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Tuesday, October 25, 2016

By Andrew Fieldhouse

Originally posted at The Century Foundation

If the Laffer curve hypothesis is the first commandment of the modern conservative movement, then its economist namesake, Arthur Laffer, is its chief apostle. Laffer argued that it is theoretically possible to raise more government revenue by lowering tax rates, thereby offering a “free lunch” for legislators. The understandable political allure of Laffer’s suggestion is directly responsible for a three-decade experiment with “supply-side” economics, an experiment whose failure has eroded inflation-adjusted incomes and living standards of the vast majority.

But the Laffer curve is merely an economic model, one originally sketched out on a napkin. The model has zero scope for informing good public policy without rigorous, accompanying empirical research on behavioral responses to tax changes.

And modern economic research isn’t on Laffer’s side.

Laffer’s proposition is based on the simple observation that the government will collect zero revenue if the tax rate is at either zero or at 100 percent. A revenue maximizing rate must lie between these bounds, and the Laffer curve is typically depicted as a symmetrical, concave function between these revenueless rates (implying a revenue-maximizing rate of 50 percent). In practice, invoking the Laffer curve has assumed de facto that U.S. tax rates were so high that they were on the “wrong side” of the revenue maximizing rate.

laffer curve 1

But after decades of tax cutting, economic research clearly suggests that top U.S. income tax rates are well shy of revenue maximization. The top tax rate would be below the revenue-maximizing rate if the Laffer curve were symmetrically distributed, but research suggests that the Laffer curve is asymmetrically distributed, with a revenue-maximizing rate well above 50 percent.

laffer curve2

In fact, economists Peter Diamond and Emmanuel Saez estimate that the revenue-maximizing income tax rate is actually 73 percent.

Diamond and Saez base their figure on an extensive review of research on the subject, and their estimated rate combines federal, state, and local taxes. As I explain in a new paper, these estimates imply that policymakers could raise the top federal statutory income tax rate from 39.6 percent to roughly 66 percent before reaching revenue maximization, all without unduly burdening economic growth.

That tax cuts do not pay for themselves may be news to conservative politicians, but this is hardly disputed by credible conservative economists. After Senate Minority Leader Mitch McConnell (R-KY) baselessly asserted that the Bush-era tax cuts “increased revenue, because of the vibrancy of these tax cuts,” supply-side apostate Bruce Bartlett chronicled numerous Bush administration economists flatly rejecting such “free lunch” arguments.

So policymakers invoking the Laffer curve hypothesis are truly calling for further increases in the top income tax rate—wittingly or unwittingly. There’s no free lunch to be had, but there is substantial scope for further raising top rates to increase revenue without unduly burdening economic growth.

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Copyright 2013 The National Memo
  • The only people that benefit from tax cuts are the top percentage of Non-taxpaying Republicans

    • republiCONsanddemsarebothsuck

      And Obama.

  • republiCONsanddemsarebothsuck

    All of this concern about the deficiet has shown a lack of genuine concern about the jobs situation and how that works with tax revenue.

    The jackass’s in washington will not admit that they have created a depression.

    • Independent1

      What’s depressed is the state of your mind nobsartist: the highest stock markets in decades don’t occur during depressions; more jobs created in 3 months than were created in a year by the previous GOP administration don’t occur during depressions; reachieving the highest consumer confidence in 5 years doesn’t occur during depressions. You’re ranting about this is as nefarious as your ranting about the fact that ACA includes something about gun control; which only goes to prove you’re so gullible that you’ll believe anything you hear from Faux News, Rush Limbag and any other right-wing wacko that comes up with a conspiracy theory. One of my relatives is one of the top 5 experts on ACA in the country and says categorically – THERE IS ABSOLUTELY NOTHING IN ACA ABOUT GUN CONTROL. Stop being so quick to believe what you hear from right wing wackos.

      • The economy added 88,000 jobs last month and unemployment is down to 7.6% and dropping. 🙂

        • itsfun

          Unemployment is down to 7.6% because people are giving up and have quit looking for jobs. What is the real unemployment rate?

          • Considering the number of “Hiring” signs everywhere we go, there is no justification for giving up. There are also a lot of jobs in fields that do not require a college degree, such as truck drivers.
            The real problem is that many of the new jobs are low paying part time jobs with no benefits.

          • itsfun

            problem is college degree folks are taking the jobs in fields that do not require a degree because of the job shortage of college degree type jobs. Sooo, employers have choice of people with no degree or folks with a degree. Who do you think the employer hires in this case. We need more college degree type jobs, so the folks without degrees will have a chance at the jobs such as truck drivers, waiters, clerks, so on.

          • There are young people with liberal arts degrees accepting jobs that do not require a college education. Conversely, the Federal government just issued a record 85,000 H1b visas to attract foreign professionals to satisfy demand in fields such as medicine, engineering, computer science, chemistry, physics and mathematics among others. There are plenty of jobs for professionals in the USA. Unfortunately, most of them involve hard sciences. BTW, this is not a new problem, it has been going on for many years and it is the result of us not placing enough emphasis on the fields that are in demand in the 21st century. We are more focused on keeping up with the Jones’ than spending time helping our children, motivating them, and mentoring them. When everything else fails we blame the teachers, the government, the boogeyman and just about anybody except the ones most responsible for what is happening in our society: us.

          • Independent1

            An intereting statistic on unemployment that I read the other day is that the unemployment rate among people with a bachelors degree is around 3.7%; far lower than the 7.6% overall rate. I think that reflects the fact that employers feel that individuals who had the motivation to work for a college degree and in fact earned one, and are therefore more likely to put forth the effort to learn the ropes in a new career line, than job candidates that have not displayed that motivation. Despite the 7.6% unemployment rate, there are millions of open jobs, just not enough applicants with the jobs skills to fill many of them, and it looks like employers are more willing to pick college grads to train for these positions.

          • Betta

            The unemployment rate is far higher than the fictitious 7.6% the government wants you to believe. The percentage is a blatant LIE. The 7.6% only reflects those who looked for work the previous 4 weeks. It doesn’t count those who just gave up.

          • Independent1

            Betta, are you aware that in an effort to include people who have dropped out of the labor force that the Bureau of Labor Statistics does not use any employment related statistics that they have to calculate the unemployment rate? No, they use a survey of 60,000 households done each month. Although the unemployment rate is not 100% accurate, it is more accurate than most polls surveys you read, and they’ve been using the household surveys for decades so rates published today and 40 years ago can be reasonably accurately compared. Despite what many pundits would like you to believe, the actual rate is not as greatly different from what BLS publishes as what many of them would like everyone to believe.

            Here’s a description of how the rate is calculated from the BLS website:

            There are about 60,000 households in the sample for this survey. This translates into approximately 110,000 individuals, a large sample compared to public opinion surveys which usually cover fewer than 2,000 people. The CPS sample is selected so as to be representative of the entire population of the United States. In order to select the sample, all of the counties and county-equivalent cities in the country first are grouped into 2,025 geographic areas (sampling units). The Census Bureau then designs and selects a sample consisting of 824 of these geographic areas to represent each State and the District of Columbia. The sample is a State-based design and reflects urban and rural areas, different types of industrial and farming areas, and the major geographic divisions of each State.

            Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than 4 consecutive months. This practice avoids placing too heavy a burden on the households selected for the sample. After a household is interviewed for 4 consecutive months, it leaves the sample for 8 months, and then is again interviewed for the same 4 calendar months a year later, before leaving the sample for good. This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year. Each month, 2,200 highly trained and experienced Census Bureau employees interview persons in the 60,000 sample households for information on the labor force activities (jobholding and jobseeking) or non-labor force status of the members of these households during the survey reference week (usually the week that includes the 12th of the month).

          • AdamMos

            Its the same way we have always measured unemployment. You cant change the calculation now to fit your narrative. It is all relative.

          • plc97477

            The states are cutting spending on education over and over again. At some point they are going to have to see that it is making it harder for Americans to fill those more challenging jobs.

          • BTW, when an employer receives applications from a non-degree and a degreed person for a non-degree position, he/she is more likely to hire the non-degree person. The reason for that is because they know that highly qualified people are likely to quit as soon as they find a more challenging job. The hiring process, training and attrition are expensive and good managers do everything they can to keep attrition – and disruption in customer services – as low as possible.

          • Independent1

            The fact that some people are dropping out of the job market has happened every month of every year since the Big Depression; it’s a normal thing for people to do and is reflective in the monthly unemployment rates that have been published since then. It is nothing new and pointing it out is just an indication of your ignorance of the nature of unemployment.

          • Independent1

            Not sure if you noticed my response to Betta below who made a similar comment about the unemployment rate not including people who have dropped out which is NOT TRUE; the unemployment rate does in fact include people who have dropped out because BLS, the Bureau of Labor Statistics does not use employment records or records of people collecting unemployment insurance in its unemployment calculations. The employment rate is calculate each month much in the same way that political pols are calculated, except in a far more accurate manner; BLS deosn’t interview just one to two thousand people, they survey 60,000 people each month and ask them pointed questions about: how many people in the house who are of an age that can work; how many of those eligible to work are working; how many that aren’t working are actively looking for a job; how many are not still actively looking, and on and on. At the end of these interviews which are done region by region and state by state, BLS calculates the unemployment rate which I’m sure is far more accurate than any political pol. If the unemployment rate is 7.6, the true unemployment rate is well within the range of 7.4% to 7.8%.

          • plc97477

            All of the people I know who have been looking for a job for a long time have finally found work. I think we are seeing those 88,000 jobs do the trick.

          • AdamMos

            10,000 people a day turning 65 and eligible for Medicare. The majority of those leaving the workforce are retiring. We call it demographics.

        • republiCONsanddemsarebothsuck

          Perhaps that is because we are in a FUCKING DEPRESSION, IDIOT.

          • plc97477

            Becoming abusive is not going to help you be relevant.

      • itsfun

        New jobless claims went up 385,000 last month. doesn’t sound like recovery to me. That is the third month in a row jobless claims have risen. Still blaming Bush for the problems, next you will blame him for starting world war II

        • Independent1

          I’ve never blamed Bush for what’s happening today, he created enough disasters during his 8 years in office for me to blame him for: like starting an unnecessary war through lies and distortions; like passing two unwarranted tax cuts when he knew the country was at war and needed tax revenues to fund those wars; like spending like a drunken sailor by keeping 25-50% of his spending out of his budgets which let him run up 90-10 trillion in deficit spending (including a lot of the deficit spending Obama had to approve just to keep America from falling into the GOP’s second created world-wide depression); like totally ignoring 7 warnings in 3 mos from the CIA about an imminent attack on America by al Qaeda which ended up in him deliberately keeping the CIA from possibly stopping 9/11 from happening, which ended up killing more than 3,000 Americans; like adding an unfunded drug benefit to Medicare as a giveaway to the drug industry which although it has helped seniors it was done with ulterior motives to feed taxpayer money to the drug cartel because it included a restriction on the government negotiating drug prices; like pushing hard to privatize Social Security as a favor to the financial industry lobby, knowing full well that that would put the retirements of millions of seniors in jeopardy; do I need to go further with blaming Bush? I’ve got another 10 or so disasters that he created I could point out. What more do you need to realize his presidency was one disaster after another for America.
          And no, I blame our job problems today and guys like Mitt Romney. It’s pretty hard to create net jobs in America when you have companies like Romney created that have no humanity – that are focused on doing nothing but destroying companies and people’s lives so they can pocket millions in profits. Companies like Bain are even today, buying out companies, many of them that are fighting against being bought out but are losing, and then stripping these companies of their assets, including their pension funds, and not only shipping jobs overseas but are also leaving hundreds of thousands of Americans with lower or no pensions to help them live better lives in what is suppose to be their Golden Years!!

          • republiCONsanddemsarebothsuck

            Thats because you are a dumb ass. Try pulling your head out of your ass now and then and try cleaning the shit out of your eyes and ears.

        • republiCONsanddemsarebothsuck

          You mean we still are not in a depression?

      • adriancrutch

        The stock market is just a out of control casino as is the fact that our government funding is a vicious circle ponzi scheme.

      • republiCONsanddemsarebothsuck

        How does it feel to be stupid? This is what you would discover if you would pull your head out of your ass on occasion.

        You are one dumb motherfucker.

        Looks like Obama should have read the “Obamacare” law before he signed it, OR he was so eager to get “Obamacare” that he didn’t care about the “gun owners” clause that was in it!

        So, Obama was either stupid for not reading the bill OR knew the clause was necessary to get his “Obamacare” passed, so that his ego could soar!

        Wednesday, it was discovered that hidden deep within the massive 2800-page bill called Obamacare, there is a Senate Amendment protecting the right to keep and bear arms.

        It seems that in their haste to cram socialized medicine down the throats of the American people, then-Speaker Nancy Pelosi (D CA) and Barack Obama overlooked Senate amendment 3276, Sec. 2716, part c.

        According to that amendment, the government cannot collect “any information relating to the lawful ownership or possession of a firearm or ammunition.” This means that the government CANNOT mandate firearm registration. No registration, no confiscation.

        Poor ol’ Joe Biden, he spent the last couple of weeks focusing on making a law requiring registration. Good thing is though, the amendment also states that not even an executive order can override the amendment. CNN is now referring to it as “a gift to the nation’s powerful gun lobby.”And according to Senate Majority Leader Harry Reid (D-NV), that’s exactly right. He says he personally added the provision in order to keep the NRA from getting involved in the legislative fight over Obamacare, which was so ubiquitous in 2010.

        It looks like Harry Reid actually helped out firearm owners without even realizing it. Thanks Harry!!

        I confirmed it on snopes and by the way, they verified that you are also a dumb ass with a big mouth.

        • Independent1

          Okay, I blew this one, but the crux of the article imbedded in Obamacare does not really accomplish anything other than keeping people from using the Obamacare law to require or control gun legislation. Here’s what really comes out of it (and it’s not my words it’s that of someone with more legal background than I have):

          The text cited says that nothing in Obamacare authorizes collecting such data, period. But it isn’t limited to data collected in the implementation of Obamacare, the broad language means that the government can’t use the text of Obamacare to justify collecting data for any purpose.

          But the language also doesn’t BAN the government from collecting such data pursuant to authorization from other legislation. You are correct that, for example, the ATF could do so. It just couldn’t use anything in Obamacare as the justification.

          • republiCONsanddemsarebothsuck

            You just blow.


  • The problem with the Laffer hypothesis is that it has been proven to be wrong. It failed miserably in the Reagan era, when tax rates were lowered and government spending and borrowing went up so much that the national debt ceiling had to be raised 18 times to keep the economy from collapsing. The same happened again when George W. Bush cut taxes and increased spending. The national debt had to be raised 8 times, our financial institutions had to be bailed out with taxpayers money, and the economy tanked. It took us four long years to overcome the effect of an economic policy that does not make sense. Fiscal conservatism for me means paying for what we get and benefit from. There are no free rides. If we want the most powerful military in the world, if we want social programs that help the elderly, the infirm and the poor, if we want to invest in infrastructure and education and do all the other things that make a country great, we better be willing to pay for it.

    • adriancrutch

      When the rest of the world tires of our policies and quit buying our debt,then the fun starts!

      • Most currencies are tied to the U.S. dollar. This is incentive to all lenders to keep our United States economy strong.

        • JDavidS

          Only as long as it suits China to do so. China, followed shortly after by India and then Brazil, will soon have the worlds’ largest economies. At that point in time it’s feasible that China could call the U.S. debt… most of which they own… and then watch the U.S. twist in the wind. That day may be a lot closer than is comfortable for the States.

          • jstsyn

            Think taxes might go up then?

  • Allan Richardson

    Some tax cuts only generate more revenue in the SHORT term, but less in the long term. One example is the Bush era cut in capital gains taxes. When it was passed, people and corporations intending to sell appreciated assets at some indefinite time in the future sold them as soon as possible after the law went into effect, thus saving on the taxes. The next tax year, there were fewer sales of appreciated assets because those who had eligible assets to sell had already sold them, and the purchasers had not yet realized the further appreciation that would make them want to sell. Thus, there was a temporary spike in the rate of asset sales, and thus a spike in capital gains tax collections, followed by a slump in both the next tax year, before a rise to the pre-tax-cut level.

  • Rayg813

    The REPUGNANT-CANS will use the G.H.W. Bush claim to fame statement…Read My Lips”. when they flip on on taxes, deficits,and their Master Deception…WMD’S in IRAQ.The REPUGNANT-CANS want everyone to read their lips because when they say anything, it is not to be believed,and it is not recorded or written. Therefore no RESPONSIBILITY for their mendacious rhetoric (as in …Right REPUGS???. Also, when a REPUGANT-CAN opens his or her mouth they have a tendency to VOMIT all over themselves, E.G. “We, Repugnant-cans, don’t care about 47% of Americans”. By their Brain-Cramp Repugnant-Can presidential candidate in 2012….Mythical Romney. The REPUGNANT-CANS are the dictionary definition of the word MENDACITY. And they prove it in congress and their candidates for any political office….Right America???

  • Rayg813

    The Repugnant-Cans do not have a clue on the true meaning of “All the People” In their Idiot-ology, they interpret that sentence in the Preamble, to mean “All the people of ONE KIND”. Pale, Stale Stuffy Old White Guys With the RED TIES That is very obvious by their philosophy of “We, Repugnant-Cans, DON’T CARE about 47% of AMERICANS….as a statement made by their Presidential candidate of 2012, yours truly….Mythical Romney, another REPUGNANT-CAN sacrificial brain-cramp put to the slaughter by the DEMOCRATS AGAIN….and it will not stop there for a LONG, LONG TIME….Right AMERICANS….All Americans????

  • Mark Forsyth

    The Laffer curve is appropriately named but they need to correct the spelling.

  • Ed

    Anyone who believes that:
    a) higher taxes on the “producers” (who already pay more than their share) are the way to go;
    b) we can tax ourselves out of this recession;
    c) we can tax ourselves into prosperity;
    d) we can have all these “goodies” and “freebies” by taxing (even more) the “rich”;
    e) the so-called “rich” are people we should “punish” by taxing them more;
    f) we can make “poor” people rich by making “rich” people poor,

    …… is a perfect IDIOT ….