the Right has a lot of reflexive dogma, litmus tests and tendencies that are growing less and less relevant in today’s political landscape and which will gradually force the Party toward a vocal, true-believer fringe and away from political reality, and....

(b) this results in picking politicians who are either good at pandering or genuinely believe and prioritize the anachronistic and inaccurate dogman/litmus tests.
 
Written By: Jon Henke
URL: http://www.QandO.net
Boy Jon, first you’re less than rabid on Al Gore and now you call BS on the cherished "the Laffer curve will save us" business, what’s next? You going to tell us that the a bunch of ragged terroists aren’t an existential threat to the US and the global war against muslamofascists isn’t the most importantest definingest conflict of our century?
 
Written By: Retief
URL: http://
Forgive me if I don’t hold government lifer bureaucrats in the highest regard.
 
Written By: jpm100
URL: http://
A tax cut now would not pay for itself in economic growth - not at current rates. The fact that I want lower taxes is fine, but the reality is that it will lower government revenues. Without lowering expenditures, that’s a bit of a problem.
That’s the honest way to support tax cuts — there are ’hard choices,’ we have to cut spending if we’re to decrease revenues. And, I know from your posts, you’re willing to do so. However, with debt at about 70% of GDP I think we’re potentially in for an economic crisis. Consider the credit crunch, which means no more home equity loans pumping money into the consumer economy to keep it going. The IMF notes that the dollar may still be overvalued, despite falling dramatically again. The reason: we have a huge current accounts deficit. That’s been possible due to a massive inflow of foreign capital (Captal Account surplus). But now it appears foreign capital is fleeing the stock market, and in general we’re undergoing a rebalancing of the international economic system which will leave the US unable to sustain current spending patterns publicly or privately. Question: will the politicians make the hard choices to handle this, or will they borrow more and finger point? One reason I can’t support the Democrats is their policy preferences seem to ignore this looming crisis. One reason I can’t support the Republicans is they spend as much or more than Democrats despite talking a better talk, and they support interventionist foreign policies.

It’s like Nero is fiddling somewhere.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Also: nsfw.

DALE RESPONDS: It is now.
 
Written By: mcgurk
URL: http://youredoingitwrong.mee.nu
The inflection point of the Laffer Curve is actually a peak, Don, so the above is only true if we are on the right side of that peak. If taxes are at 0% and you raise them to 2%, it does not diminish returns.
Wulf,

No, increased taxation has diminishing returns. Always, that’s the point of the Laffer Curve.

For example, if you are currently taxed at 1% and we doulbe it to 2%, the tax revenue will increase but it will not double, assuming we are on the left side of the peak.

If we are on the right side of the peak, tax revenue will actually decrease with an increase in taxes.

But increasing taxes always has diminishing returns, the inflextion point, or peak, is where the returns are negative.



 
Written By: Don
URL: http://
is where the returns are negative.
Should have said:
is where the returns become negative.
 
Written By: Don
URL: http://
Don, my apologies, I mistook your original point.
 
Written By: Wulf
URL: http://www.atlasblogged.com
Follow the links above. Read the Treasury study. Read the economic research on returns to tax cuts.
Seems to me that your initial post was essentially a strawman: the Laffer Curve is in effect on both sides of the inflection point.


This is nonsense:
spiked a book review because I said that the Laffer Curve didn’t apply at American levels of taxation,


The Curve always applies. Increasing taxes always results in decreasing returns, and the returns go negative after the peak.
a) the Right has a lot of reflexive dogma, litmus tests and tendencies that are growing less and less relevant in today’s political landscape and which will gradually force the Party toward a vocal, true-believer fringe and away from political reality, and....
Sounds like the Democrats . . .
(b) this results in picking politicians who are either good at pandering or genuinely believe and prioritize the anachronistic and inaccurate dogman/litmus tests.
Uh, Rudy, Mitt, and McCain are hardly far right.

By contrast, Hillery is the "moderate" among the Democrat front runners.

And what happened to Lieberman?

Which party is applying litmus tests?
 
Written By: Don
URL: http://
I always thought the peak was somewhere around 15-25%, but I guess now I’m learning from Jon and Megan it’s more like 50 or 60% to maximize revenues?

Alas.
 
Written By: abw
URL: http://abw.mee.nu
Attached is a Cal Thomas article from 2001.
How can their experience be so similar to our own if Supply side doesn’t work, Jon?

>>>


Irish eyes are smilin’

Tax cut-fueled prosperity in Ireland shows the wisdom of supply-side economics—and why George W. Bush should not shrink from his economic plan
By Cal Thomas

in Dublin—"Prosperity is a new visitor to Ireland," says the taxi driver. "She’s not been here before."

The Irish economy is booming, thanks mainly to the "supply-side economics" derided by big-government devotees in America and by editorial writers for influential publications such as The Economist and Financial Times.

Irish Finance Minister Charlie McCreevy ignored their advice. He cut taxes by more than $1 billion in this formerly impoverished nation and watched its economy take off.

The budget surplus of more than $2 billion and a 9 percent increase in the gross national product has allowed Mr. McCreevy to begin paying down government debt. He is also cutting spending in some areas, most notably in Social Community and Family Affairs. That agency’s budget was reduced by about $100 million because so many former recipients of government checks now have jobs and no longer need assistance.

An editorial in the Irish Independent newspaper said many of the newly employed hold the "right kind of jobs." Forty percent of those jobs pay $25,000 a year or more. That puts additional money into government coffers because more people are working and paying taxes. Businesses can now afford to hire new employees because their taxes have been cut and they have more capital to spend.

Those familiar with the old impoverished Ireland chronicled in Frank McCourt’s Angela’s Ashes recall a nation in which emigration topped immigration and poverty seemed like a permanent resident. No more. Housing starts are up substantially. Six years ago, the government reported that 6,731 new houses were built. Last year, there were 10,399 housing starts and their cost was about $20,000 greater than in prosperous Northern Ireland.

In the trendy and traffic-free Gafton Street shopping area, post-Christmas consumers were literally wall-to-wall. When fatigue or hunger made them pause, they flooded moderately expensive restaurants. Following dinner, some headed home in expensive cars while others returned for more purchases.

Rosy economic projections of just a year ago have been eclipsed. The workforce is at record-high levels. Income tax receipts tripled estimates. The Value Added Tax on goods and services is 5 percent above projections. Perhaps no figure demonstrates the power of the prosperity engine more than the tax on corporate profits, which were up in 1999 by 13 percent over the previous year.

The American economics consultant Polyconomics, which helped fuel the supply-side policies of the Reagan years, thus launching the American economic boom, chose Mr. McCreevy as its "Man of the Year." It said his tax reforms have single-handedly been the catalyst behind Western Europe’s "gigantic shift toward pro-growth reform."

In view of such a stunning economic expansion, why did a reporter ask President-elect George W. Bush this question last week: "As you prepare your economic plan to submit to Congress, I’m wondering if you could tell us, do you believe, sir, that if you cut taxes, whether it’s the marriage penalty or marginal rates, revenues to the federal government necessarily increase, that is to say, you adopt the Reagan philosophy that lower taxes create a revenue source for the government and do not create deficit problems in the future?"

In his answer, Mr. Bush said, "I do believe that a properly structured tax-relief plan will cause revenues eventually to go up. I believe that a tax-relief package, if properly structured, and I’m confident ours is properly structured, will encourage economic growth and vitality and more job creation."

That is precisely what happened because of the Reagan tax cuts (and those of John F. Kennedy nearly 40 years ago). In the Reagan era, the deficit would never have materialized to the extent it did had the Democrat-controlled Congress reduced spending to give the economy more time to produce the new tax revenues it eventually did.

For those too young to recall the Reagan boom, or who have forgotten, or who believe the fiction from liberal Democrats and certain editorial writers that government must be fed before people, they should come to Ireland. Many expatriates are returning home to find their country as beautiful as ever, but with new economic incentives that make one appreciate the color of money almost as much as the color of the grass on the lovely hills.
 
Written By: Bithead
URL: http://bitsblog.florack.us
Jon,

Just like Al Gore is allowed, nay, praised to exaggerate the effects of Global Warming in order "evangelize" shouldn’t you hold the same standard for those who use the Laffer Curve to keep up pressure for low levels of taxation?

See, that argument you used for Al Gore is going to come in mighty handy...




 
Written By: Harun
URL: http://
Which party is applying litmus tests?
Which party isn’t?

But Don, much as I mistook your original point, I think you are mistaking Jon’s and Megan’s point. Neither said the Laffer Curve doesn’t exist. I didn’t notice Megan’s poor wording until you commented on it, but she and Jon are simply pointing out that conservatives are fixated with the notion that we are on the right side of the curve, despite evidence to the contrary.

I think if you focus on the Bruce Bartlett and Ramesh Ponnuru quotes in Jon’s article, you’ll see what Jon is actually getting at.
 
Written By: Wulf
URL: http://www.atlasblogged.com
I agree, it’s idiotic to paint yourself in a corner where your primary and only justification for tax cuts is that more revenue will return to the government as a result of greater economic activity. Wouldn’t a real conservative want less revenue until such point that the government is a suitably small size? Republicans do not have a great track record arguing their POV to the general public.
 
Written By: Grimshaw
URL: http://
Wouldn’t a real conservative want less revenue until such point that the government is a suitably small size? Republicans do not have a great track record arguing their POV to the general public.
Given that Republican Administrations tend not to spend less than Democratic ones, I wonder if they even convince themselves?

How can their experience be so similar to our own if Supply side doesn’t work, Jon?
It’s that supply side "doesn’t work," but that it only works if tax rates are sufficiently high. That’s what’s signified in the Laffer curve.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Given that Republican Administrations tend not to spend less than Democratic ones, I wonder if they even convince themselves?
As usual, Erb, you miss the idea that what Republicans spend such funding on tends to have the small advantage of being constitutionally mandated... such as on your biggest complaint... defense.

It’s that supply side "doesn’t work," but that it only works if tax rates are sufficiently high. That’s what’s signified in the Laffer curve.


Then it would appear that taxes have been sufficiently high each time it’s been applied. What does this say about the Democrats?


 
Written By: Bithead
URL: http://bitsblog.florack.us
Wulf (and Jon), the problem with Megan’s complaint is that she’s just plain wrong, as Don pointed out. Wulf’s reading of what she meant to say may be correct, but if her book review stated the same premise then I don’t see how it could be accepted.

That being said, there’s no doubt that GOP dogma regards income tax rates as being on the right side of the curve. That may or may not be correct, but it’s completely irrelevant without (a) the remainder of federal and state taxes taken into account, and (b) an accurate measure of government expenditures.

IOW, so what if tax revenues go down? Unless that means we as a nation are not getting as much government as we need. And I seriously doubt anyone of non-troll status is going to argue that we need more government, are they?
 
Written By: MichaelW
URL: http://asecondhandconjecture.com
As usual, Erb, you miss the idea that what Republicans spend such funding on tends to have the small advantage of being constitutionally mandated
Prove that statement.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm

As usual, Erb, you miss the idea that what Republicans spend such funding on tends to have the small advantage of being constitutionally mandated
Prove that statement.
Why not put a little effort in here, Erb? All you have to do is provide one example of unconstitutional funding passed by the Republican congress to disprove his contention.

Alternatively you should tell use what would you accept as proof the Republicans only fund that which is constitutional? What are you really asking bithead to do?

OTOH, considering the current legal interpretations of the commerce clause and the power to tax, I can’t think of anything not explicitly denied by the bill of rights (as extended by the 14th) that is not "constitutional". Even restrictions on political speech seem to be "constitutional" in what seems a clear contradiction of the first amendment.
 
Written By: newshutz
URL: http://
Why not put a little effort in here, Erb? All you have to do is provide one example of unconstitutional funding passed by the Republican congress to disprove his contention.
Ummm... "Tends to have" isn’t an absolute. I never claimed republicans were perfect in that area. Just closer to the ideal.


That said, I doubt Erb can satisfy even that broad a statement.


 
Written By: Bithead
URL: http://bitsblog.florack.us
All you have to do is provide one example of unconstitutional funding passed by the Republican congress to disprove his contention.
If either party does unconstitutional spending, take them to court. None of us can enforce our own idiosyncratic interpretations of the constitution; that’s is the job of the Supreme Court.

I don’t always agree with the Supreme Court, but who does?
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm

That said, I doubt Erb can satisfy even that broad a statement.
Like I said....
 
Written By: Bithead
URL: http://bitsblog.florack.us
Why would I show GOP unconstitutional spending? If either side spends and it’s not struck down by the courts, it’s constitutional. It may not be wise, but its constitutional until ruled otherwise by the court system.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Oh, and the GOP supported and was involved in the creation of our social welfare system in the US. In fact, I can’t think of much that the Democrats have supported that wasn’t also supported by the GOP, with the argument being about how much to spend or how extensive the spending. So I really do not understand what the question is trying to get at.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Cato thinks this issue is a strawman.
 
Written By: Aldo
URL: http://
In other words, Cato agrees that "Federal revenue is lower today than it would have been without the tax cuts. There’s really no dispute among economists about that." and pretends that because they believe it everyone does. Of course the politicians they deride for suggesting otherwise are just dumb, not saying what many of their constituents believe. Of course.
 
Written By: Retief
URL: http://
The problem with that statement of course, is that the Federal revenue is not static; it is entirely dependent on the state of the economy. This seems to me a point that the democrats, who seem all fired up just now about raising taxes, seem to forget, possibly by intent.
 
Written By: Bithead
URL: http://bitsblog.florack.us
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