The Laffer Curve, Part II: Reviewing the Evidence

[itcanbecheezcaketime]

The Laffer Curve isn't always accurate. Just because people are taxed less doesn't mean they're willing to report more to the IRS. It reminds me of trickle-down economics, in that if we give the rich more tax breaks, they'll spend it on jobs. Truth is, more profit does not equal more jobs. The only thing that equals more jobs is more demand for products. And just like taxes don't equal more productivity for the economy, what does equal more productivity is demand and public certainty. I guess...

[Xtragicfever]

@itcanbecheezcaketime LOL WTF are you talking about?

[itcanbecheezcaketime]

@Xtragicfever

Economics, kid. Learn it.

[p4h10oso]

So is this an argument for a flat tax, dunno.

[nlefevre]

This is comical. For each argument there is a glaring and well-known fundamental flaw. In each and every case, Mitchell fails to address it although he is surely aware of them. Could it be that Mitchell is preaching only to the priesthood and the ignorant?

[nlefevre]

This is comical. For each argument there is a glaring and well-known fundamental flaw. In each and every case, Mitchell fails to address it. Could it be that Mitchell is preaching only to the priesthood and the ignorant?

[daobagua]

@nlefevre Please elaborate. I might be one of the ignorant and would like to rid myself of that.

Cheers.

[gkwedlund]

While it is possible that a moderate rate of taxes is better than a gigantic 70%. But that's rigged, and you guys know it. That's why you picked 70%

[vickiedavis]

So the rich cheat more with higher taxes. I wonder how much they cheat all the time??

[Illyrien]

@vickiedavis

Not just the rich... While I was studying at the university (in Denmark) I spent a fair deal of effort evading taxation. These efforts included evading the tv tax man (saving about 350 USD/year) and also buying soda and beer from Germany, CD/DVDs from Sweden and books from the UK.

[hiredhelp]

And what the hell is wrong with that neanderthal-looking guy? Is "the Cato institute" some kind of kindergarten for the mentally disabled?

[hiredhelp]

You people don't know economics from a hole in the ground. The Laffer curve is a joke. Even Laffer himself tries to get away from it.

[Illyrien]

@hiredhelp

True, but despite the oversimplifications, it hardly compared to the economic mistakes of say Marx or Keynes. There is some truth here.

[PENNA65000]

Funny thing. Dan Mitchell shows Ireland doing wonderfully by lowering tax rates. Trouble was he coudn't look into the future -- now (2011). Ireland is bust and in very , very serious trouble and dragging down the European Union. If it was all so rosy in Ireland (and it was) how come they fell on their face. Economics is far, far more complex than what Dan shows here. It's a loaded argument he makes. And meanwhile the rich in the USA are getting away with murder (so to speak).

[B17Boy]

@PENNA65000 - The reason Ireland fell on its face is the same reason the US fell on its face. Everyone was up to their neck in debt, the housing market crashed, and...well, you know the rest.

Fact is, from 1985 to 2000, Ireland cut taxes and had the biggest economic boom in the EU. Did they cut too much? Who knows. But cutting taxes always produces more economic activity. It's a fact.

[creptoin1]

@B17Boy It's a pretty simple concept.

[nek0s]

I love the way this guy tries to claim more money was taken in under the lower tax rates. I'm doing this math in my head so it will be close but not exact numbers. Before the tax decrease 100K people paid $19b in taxes. After the tax reductions 700K people paid $99B in taxes. While this looks like more tax revenue was achieved, money was actually lost. If those same people in the new tax bracket paid their 70% we would have generated roughly $500b in taxes, a net loss of over $400B

[scruncherg]

@nek0s you don't listen well. This is not a zero sum game here. if the rate was 70% they would find ways to hide the money since it's cheaper than paying. you are assuming everyone will pay their taxes regardless of rate. 70% tax rate??? I keep 30% of what I make, I would mail the IRS poo in a bag before i paid that

[rsbrumwell]

@nek0s wow u are a moron...

[nek0s]

@rsbrumwell Why am i a moron ? The video claims 116,000 people generated $19 billion in tax revenue at 70% and 723,000 people generated $99 billion at 28%. I just added up what the extra 600,000 people would have generated in tax revenue if they paid 70%... something this video conveniently left out.

[gregreman]

He mentioned Ireland. HA HA HA, but then he mentions Russia. Oh dear. To be fair he isn't talking about quality of life, just money.

[MentalAtheist]

1.The laffer curve is a dishonest way of looking at the economy. Because it make the case that who has the money is more importent then what it's being spent on. Correlation is not causation!!!

2.Government money is recycled back to the very people from which it was taxed. Government taxation acts as the heart of the economy.

3.The richest are the largest siphoners of wealth and they aren't investing it back into the economy fast enough. This is what's choking the economy. Tax the RICH!!!

[cyofish]

Another caveat - Give with one hand take with another. Reagan eliminated many tax shelters and drastically reduced deductions through the Tax Reform Act of 1986. Prior to the reform there were "Rich" who paid no taxes because of the allowable deductions and tax shelters. Deductions for consumer interest and passive activity loss was eliminated; capital gains was taxed at ordinary income; depreciation deduction was curtailed. It also consolidated 15 levels of tax rates to 4 levels.

[eyeammi]

The yacht example is the reason why I'm against the national sales tax, aka the "fair tax". Income tax really has no effect on peoples spending habits. It gone before anyone takes it into account. Sales taxes do. The people who buy yachts, by all accounts, wouldn't really have been hurt by the sales tax, yet its implementation had a profoundly negative impact on all things yacht related. If you think that was, bad watch what happens when everyone has to pay high sales taxes on everything new.

[scotths]

One problem.. Under Reagan through the present executive salaries and dividends have gone up while worker salaries have gone down. Boards of directors are paying executives more and paying out more in dividends at the expense of all other employees. This would have the effect of increasing the tax payments of the wealthy, but not because they have invested more or were more productive only because they paid themselves more.

[headbanger623]

At 4:40, what is "caviats"?

[SimulacrumMaster]

@headbanger623 a condition that changes perception. going back to the video, the tax revenue increases following reagan's tax cuts are not completely caused by the tax cuts, as some of it was due to inflation, growing tax base, etc.

[Ladiestreat]

Irelands government is broke.

[Shalek]

Such a well formed video.

[Gniruks]

i enjoy your analysis, but i have the feeling you're slightly biased

[getnbusy2nite]

Lower taxes are not necessarily a bad thing and neither is more controversial topics such as redistribution of wealth. Both have ideological principles associated with them, but both are tools that can help the economy, but just like medicine they have to be administered at the appropriate time to have a positive effect. Extra revenue from growth taxation could be used to hinder a downturn in the economy coupled with a stimulating tax decrease for consumers and corporations.

[kstupider]

I thot that the erst video on lafer curv was v good so I clicked on part 2. but this one is stoopid. ideological. even stoopid like me knows that 1980 was between a duble dip recesion and comparing it with mid 80 when the markets were hot and there was paper wealth is decitfool. and heck, ireland in 80's had stonehenge and in 04 the world had changed. check out ireland housing prices. i might be stoopid, but u are either stoopid or misleading. pl think cleanly and teach with intelectual honesty.

[machomaas]

He doesn't seem to make the case at all that the Reagan tax cuts did anything to revenue. Just because revenue grew between 1980 and 1988, even by alot, does not mean that the tax cuts were necessarily responsible for some or even any of it. Logically speaking, it just doesn't follow.

[1AUsomeguy]

Very true. The economy tends to expand as the population tends to increase. As a result of this, tax revenue will tend to increase in real numbers regardless of what the tax rate is. For example, from the years 1960-2000, real tax revenue increased each successive year (excluding 1971 and 1983) despite the numerous adjustments in tax rates that occured between those 40 years. Another note, tax revenue increased even more after the Clinton tax increase of 1993.

[cpacekjr]

At this point, if you don't see a case, then you don't want to. The piece of the puzzle that didn't happen was Fed spending cuts. Even Reagan couldn't get that done with the still big gov't Dems in charge. Logically speaking, it absolutely follows. Emotionally speaking, you don't want it to follow. Otherwise, you have to rethink your entire political being.

[machomaas]

Please don't make projections on my mental state, this does not advance your argument. All I'm saying is that correlation does not necessarily imply causation (especially in economics).

What is your point about the spending cuts?

[Boeing727223]

Please explain to me why not?? Explain how it happened then..... If you are going to make a statement like you are doing, then back it up with solid facts as to why not? Did we increase infrastructure spending, entitlements, what? Print money, give it away??

[Boeing727223]

@Machomaas

[ixaxion]

The 3% decline could also have something to do with the recession that happened to occur around that time too.. So lost jobs and the fed increasing interest rates to combat inflation.

[Surhotchaperchlorome]

Laffer Curve = Win. :3

[Cutplains]

In 2003, the United States Department of the Treasury released a non-partisan economic study showing that the 1981 tax act produced a major loss in government revenues of almost 3% of GDP.

[Superplatanoman]

True. Look how many jobs were created under Reagan vs Carter. It's almost the same. So, this whole trickle down stuff is all bs.

[Surhotchaperchlorome]

Carter also had one of the largest inflation rates in the last 100 or so years.

Something helped by less taxes on productive behavior.

It isn't bullshit.

[Superplatanoman]

Actually, less taxes didn't help inflation go down. The federal reserve increased interest rates. High interest rates caused the recession of the early 80's. As soon as interest rates came down, we were back on the road to recovery.

[Surhotchaperchlorome]

Actually, it was the supply shock of oil that helped cause it.

Granted, high interest rates may have helped it, but supply side economics still helped ease the burden of the supply shock, and help things at the time.

Can you, or Cutplains link me to anything?

[popcur]

In time, inflation will go large on Obama's watch. Maybe, in the future Obama and Carter could goon a tour together. Obama will do his best to kill the american dream. President GW Bush had a hand in it , too.

[ExhibitMan]

there's no way big sky inflation is coming. The U.S. had sky rock inflation during the 80/70s. Everyone is threatening that China will soon stop purchasing debt to the U.S. The Fed could simply pring the money and the Chinese would loose value to their dollars. That means China has no choice but to accept the ways things are. Money that the government borrows have already been in circulation, and still is. Thus, no inflationary.

[Boeing727223]

What about us printing money...that's what causes inflation last time I checked.

[dfctomm]

Printing money is only half of the inflation equation, the velocity of money is the other half. since the current crisis began we have printed a great deal of money, but it hasn't ramped up inflation because the velocity has dropped sharply. The money isn't circulating through the system, instead it's just sitting there in the large banks, and that's why inflation hasn't ramped up.

[DarthByss]

@ExhibitMan wow...that was the most ignorant statement ever made about the nature of inflation and the leverage China has over us...

[XCritonX]

@popcur In the future America will send Carter and Obama on advisory tours to your enemies. They will be the financial equivalent to nuking Japan. We will call them Big Boy and Little Boy.

[Surhotchaperchlorome]

Link?

[patwayne2000]

The Russian economy is doing great! Retards!!!

[WhatsUpWithOurWorld]

Russia was booming after communism fell. It's growth was astronomical, all because of conservative tax policies.

[Cutplains]

Saying it don't make it so. Show us the math and the importance of each of the factors.

[agent59717802]

Dude,

Didn't you look at the initial explanation. The other factors are:

1. 7% population size

2. 44% cumulative inflation from 1980 to 1988

3. Revenue increased 5 times (400%)

Obviously the Laffer curve had a non trivial effect.

[Cutplains]

Dude, did you fail econometrics?

I want to see the form of the statistical model, the number of observations, it's dependent variable (raw $,percent change ...) and independent variables (factors) and the transformations on each, the result and statistical diagnostics for the technique used. Once we get this we can evaluate the factors to see how it contributes to the change in the dependent variable.

[delta4000]

you do put out a report and i will listen, dont just bag people out, and please back it up, not with Utopia ideals from econometrics class

[Cutplains]

In 2003, the United States Department of the Treasury released a non-partisan economic study showing that the 1981 tax act produced a major loss in government revenues of almost 3% of GDP. I posted a link, but it didn't take or was removed (it is mentioned in the Wikopedia article).

Maybe the claims of the lafer curve are real, but, so far the proponents have only offered evidence that could be explained by other factors or collinarity. I'm not ready to believe it on their word.

[mossretard]

actually the Irish example kind of proves this, until 1990 or so Ireland was one of hte poorest countries in western europe despite an educated population they then cut corporate taxes and created incentive for high tech companies to come, Ireland now has the same GDP per capita as the United States after being a border line second world country until 1990

[RHJunior]

"Voodoo economics?" Tell me, just how many different examples do you need that the Laffer Curve is a proven economic law?

[20000miles]

I've said it before, the laffer curve is a sham based on no empirical evidence of research carried out by Art Laffer.

Here, Mr. Mitchell is trying to convince us that all birds are black by showing us a few ravens.

[jumboshrimp09]

Your about as economically literate as Barrack Obama or John McCain

[BDizzle66]

Dan Mitchell went to Georgia about 50 years ago. Hope the Laffer Curve has better luck than his horrible football and basketball teams since he left. Boy did they ever lay an egg in the 2008 NCAA Tournament in the first round.

[soccer4ever]

THANK YOU. Wish everyone in Congress would watch this video.

[UnderseaCaveman]

We keep seeing more Millionaires, not because of excellent economy, but INFLATION...

At some point in the WEIMAR republic, if you weren't a MULTI-BILLIONARE, you were literally a BUM! History to repeat itself in the good ole USA! Cheers

[MarkWads]

What Seal 010101 says!

[patwayne2000]

A Relevant Sample Size??? In his examples of Russia and Ireland other factors played a larger role than the tax rate. Ireland's immigration policy allowed its population or work force to grow and enabling its economy to grow. Russia's economy is closely tied to price of oil. I can't imagine the price of oil dropping and the economy growing if the government lowered taxes. His examples are worst than flipping a coin twice and checking the weather to see if there is a correlation.

[davidcarvin]

It is not a rational response to stick your fingers in your ears, close your eyes, and say, "Nahnahnahnah" when you don't agree with examples.

[patwayne2000]

He is using loaded examples! Statistical evidence shows that his "evidence" is not typically what happens. Actually, when you look at examples around the world throughout history, the opposite of what he is saying happens. This video is very misleading.

DO YOU THINK RUSSIAS ECONOMY ISN'T TIED TO THE PRICE OF OIL???

DO YOU THINK HAVING A LARGER WORKFORCE WILL NOT GROW AN ECONOMY???

[moddy82]

And what kind of "statistical evidence" are you speaking of? At least, he names his sources in contrast to you.

If I look at history, I see that flat tax countries like Estonia and co. are doing good. I see that Luxembourg is just doing so well on the tax department that Germany had to use its "Großmacht-Anspruch" again to bully its smaller sovereign neighbour.

I see that Swiss is doing fine with lower taxes and that workers from Germany move there for work...

[patwayne2000]

Read what Bill Easterly says, for yourself rather than having it spoon-fed, misquoted, and distorted by the Cato Institute. Read his books rather than what the Cato Institute says about his research.

[davidcarvin]

Could read Easterly, or Malthus, or Ehrlich, or could consult common sense: At 0% rate and 100% tax rate, revenues are always zero. Only question is the shape of the curve.

Our current economic projections are static, therefore seriously distorted and always way off.

Resistance to this common sense is like Creationism, based on pure mistrust of common sense.

[patwayne2000]

I agree. The main question is what's the shape of the curve? Did you see the comment of "prestable"?

[davidcarvin]

I saw 'prestable'. At the peak of that curve, there's a big "plateau" where you're merely trading dollars. So the political issue should not be a 71% peak, beyond which tax cuts entirely pay for themselves. Even moreso, the CBO projections need to incorporate such dynamics in their forecasting in the interest of clothing the Emperor. Can I get an AMEN?

[davidcarvin]

He gives two examples with multiple caveats that the curve is only one factor among many. You ignore the caveat, and make claims without any evidence or examples at all. Where can we see your "statistical evidence"? Shouldn't be hard to find if it is "throughout the world" and "throughout history".

[patwayne2000]

Read what Bill Easterly says, for yourself rather than having it spoon-fed, misquoted, and distorted by the Cato Institute.

[SupplySideRules]

Mr patwayne2000: Asking us to read "what Bill Easterly says" is just a rethorical maneuver. What does Bill Easterly says? Can you explain a little or must we read every book and paper that Easterly wrote?

[SupplySideRules]

patwayne2000, the statistical evidence is overwhelming, progressive taxes are asphyxiating the industrial wolrd, whether you examine several countries or what happens over time in a country like the USA. Ireland and Russia are only two examples. Google "The size and functions of government and economic growth" by Gwartney and you will see clearly how as industriel countries increased government spending they fell into economic stagnation and the countries that reduced government

[SupplySideRules]

Part2 patwayne2000:as Ireland, New Zealand and UK got better economic growth. Higher government spending means higher taxes. Google "Fiscal Policy, Profits and Investment" and you will see how often government contractions are related to higher growth like what happened with Ireland, US, UK, New Zealand, Spain, Sweden, Finland, Estonia, Slovaquia, Russia and others that I do not remember when they reduced taxes. And EVERY OECD country sloweb their growth in 1960-1996 when they increased taxes

[SupplySideRules]

Part3 patwayne2000. Japan, Germany and Spain, for instance, were "growth miracles" turned into nightmares of stagnation when government spending increased. Oil was 20% of GDP in 2005, it is unlikely that oil alone explains a 19% increase in tax collections. And how do yiu explain Ireland? Does Ireland has oil too? How do you explain Hong Kong that has no natural ressources but got the highest growth in the last 50 years? Why are so many countries adopting a flat tax if it is so bad?

[davidcarvin]

I do agree that oil is a big factor in the Russian economy. As is also Putin's imprisoning the owner of Gazprom. But I fail to see that this discredits the Laffer Curve.

[seal010101]

Remember to be wary of concensus among economists. Paul Krugman is an economist, so he surely causes a strong "Moron-Curve" effect. This moves the curve to the left.

[paltoys]

Yeah!!

[prestable]

If anyone is interested, the consensus among economists indicate that the tax rate that hits the peak of the Laffer curve is roughly 71%, assuming the structure of the system is a flat tax. (The revenue-maximizing point is calculated like so: t*=1/(1+e) where e is the elasticity of labor supply. Since e is on average estimated at 0.4 for the US, that gives us 1/1.4 or roughly 71%) Analyzing the system for a progressive tax is more complicated though.

[cmoplay]

The only consensus among economists is that economists never have a consensus on anything. If you get 5 economists in a room, and ask them what the optimal tax rate is for revenue production, you are likely to get 5 different answers.

So, I have to disagree with what you've stated. But I do like how you presented your info. such that anyone who disagrees is going against the 'consensus', which is nothing more than a ruse to stifle debate.

[prestable]

Ok, I'll throw out the word consensus. The studies on the elasticity of labor supply in the US on average point to a value of 0.4. This value of e would point to a value of 71% for the peak of the Laffer curve (for a flat tax).

[SupplySideRules]

Mr. prestable: Those studies are flawed. Labor supply is very elastic, the elasticity is around 3. Edward C. Prescott, who won 2004 nobel in economics analyzed the actual hours worked in the formal sector and he found an elasticity of about 3. Why? Because when taxes are raised people would get unemployed or would go to work in the informal sector, making hours worked fall enormously. That is the correct analysis.

If you into account people that starts working in the informal sector and

[SupplySideRules]

Prescott paper also finds that europeans when they were less taxed than americans, worked much more. A footonote: The higher productivity of the french is just an illusion, in France the less productive people cannot find a job.

Mitchell has shown that Value Added Tax was essential in transforming Europe into the stagnated "fiscal hell" that much of it now is.

[SupplySideRules]

Just google "Why do americans work so much more than europeans" and you can read the paper by yourself.

[prestable]

If the elasticity it around 3, then the revenue maximizing tax rate would be roughly 25%. That doesn't play with the fact that the Reagan tax hike, the G HW Bush tax hike, and the Clinton tax hike all raised revenues above projected despite increasing marginal tax rates well above 25% (and that all the tax cuts in between have decreased projected revenue below projected).

[SupplySideRules]

Mr prestable, you are reading carelessly. I said that the elasticity of the supply of labor is 3, I said nothing about the revenue maximizing point. What is flawed is ignoring people that goes out of the formal sector when analyzing labor supply. And that elasticity is for some level of taxation, not for every level but I am talking from memory. You are assuming an ideolgy in me. Taxes are asphyxiating the industrial world but there is a enormous bunch of professional hypocrites

[SupplySideRules]

trying to mask that simple truth. If people goes out of labor market that does not mean they stop working, if you tax labor at 71% then companies will probably outsource even secretarial services and every employee would be an entrepreneur. But it is obvious from Prescott study that labor supply was reduced by taxes in Europe. Just tell me the flaw in Prescott Study. And adjust your studies and compute as Prescott does and you may find the same result.

[prestable]

1) I didn't say his study was flawed. I haven't read it yet. And of course taxes discourage labor supply. The question is how much. An elasticity of 3 has got to be considered a little extreme to the point of being a red flag. Other studies have found an elasticity of 0, but that does not prove that the truth is zero.

[prestable]

2) The revenue maximizing tax rate for a flat tax is equal to 1/(1+elasticity), (derived from simple calculus, which I will supply if you don't believe me) which means an elasticity of 3 would imply a rev. maximizing rate of 25%.

3) I'm sorry I didn't mean ideology. I misspoke (mistyped rather). I meant that blind dedication to any theory, including supply side theory, is not helpful to the discovery of truth.

[SupplySideRules]

Yes, please give the Calculus because I suppose you are assuming a constant elasticity all over the curve.

[prestable]

4) If people go out of the formal sector, the deadweight loss associated with that choice is negligible because they are simply switching to the next best use of their time (by the envelope theorem)

[prestable]

Further, could you explain how all studies of labor supply are flawed (It would be a trick, considering you haven't looked at the studies)? Except for Mr. Prescott's study of course. He can't be wrong. You're right--It's much more likely that everyone else is. I'm searching for the truth, and blind devotion to an ideology simply gets in the way.

[prestable]

However, even if the reason you state is true (that hours worked fell because people moved to the informal sector) then it means that tax hikes are less harmful than we thought--it's better on the margin.for someone to avoid taxes and continue working in the informal sector than for them to quit working entirely. At least in that case they're still being productive.

[Doubleohhoya]

Someone send this series to the Obama campaign

[ejpasseos]

Great information. Hopefully, the left will watch. I can't wait for the next installment. Thank you to Lawrence Kudlow for recommending.

How about something on free-trade? It looks like Barack & Hillary could use some education.

[adamcm1993]

Great job. Can't wait for Part III.