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California's Laffer Curve: Playing with Fire
Econlog ^ | November 12, 2012 | David Henderson

Posted on 11/18/2012 7:14:37 PM PST by reaganaut1

It's not Go Galt: It's Go to Texas.

As I have noted before, the Laffer Curve--the curve that relates tax revenues to tax rates--must be correct. The relevant question is where we are on the Laffer Curve. Are we on the part of the curve--the "prohibitive region"--where an increase in marginal tax rates will reduce revenues and a decrease in marginal tax rates will increase revenues? For the United States, I think the answer is pretty clearly no.

But what about for California? We are about to have an empirical test. Proposition 30 garnered about 54 percent of the vote earlier this month. One provision is a one-quarter percentage point increase in the sales tax rate.

But the other provision is a substantial increase in marginal tax rates for the highest-income taxpayers. I'll give the rates for married filing jointly and you can find the others here.

For taxpayers with taxable income between $250K and $300K, the marginal rate rises from 9.3 percent to 10.3 percent. For taxpayers with taxable income between $300K and $300K, the marginal rate rises from 9.3 percent to 11.3 percent. For taxpayers with taxable income over $500K, the marginal rate rises from 9.3 percent to 12.3 percent.

Why would I raise the issue of the Laffer Curve in the context of California's Prop. 30? For two reasons.

First, the way you're most likely to get into the prohibitive region is to raise the marginal tax rate on the highest-income people. This is because their marginal tax rate is already high and they generally have the most flexibility in arranging their affairs to reduce their tax.

(Excerpt) Read more at econlog.econlib.org ...


TOPICS: Business/Economy
KEYWORDS: california; laffercurve; taxes

1 posted on 11/18/2012 7:14:42 PM PST by reaganaut1
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To: reaganaut1

As we sit back and watch, we will see that it can more accurately be called the “Laugher Curve”. CA is out of its mind.


2 posted on 11/18/2012 7:18:51 PM PST by meyer (Proud member of the 53%.)
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To: meyer

This is from a state that is already notorious for throwing bogus tax liens on armed service members who were unfortunate enough to be stationed in California.


3 posted on 11/18/2012 7:45:20 PM PST by USNBandit (sarcasm engaged at all times)
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To: reaganaut1

Goodness. The last thing Texas needs is a bunch of liberal/humanist nose buds who think they are smarter than and superior to the people who make Texas a place in which to flee places like California.

Look at what happened to poor conservative and sane New Hampshire after they hosted the Mass. tax runners.

Oh my.


4 posted on 11/18/2012 7:47:28 PM PST by SaraJohnson
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To: reaganaut1
Are we on the part of the curve--the "prohibitive region"--where an increase in marginal tax rates will reduce revenues and a decrease in marginal tax rates will increase revenues? For the United States, I think the answer is pretty clearly no.

I think your answer is pretty clearly wrong.

Some other points: Ohio, under governor Celeste a number of years back, was tired of industry moving south, so they passed an "exit tax", whereby any company leaving the state had to deposit a tax equal to six months wages. After the bill was signed into law, Celeste couldn't figure out why new business formations dropped to virtually zero. Fortunately, others with a few neurons still firing figured the problem out and killed the tax.

Finally, with the unemployment problems faced in CA, why would you make it less attractive to do business there for the very people who drive your economic engine? I don't know about the rest of you, but in 45 year in the labor force, I was never once hired by a poor person.

Idiots.

5 posted on 11/18/2012 7:53:41 PM PST by econjack (Some people are as dumb as soup.)
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To: econjack

Kalipornia is clearly in the “prohibitive zone” and a number of states are following them. The whole country is right on that edge and will go off it about Jan 1.

That is when taxes and regulations will make it unprofitable to do business without a government hook up


6 posted on 11/18/2012 7:56:58 PM PST by GeronL (http://asspos.blogspot.com)
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To: reaganaut1

What he wrote made sense, but he didn’t use the clearest example at the end. Let me try a different example.

And elementary school bully demands a dollar from the lunch money of 10 kids he has intimidated at his school. So every day he gets $10 from them. But then he gets greedy and demands that each of them also chip in a dime, so every day they will pay him $1.10, for a total of $11.

But one kid just can’t take it anymore, so he convinces his parents to move him to another school. This means that, from the 9 remaining kids, the bully only gets a total of $9.90, so even by charging more, he is getting less.

The trouble is that the *reason* the bully demanded money in the first place is because he is a drug addict. And he’s already maxed out his tab with his drug dealer, so to get any more of the increasing amounts of drugs he craves, he has to pay cash. No cash, no more drugs.

So what is the bully going to do? He could cut back on his drugs, or he could lean even harder on the remaining 9 kids. Which do you think he will do?


7 posted on 11/18/2012 7:59:03 PM PST by yefragetuwrabrumuy (DIY Bumper Sticker: "THREE TIMES,/ DEMOCRATS/ REJECTED GOD")
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To: yefragetuwrabrumuy

Good example.


8 posted on 11/18/2012 8:21:51 PM PST by blueunicorn6 ("A crack shot and a good dancer")
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To: reaganaut1

I disagree with this offer. He states unilaterallly that we are not in what he calls the prohibitive zone without evidence. Even though Obama extended the Bush tax cuts yet continued to “jawbone” the so called “rich” about raising them later. This had two effects.

1) To ostensibly reduce the income to the Treasury for you people that don’t believe in dynamic economic analysis like Obama, and...

2) To check the hand of the “job creators” from actually deploying that capital that they saved in the extension into creating jobs. Who wants to create a job that you will be nailed with other costs like Obamacare later.

So in short this was a Lose/Lose situation for the U.S. Treasury. Accept lower revenues to stimulate the economy and then forgoe the benefits of that trade off by “bitch slapping” those Job creators during the entire term, yet hoping they will trust that their committments would be honered with a reasonable regulatory, legislative and tax environment.

This is evidence that we ARE INDEED in that prohibitive zone.


9 posted on 11/18/2012 8:41:36 PM PST by scannell
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To: SaraJohnson

They did it to Nevada, Oregon, Colorado... Texas doesn’t have an immunity shield against these Californians invading and voting the same way they did in California.

Texas will be a blue state within ten years.


10 posted on 11/18/2012 9:19:31 PM PST by sf4dubya (I rebelled against my parents by becoming a conservative.)
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To: sf4dubya

Texas will be a blue state within ten years.


Oh goodness. :(


11 posted on 11/18/2012 10:27:08 PM PST by SaraJohnson
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To: reaganaut1
Obviously the after-tax income of the taxpayer is the product of his taxable income times the difference between 100% and the state tax rate, times the difference between 100% and the state tax rate (YMMV if you also have local sales tax, or if you itemize your deductions). So if the Feds are greedy and risk going past the peak of the Laffer curve in their own right, the effect of a state income tax easily functions as the last straw which breaks the camels back. Combine that effect with the additional flexibility which typically attaches to the affairs of the most prosperous, and you have a recipe for a Rush Limbaugh leaving New York for Florida, and shaking the dust off his shoes as he goes.
The other point about the Laffer Curve is that taxes on capital gains are notorious for yielding less revenue whenever the rates are raised, and more revenue when they are lowered. A state income tax on capital gains would thus be most certain to be counter-productive.
Finally, if the government actually wanted to maximize revenue (and not indulge in class warfare, which is the president’s obvious objective) you would set a limit on the revenue of the capital gains tax, providing that any increase above that ceiling would be pro rata rebated to the taxpayer (Obviously you would set that limit above your current revenue from the tax). If you were actually below the counterproductive range, you would see no change - the revenue limit would not be reached because nothing else had changed to make revenue change. But if your rate is significantly above the counterproductive limit, people who have capital gains would realize them, in the confidence that there would be a rebate, and the effective tax rate would in fact be well below the counterproductive limit. That would be a self-fulfilling prophesy, and the government would net the higher revenue which it had set as the “revenue limit” for the tax.

The government would then have a data point on the Laffer curve, known to be below the counterproductive limit. The government could then simply set the tax rate to that non-prohibitive value, and dispense with the revenue limit. I would estimate that the resulting tax rate would be below 10%.

Finally, it is important to note that whenever the tax rate is above the Laffer counterproductive limit, raising the rate lowers the revenue by the mechanism of causing a recession. A recession is not a valid excuse for explaining away a decline in revenue associated with an increased tax rate, recession is the predicted symptom of a tax increase into the counterproductive range.


12 posted on 11/18/2012 11:15:54 PM PST by conservatism_IS_compassion (The idea around which “liberalism" coheres is that NOTHING actually matters except PR.)
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To: sf4dubya

“Texas will be a blue state within ten years.”

hee hee hee

Utter BS!


13 posted on 11/19/2012 2:56:00 AM PST by Texas Fossil
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To: Texas Fossil

I used to say that about Nevada.

The number one place Californians are moving to is Texas. Pipe dreams to think they change their voting habits. I wish I was wrong.


14 posted on 11/19/2012 3:21:38 AM PST by sf4dubya (I rebelled against my parents by becoming a conservative.)
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To: SaraJohnson

If I was Texas I’d restrict the number of immigrants from Hollywood from settling in Texas.


15 posted on 11/19/2012 3:38:22 AM PST by Portcall24
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To: sf4dubya

Also Hispanics are over 35% of the Texas population and their percentage is rising fast. Not only will Texas be a socialist state soon, but the whole country will be. America is over.


16 posted on 11/19/2012 3:54:13 AM PST by Reeses
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To: reaganaut1

Is it REALLY the job of government to MAXIMIZE revenue paid in taxes?

Or to do its job with the least impact to society...?


17 posted on 11/19/2012 6:31:58 AM PST by 2banana (My common ground with terrorists - they want to die for islam and we want to kill them)
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To: reaganaut1

When the taxes kickin just watch the tax revenue ‘unexpectedly’ drop even further than it presently does on a quarterly basis.

Kalifornia has devoured golden eggs and is presently going after the goose as well.


18 posted on 11/19/2012 7:56:26 AM PST by Godzilla (3/7/77)
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To: conservatism_IS_compassion
conservatism_IS_compassion said: "... set a limit on the revenue of the capital gains tax, providing that any increase above that ceiling would be pro rata rebated to the taxpayer ..."

Oh, my ...

I know some people who own stocks whose value is almost entirely capital gains today. They've owned the stock for decades.

If your idea was implemented, even assuming that the government intends to raise double the present annual revenue, just imagine how this would play out.

In January of the first year of effect, perhaps a twenty percent increase of the usual capital gains is claimed. Then in February, perhaps the revenue is up about fifty percent.

Once it is realized that the effective rate is going to be lower than the prior rate, March shows double the usual amount of capital gains. From this point on, people might be looking at getting their capital gains at 75% of the usual rate. April might show TRIPLE the usual capital sales.

That rate of capital sales would lower capital gains to 66% of the prior rate. Through the rest of the year, investors might be anticipating that the rate would end up even lower.

Imagine now that by the end of the year, the total capital gains realized was TEN times the prior years amount. That would make the effective tax rate 20% of the prior rate.

This rate would accomplish just what you anticipated; that is, the revenue doubled. The problem is that the FUTURE revenues might disappear for several YEARS since the new rate encouraged TEN times the activity that would otherwise have occurred.

19 posted on 11/19/2012 11:33:31 AM PST by William Tell
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