Life on the Downside of the Laffer Curve

Life on the Downside of the Laffer Curve
House Chamber, Washington, D.C.
March 3, 2009


M. Speaker:

The Laffer Curve is a simple but elegant method of demonstrating how increasing taxes reduces economic productivity until a point of equilibrium is reached when further tax hikes actually reduce revenue.

If the tax rate is zero, tax revenues are zero. But if the tax rate is 100 percent, tax revenues also reach zero, because theres no point in working.

Thus, every increase in a tax rate produces a progressively smaller return of tax revenues as people adjust their behavior to reflect the reduced value of their work. When taxes exceed an economic tipping point, revenues begin to fall.

California vividly demonstrated this effect in 1991 when Gov. Pete Wilson imposed the biggest state tax increase in American history.

The $7 billion tax hike a staggering combination of increases in sales, income and car taxes broke the back of Californias economy.

While the rest of the nations economy expanded, California entered into a nose-dive, including the biggest plunge in retail sales in 30 years.

Those taxes brought in barely half of the new revenue predicted and then produced two consecutive years of billion-dollar-a-year declines in state revenues.

California is about to get another very expensive lesson in the Laffer curve, courtesy of a $13 billion tax increase that will sock an average family with more than $1,200 of new taxes.

We should watch Californias experience carefully in the days ahead, because it will be a harbinger of the impact we can expect under President Obamas proposed tax increases.

Although California already has the highest sales tax in the nation, and it is about to rise by another 13 percent (or a penny per dollar).

Although California already has the highest income tax in the nation, it is about to have an additional quarter percent increase.

Although Californias sales tax is the second biggest generator of revenue for the state and automobile sales comprise a fifth of all sales taxes, the state has also doubled the car tax and is lobbying for new regulations that will increase the price of a new car by as much as $5,000.

Benjamin Franklin said that Experience keeps a dear school, but fools will learn in no other.

Appropriately, the California tax increases will take effect on April Fools Day, illustrating that some people wont even learn from experience.

But perhaps there is hope. If Californias experience with the Wilson tax increases is any indication, the impact of the Scharzenegger tax hike is likely to be immediate and devastating.

Perhaps it may serve as an invaluable lesson for the Obama administration, which last week announced a whopping tax increase of $1.4 trillion over the next ten years averaging about $1,800 per family per year.

I know, the President promises that these taxes will fall only on the very wealthy (individuals earning $125,000 and couples earning $250,000). But the fact is that 65 percent of these folks arent folks at all theyre small businesses that are the very foundation of our economy, many of which are barely holding on as it is.

The other tax will directly hammer families with higher energy and consumer prices through a $656 billion carbon tax.

Its not that another example should be necessary. Herbert Hoovers response to the recession of 1929 was to increase the marginal tax rate from 25 percent to 65 percent and to burden international trade with steep tariffs.

Obamas tax increase has yet to be enacted, and if passed this year it will not take effect until 2010. By then, California will have become a poster child for governments gone wild, a vivid warning of life on the downside of the Laffer Curve.

Its a lesson that may yet save our nation from an economically devastating mistake.

Congressman McClintock's Website: http://mcclintock.house.gov/index.html

Category:

News & Politics

Tags:

• Laffer Curve
• economy

[HoGraz]

@JerryGing THANK YOU! People have been doing this dumbass stuff about how Obama raised taxes and that's why the economy is bad. That's silly. The deficit will increase taxes for everyone. Boener wants to get rid of Social Security. Its' ridiculous. This is very forceful to everyone. This is not through democratic process.

[JerryGing]

I voted for R.R. twice, and have known who Art Laffer is for 30 years, but my family paid 8% in Federal Taxes last year. Do I hate paying taxes? Sure, but reducing my rate to 7% would mean that I would add to my foreign stock holdings a bit while the U.S. deficit grows insanely. Republicans need to get serious...for real! We are talking massive tax increases and massive reductions in government services and the military, and that is just the beginning. Our creditiors know the score.

[sparky41684]

are they asking for civil war

[BiggsReport]

Excellent. Rep. McClintock is demonstrating the future of the Republican Party here. He is informed, educated, has a grasp of economics, and knows how it will impact people's lives. This is the part of the party that has a future. Practical and fiscally conservative.

Look for McClintock to become more prominent in the future as a lot of people feel the pain of our leftward political lurch.

[packers56789]

The average family will pay $1200 more, ok. But what about the median? Or did this congressman not take 5th grade math?

[obmij4]

If we ALL MADE OVER 150.000 a year it would be great for us but the ,other 3/4 of the state would feel like the depression of 1945s terrible for 2009,what do you think,and thats in black and white.