J.C. Moore Online
Current Events from a Science Perspective

Posts Tagged ‘Laffer curve’

President Trump’s Tax Plan: Why Rational Republicans Should Bail

Fri ,10/11/2017

President Trump’s new tax plan looks a lot like Governor Brownback’s tax plan for Kansas, which had been disastrous for the state’s economy. Rational Republicans should realize that if an experiment fails, and fails miserably, there is no point in repeating it. That is particularly true when the economy of the entire country is at stake. Both the economic theory and Governor Brownback’s experiment with the Kansas economy show that Trump’s tax plan is doomed to fail our country. The tax bills now winding their way through Congress will lead to economic stagnation and an increased  in the national debt of $1.5 trillion, both things which are repugnant to rational Republicans.

The Theory is based on Laffer’s curve which is displayed at the right. 

The Laffer curve looks like a normal distribution curve. In theory, if the nation is on the high side of the curve with taxes around 80%, then the curve predicts that cutting taxes will cause a move to the left along the curve, increasing tax revenue. That is likely to improve economic growth.  If the nation is on the low side of the curve with taxes around 40%, then cutting taxes will also lead to the left along the curve,  decreasing tax revenue, leading to a stagnating economy, and certainly a greater public debt.

The United States is now on the low side  of the curve with the high marginal tax rate around 40% – so cutting taxes will not lead to increased revenue or spur economic growth. Laffer should know that, but he has abandoned reason and professional ethics and now just supports tax cuts without reference to his own curve. Kansas paid Laffer $75,000 in consultation fees. His advice, when the Kansas economy was tanking, the public debt was mounting, and job growth was decreasing – was to stay the course. Kansas Republicans finally realized that the experiment had failed. They increased the tax rate, and overrode Governor Brownback’s veto of the tax increase. The governor is now leaving the state before his term is up.

The failure in practice is described by Duane Goossen, who was the Kansas budget director for 12 years prior to Brownback’s experiment:

  • “Just like the Brownback tax cuts, the Trump plan makes dramatic changes to tax policy by consolidating income tax rates and reworking deductions. Most notably, the Trump plan offers an enormous tax break to individuals who receive “business pass through income.” In Kansas this feature has become known derogatorily as the “LLC loophole”, allowing business income to be sheltered from income tax while people who earn a paycheck must pay tax.
  • Given that the same economists who advised Brownback now advise Trump, it’s unsurprising that his administration uses similar arguments to sell its plan: the tax cuts will grow the economy and create millions of jobs; the tax cuts will pay for themselves; everyone will benefit. Brownback said all that, too.”

At the right is a graph showing job growth in Kansas during Brownback’s years. It is lower than the United States job growth and much lower than in California, which has a high tax rate.

  •  Mr. Goossen goes on, “But after five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefiting — well, it turns out that the bulk of the benefits went to the wealthiest Kansans while the tax bill to low-income Kansans went up.
  • The idea that tax cuts will ‘pay for themselves’ or that tax cuts for the wealthy will ‘trickle down’ to the middle class should be added to the list of discredited ideas that sound good but don’t work. The sell job was seductive, but Kansans have the raw experience to grasp that the experiment carried out on us was a failure.
  • Do you know how hard Kansas legislators must labor now to fix the financial disaster? Are you catching on that general fund revenue has fallen $1 billion below expenses? Can you see how all political energy goes into crisis management rather than building our future? Is that what you want for the entire country?”

There you have it.

The Eisenhower Memorial is now being built and the Kansas politicians are using it as a chance to praise Eisenhower.  Eisenhower was a great General and President because he realized that it required requisite resources to get the job done. Under Eisenhower, the top tax rate was 90%. Eisenhower used the money to pay our war debts, rebuild Europe, educate returning GIs, and build the national highway system which ensured economic growth for decades to come. We no longer need a 90% tax rate, but our tax rate is now too low, and cutting it further will deprive the country of the resources it needs.

The the current Republican tax plan is taking shape. The big winners will be corporations and those already wealthy. Though billed as a tax cut for the middle class, the biggest losers will be the middle-class taxpayers and United States economy. Under the proposed plan we will see:

  • “Up to half-a-trillion dollars cut from Medicare and Medicaid
  • Substantial increase in the national debt with no way to pay it off
  • Elimination of state and local tax deductions – designed to hit people who live in “blue” states the hardest
  • Repeal of an itemized deduction for medical expenses – hitting people who rack up large medical bills because of the inadequacies of our health insurance system
  • Repeal of the deduction for interest on student loans
  • Repeal of the deduction for teachers purchasing classroom supplies
  • Slashed incentives for wind energy and electric vehicles, while maintaining most of the permanent oil incentives and extending nuclear energy tax breaks”

Our current Republican tax plan will add over a trillion dollars to the national debt and will not provide the resources needed to take care of the needs of our country and build for the future.. The tax rate we now have is already too low as the national debt is increasing. Cutting taxes further will surely lead to economic stagnation and an increased national debt, both things which are repugnant to Republicans.

(c) 2017 J.C. Moore

 

President Trump’s Tax Plan: a Disaster for the Economy

Sun ,21/05/2017

Article Photo

Trumps new tax plan looks a lot like Gov. Brownback’s tax plan for Kansas, which had been disastrous for the state’s economy.  It is based on Laffer’s curve which is displayed at the right.

The Laffer curve looks like a normal distribution curve. If the nation is on the high side of the curve with taxes around 80%, then the curve predicts that cutting taxes will cause a move to the left along the curve to increased tax revenue. That is likely to improve economic growth.  If the nation is on the low side of the curve with taxes around 40%, then cutting them will lead to the left along the curve, toward decreasing tax revenue. That  likely leads to a stagnating economy, and certainly greater public debt.

We are now on the low side – so cutting taxes will not lead to increased revenue or spur economic growth. Laffer should know that, but he has abandoned reason and professional ethics and now just supports tax cuts without reference to his own curve. Kansas paid Laffer $75,000 in consultation fees. Here is how it has worked out in Kansas as described by Duane Goossen, who was the Kansas budget director for 12 years prior to Brownback’s experiment:

  • “Just like the Brownback tax cuts, the Trump plan makes dramatic changes to tax policy by consolidating income tax rates and reworking deductions. Most notably, the Trump plan offers an enormous tax break to individuals who receive “business pass through income.” In Kansas this feature has become known derogatorily as the “LLC loophole”, allowing business income to be sheltered from income tax while people who earn a paycheck must pay tax.
  • Given that the same economists who advised Brownback now advise Trump, it’s unsurprising that his administration uses similar arguments to sell its plan: the tax cuts will grow the economy and create millions of jobs; the tax cuts will pay for themselves; everyone will benefit. Brownback said all that, too.
  •  But after five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefiting — well, it turns out that the bulk of the benefits went to the wealthiest Kansans while the tax bill to low-income Kansans went up.
  • The idea that tax cuts will “pay for themselves” or that tax cuts for the wealthy will “trickle down” to the middle class should be added to the list of discredited ideas that sound good but don’t work. The sell job was seductive, but Kansans have the raw experience to grasp that the experiment carried out on us was a failure.
  • Do you know how hard Kansas legislators must labor now to fix the financial disaster? Are you catching on that general fund revenue has fallen $1 billion below expenses? Can you see how all political energy goes into crisis management rather than building our future? Is that what you want for the entire country?”

From : http://www.kansas.com/opinion/opn-columns-blogs/article151800857.html

Note added on 11/05/2017: The Eisenhower Memorial is now being built and the Kansas state politicians are using it as a chance to praise Eisenhower for his great leadership. However, they should have learned the lessons from Eisenhower’s leadership. Eisenhower was a great General and President because he realized that it required requisite resources to get the job done. Under Eisenhower, the top tax rate was 90%. Eisenhower used the money to pay our war debts, rebuild Europe, educate returning GIs, and build the national highway system which ensured economic growth for decades to come.

Our current Republican tax plan will add trillions to the national debt and will not provide the resources needed to take care of the needs of our country and build for the future. It is being sold as a tax cut for the middle class, when most of the benefits go to those already wealthy We certainly do not need a 90% tax rate, but the tax rate we now have is already too low, and cutting taxes further will lead to economic stagnation and an increased national debt, both things which are repugnant to Republicans.

Note added on 11/09/2017:The Republican tax plan is taking shape. The big winners will be corporations and those already wealthy. Though billed as a tax cut for the middle class, the five biggest losers will be:
1. Middle class taxpayers. They receive a small rate cut but will lose many of the deductions they rely on.
2. Teachers. They will no longer be allowed to deduct school supplies paid for from their own pocket.
3. College students. The amount of deductible student debt interest has been cut from $2500 to $202 and graduate students will now be taxed on research and teaching assistantships.
4. Mortgage holders. The home mortgage interest deduction will be cut about in half and there is now a limit on how much taxpayers can deduct for state and local property taxes.
5. Charities. A higher standard deduction reduces the number of people who will itemize and claim charitable deductions.
Source:http://www.care2.com/causes/5-big-losers-in-the-gop-tax-plan.html

 

(c) 2017 J.C. Moore

Laffer Economics: The Long Spiral into Debt

Wed ,28/08/2013

The Laffer Curve: Laffer economics, or supply side economics, is based on the idea that cutting taxes will provide more money for investments and job creation. That in turn should increase economic growth, resulting in an increase in tax revenue. That has not worked well in practice.

The idea was not new to Arthur  Laffer, but he used it to greatly shape the United  States’ economic policies during the Reagan Administration and to this day.  Laffer used the curve  below to argue his case:

LafferIt is based on the idea that at a zero tax rates, the government collects no taxes – and at a 100% tax rate,  the economy would collapse, resulting in zero tax collected.  If taxes are too high, then cutting them will cause a move to the left on the curve, toward higher tax revenue. The top tax rate when Reagan came into office was 60%.  Laffer used his curve to convince the Reagan Administration that lowering the tax rate would move the country to the left on the curve, stimulating the economy, and increasing tax revenue.  Did it work?

Empirical data: Laffer, and those favoring  supply-side economics, often point to the 3.5%  growth in GDP during the Reagan years as validating their theories. However, the GDP growth was less under Reagan and George W. Bush, when tax rates were low, than under administrations where the tax rates were higher.  The table below compares economic indicators among administrations:

President Top Tax Rate  GDP Growth  Job Growth    Public Debt
D. Eisenhower 90% 4% 7.20%      +14.9% GDP
Ronald Regan 28% 3.50% 16.40%        +7.1% GDP
Bill Clinton 39.60% 3.90% 19.60%       -13.6% GDP
George W. Bush 35% 2.50% 1.40%        +5.6% GDP
Source Historical CBO Records Bureau of Labor        CBO

Laffer was certainly wrong about tax cuts leading to GDP growth and increasing tax revenue. Certainly, the public debt grew substantially when taxes were lower. Public debt was high during Eisenhower’s administration because of war debts and because he built the interstate highway system that accelerated economic growth under following administrations.

What went wrong?   Basing economic decisions on Laffer’s theory involves accepting the assumption that tax rates are the main factor driving economic growth, an assumption not borne out by the empirical evidence. Also, Laffer did not present evidence showing that the maximum in his curve was at 50% . Some economists argue that the curve should  actually look like this :

Laffer2

If that is the case,  cutting the tax rate from 60%  would not necessarily stimulate the economy, but certainly would decrease tax revenue, as happened.  Taxes need not be as high as the optimum rate,  but they should be high enough to pay the country’s debts .

Recent tax cuts: Despite its failures, Congress is still trying to justify tax cuts using Laffer’s Theory. A recent survey of 40 economists found that not one agreed with Mr. Laffer that reducing the top tax rate would lead to economic growth over the next five years. A University of Chicago poll  taken in 2012 found that of 40 leading economists, not one agreed with the statement: ”  A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut. ”  The results of the survey is listed below:

Laffer survey

  Still, Paul Ryan has proposed  a budget that would reduce the top tax rate to 25%. The nonpartisan Tax Policy Center estimated Ryan’s budget would add $5.7 trillion to the deficit over the next decade and would increase the after-tax income of the top 1% of citizens by 18%.  His budget is a case of ideology trumping practical economics.

 State tax cuts: Arthur Laffer now sits on the Board of Directors of the American Legislative Exchange Council (ALEC).  One of  ALEC’s  goals  is to pass laws at the state level which allow wealthy citizens and corporations to avoid regulation and taxes.  Laffer’s research has been used by members of ALEC to try to justify state tax cuts by claiming  that the nine states that have no income tax had the highest rates of job creation, as shown in his chart below:

 

Laffer5

 It looks impressive, but most of the growth was in Texas and in a carefully chosen time period when job growth was strong because of oil revenues and population growth.  Besides carefully picking his data, Laffer also ignored other economic indicators – and didn’t do a comparison with high tax states. If Laffer were correct, the nine States  with the highest income taxes should have failing economies. However, that is not the case, as shown below:

 

Laffer hgh

  The nine states with high income taxes had higher economic growth , a much smaller decline in household income, and almost exactly the same unemployment rate. Laffer’s research was biased and would never stand up to peer review, yet many states have used it as a justification for income tax cuts for the wealthy.

 Summary: Laffer’s theories are highly popular with the wealthy who want to lower  their income taxes, and with those who want to reduce the size of the Federal government.  While Arthur Laffer may be charismatic, his theories are not borne out by empirical evidence and we should not make economic decisions based upon his theories or his articles. While money may trickle down, it flows upward and pools at the top.  Cutting top tax rates has led to a more regressive tax structure, shifting more of the tax burden to sales taxes, property taxes and a myriad of government fees. Following Laffer’s economics has led to a great disparity in wealth in United States and a crushing national debt.  Arthur Laffer’s legacy is not economic growth, but a long spiral downward into debt and austerity and a tremendous increase in the number of poor Americans. Forbes put it best a couple of years ago – “Economist Arthur Laffer has had a long, distinguished career. Unfortunately one of the things that has distinguished it is that he has often been extremely wrong.”