If you think that Reagan’s presidency is an example of tax cuts leading to significant growth in tax revenues, read this (or read this, if you’re feeling lazy: no, it isn’t).
If you think that Reagan’s presidency is an example of tax cuts leading to significant growth in tax revenues, read this (or read this, if you’re feeling lazy: no, it isn’t).
But so what? If tax cuts lead to even ‘anaemic’ growth in tax revenues, that’s obviously good.
It’s not ‘anaemic’ growth above what would have occurred with no tax cuts, it’s ‘anaemic’ growth. Much of that was due to the tax increases which happened too.
The linked article isn’t referring to growth. It is referring to growth in tax revenues. The more details link in that post, supposedly referring to tax increases, does nothing of the sort. It actually refers to tax revenue increases, not tax rate increases. So in an article supposedly debunking someone else’s use of stats, Drum manages to obfuscate the point with dodgy use of stats. I wonder why…
No, it’s not referring to growth, but growth in tax revenues, as did John. And obviously so was I given the context.
You are correct the Treasury paper also refers to tax revenues. The commentary though refers to tax increases.
"And of course, population increased over that time too, which naturally increases tax payments. Adjusting for that, tax revenue was $2,283 per person in 1980 and $2,694 per person in 1990."
Depends on how the population increases. People living longer and a skew in the age profile of the population will reduce it. So will an increase in population via a high birth rate (for the first 20 years, anyway). Lots of illegal immigrants will lower tax revenue, lots of legal adult ones increase it. All of these effects will be greater in a country that in many places has no sales tax system at all.
I’m not convinced, personally, that the Reagan tax cuts do prove the Laffer Curve. There are other better proofs out there. It isn’t the existence of the curve that is in doubt, it’s where we are on it.
So my first point still stands. You can cut taxes, and still see tax revenues rise, even if only by a tiny amount. But that is clearly a good thing. Laffer has the last laff.
Tim – it’s a good point. However working-age population rose from 108m in 1981 to 122m at end 1988, so I think that’d be at least as fast as overall population growth — this was the baby-boom in workforce era.
Andrew – But no-one’s doubting that over time. The issue is whether a tax cut raises more revenue than a tax increase.
Or at least leads to (John’s word) "significant" increases in revenue.
Matthew: No, the issue is whether a tax rate cut leads to an increase or a decrease in tax revenue – i.e. Tim’s point – where we are on the Laffer curve is at issue.
Well ok then, it appears there’s no good evidence it does. You can’t just say tax was A in 1980 and raised X and was A-1 in 1988 and raised Y, as a static tax will raise a lot more over time.
No good evidence that a tax rate cut leads to an increase or a decrease in tax revenue? So cutting taxes keeps tax revenues exactly as they were beforehand? We must inform the Chancellor – perhaps it’s not too late to get into the next budget.
a static tax will raise a lot more over time
Nonsense. Clearly, there is an optimal tax rate at which tax revenues will be maximised. Moving towards that optimal rate will necessarily raise more revenue over time, all other things being equal.
Now you’re just being silly. Over time a static tax rate will lead to higher tax revenues because economic activity expands. VAT is at the same rate today as it was in 1993, but it collects nearly twice as much.
Thus the "laffer curve" cannot be isolated from this. Just saying revenue is higher now and taxes lower doesn’t explain anything.
Well, you obviously have to correct for inflation and economic growth. The linked post does this.
I’m not sure it does correct for economic growth. It’s a tricky issue there of course because if you’re (or one) is claiming that lower taxes stimulate GDP and thus tax revenue, then correcting for economic growth will also ‘correct’ for what you’re trying to show.
Anyway I need to leave work, so that’s all.
You experts can argue amongst yourselves (and very interesting and informative it is) but I know for an absolute fact, beyond debate, that I can spend the vast majority of my money better and more wisely than any chancellor could, spending it on my behalf. Better and more wisely in furtherance of my own interest, and as a result, better and more wisely in everyone’s interest. Cutting taxes is, in the Sellars and Yeatman phrase, ‘A Good Thing’, because it is the only way to cut down on government activity, nearly all of which is wasteful and useless when it is not downright malignant (eg, the welfare state).
DD – that’s a fair call – however, the Laffer curve theory suggests specifically that cutting tax *rates* will boost tax *revenues*. This isn’t what you want, and is a daft assertion.
It’s not a daft assertion, because it is based on sound evidence. You may well be right that, when you take into account other bits of evidence, it turns out not to be true. That doesn’t make it daft.
I think John was referring to David’s assertion that lowering taxes would decrease the size of government, which (since tax revenues are supposed to increase as tax rate falls) is indeed a daft assertion (presuming that we are above the midpoint on the curve).
John: That isn’t what the Laffer curve theory suggests at all. It suggests, as I said above, that there is an optimal tax rate at which tax revenues will be maximised. Whether we (or any other govt.) are above or below that optimal rate, is arguable. To prove the point, if you cut tax rates to zero, clearly your revenues will not increase.
So I guess the conundrum is, how do we maximise tax revenue, without simultaneously maximising government spending?
Or, to put it another way, if the aim is to minimise government spending we need the tax revenue to be less than optimal. Therefore we should obviously set the rate and a ridiculously high, un-optimal rate! Problem solved!
This economics stuff is dead clever, isn’t it?
(For my next trick, I shall prove ‘up’ is in fact ‘down’)
Yes, you have to be a bit careful with the word ‘optimal’ (which is not wrong). It just means ‘highest’, in this context.
I’m using optimal in the mathematical sense. Obviously, from my own political perspective, such a tax rate would be far from optimal.
N.I.B.: Proving ‘up’ is ‘down’ is dead easy. As Einstein basically said, there is no such thing as a preferred frame of reference. Hence up is down. It all depends on how you look at the world.
You experts can argue amongst yourselves (and very interesting and informative it is) but I know for an absolute fact, beyond debate, that I can spend the vast majority of my money better and more wisely than any chancellor could, spending it on my behalf. Better and more wisely in furtherance of my own interest, and as a result, better and more wisely in everyone’s interest. Cutting taxes is, in the Sellars and Yeatman phrase, ‘A Good Thing’, because it is the only way to cut down on government activity, nearly all of which is wasteful and useless when it is not downright malignant (eg, the welfare state).
Of course – drudgery, serfdom, starvation and a quick death are far preferrable to the nasty welfare state. I don’t know why I didn’t see it before – who wants a basically decent existence for all when it comes at the high price of David Duff not being able to spend all his money himself. We’ve been fools these last sixty years, living the life of riley whilst our betters suffer the iniquity of not being rich. I for one welcome the coming return of our chinless overlords. Much better that they have all the money than it fall into the hands of a democratically accountable government which pools the money together for the benefit of all people in the country.
Aye, but 0 < 1
So we’d have to resort to Really Advanced Sophistry to *mathematically* prove up is down.
Unfortunately I never went to my Really Advanced Sophistry lectures.
As is often the case, you don’t need sophistry, mathematics, economics, or even a graph, you just require a little common-sense and a knowledge of human nature (starting with yourself!), to know that if you hike top rates of tax to the rich they will *spend* money to avoid it, or, just move to somewhere cheaper and as congenial. The converse is also true.
Gregg, I suspect, may be a young man, and that excuses his potty notion that life over the last sixty years has improved, except in the area of material possessions. Everything the government has run; education, health, policing and so on, has steadily got worse. And the biggest evil ever inflicted on the British public in the last thousand years, the welfare state, has spread like cancer into every nook and cranny of our lives with disasterous results.
"the welfare state, has spread like cancer into every nook and cranny of our lives with disasterous results."
Bit cranky because the DHSS mucked up your giro this week, David?
Duff, are you drunk? Have you had a stroke? The welfare state is the biggest evil inflicted on the British public in a thousand years?
My God David! What the Hell happened just the other side of that thousand year span? What could possibly be more evil than the welfare state? Surely you meant ‘the biggest evil… ever’?
David, I do apologise – I thought you were being serious in your original post. Snark withdrawn.
David D tells us " Gregg, I suspect, may be a young man, and that excuses his potty notion that life over the last sixty years has improved, except in the area of material possessions. Everything the government has run; education, health, policing and so on, has steadily got worse"
and he does have a point, I suppose. But there’s not much of a market for iron lungs these days, is there? I guess that’s a bad thing if you run an iron lung factory, but for most other people it isn’t.
Gregg, I suspect, may be a young man, and that excuses his potty notion that life over the last sixty years has improved, except in the area of material possessions.
Cuh, cheer up. What a miseryguts. You’ll be telling us the oil is running out next.
Actually, you might consider that the word "cancer" does have a very real meaning to *millions* of bereaved families in this and other countries. The same courtesy and sympathy that would stop one from bandying Auschwitz around in loose metaphors should apply here.
Well, if the welfare state is the greatest evil visited on Britain in a thousand years, then an analogy with cancer is pretty resonable, even understated.
Well obviously Andrew – there was no such thing as cancer before the welfare state was set up.
"the welfare state, has spread like cancer into every nook and cranny of our lives with disasterous results."
Oh yes, and if we’re not careful, we might even end up living in a hell-hole like Sweden. [shudders]
Mr. Drum fails to account for the fact that the economy is about 95% confidence, and 5% other factors. FDR had a similar problem. Tax cuts do wonders for consumer- and investor-confidence.
Erm, no, that’s not the economy, that’s the stock exchange. You know, the stock exchange – the non-productive bit of the economy, that fucks up all the productive bits.
Sure, that’s why they poll consumer confidence every other week, it’s meaningless busywork for financial interns. Please, save your dignity and don’t let strangers in on your ignorance.