2005 Budget Laffers Last

The final budget numbers got very little attention. .... And it turns out that these numbers paint a fairly encouraging picture. ... Perhaps that’s why they didn’t get much coverage

"The "free lunch" that I referred to is the belief that cuts in the top marginal rate in the current 30 to 40 percent range will pay for themselves."

This can be argued in the context of the Laffer curve by saying that the 30 to 40 percent range is close to point A shown in post 5. The Laffer curve, and supply siders, do not deny point A, they affirm it. At some point, tax rates are too low to generate maximum government revenues.

"Every one of Bush's budget documents that has addressed the matter has projected that the tax cuts will cause revenues to be lower, at least in the short to mid-term (the long-term is not projected)."

I think the problem here is that almost all analysts simply "run the numbers." Someone goes to their spreadsheet, reduces a tax rate factor and tax revenues go down correspondingly. If you double the rate, you double the revenue. It would be like going to a car dealer's spreadsheet, doubling unit price, and computing a doubling of revenues.

"Supply-siders are madly clicking their heels to no avail. They're arguments are bankrupt, and their bookkeeping would make Al Capone proud."

Advertising a 25% off sale, filling the store, and increasing revenues is not bookkeeping. It's economics.

Similarly, reducing the cost of economic activity (tax cut), and getting more economic activity is not bookkeeping. It's economics.

Almost all budget analysis (from either party) is bookkeeping. It's not economics. Incorporation of a sensible economic response to tax cuts is sometimes called voodoo economics, because it is not the simplistic bookkeeping that is almost universally practiced by budget analysts.

Bookkeeping and green eye-shade accounting is fine. But sometimes, it's not enough. It's not realistic. People respond to changing prices. This includes the after-tax price of their time, or the after-tax return on their investments. The bookkeeper does not consider these responses.

Let me know if you'd be willing to accept the model if you could reserve the right to add your own scales (log/liniar, log log, trigonometric, whatever). I had understood that the model only required a maximum revenue point between 0 and 100%, increasing revenue between 0 and the max, and decreasing revenue between the max and 100. Perhaps you'd be willing to accept a curve described in those terms.

Even in those terms, I think that the Laffer curve is too simplistic to describe the economics of taxation with very much accuracy. For one thing, there are other factors besides the top marginal tax rate that effect revenues. Some of those factors include the the lower income limit to which that top marginal rate applies, the other tax brackets in effect, and the ease with which taxpayers can take advantage of various deductions and tax loopholes to avoid higher rates. None of these other factors are indicated by the Laffer curve.

If you do, please tell me where on the curve you'd want to plot current revenue. If you don't, I'd be grateful if you could tell me where and why the plot would show reversing/negative slopes.

Because of the above listed limitations of the Laffer curve and the lack of enough historical data for any serious statistical analysis, I don't think it possible say exactly where we are on the curve. However, all of the data in the aforementioned analysis suggests that the Reagan and Bush tax cuts caused revenues to be lower than they would have been and that the Clinton tax hike caused revenues to be higher. That would suggest to me that, under our current tax structure, a top marginal rate in the 30 to 40 percent range is to the left of the "Equilibrium Point" in the Laffer curve shown in post #5, at least in the short to medium-term.

Do you believe that Reagan's first tax cut paid for itself? Did reducing the top rate from 70% to 50% cause more revenues to come into the government's coffers? Did that reduction in taxes help the economy to grow faster and did it result in higher after tax income for America's citizens?

Given the limitations of the Laffer curve that I listed in the previous message, I don't think there is enough historical data to answer those questions. Individual income tax revenues did drop sharply from 1982 to 1984 so they did not appear to increase in the short-term. Then the 1986 tax cut further reduced the top rate to 28% and changed the tax structure (reducing many deductions) so it's difficult to make any judgment about the medium-term.

This can be argued in the context of the Laffer curve by saying that the 30 to 40 percent range is close to point A shown in post 5. The Laffer curve, and supply siders, do not deny point A, they affirm it. At some point, tax rates are too low to generate maximum government revenues.

I agree. However, any supply-sider who argues that the Bush tax cut increased revenues would presumably believe that we are closer to point B.

I think the problem here is that almost all analysts simply "run the numbers." Someone goes to their spreadsheet, reduces a tax rate factor and tax revenues go down correspondingly. If you double the rate, you double the revenue. It would be like going to a car dealer's spreadsheet, doubling unit price, and computing a doubling of revenues.

I do know that the government's process of "running the numbers" is much more accurate than simply doubling the revenues to estimate the result of a doubling of the tax rate. For example, the following graph shows the results of a CBO study that estimated the cost of Bush's 2004 budget proposals using the conventional "running of the numbers" and various supply-side models:

As you can see, there was not that huge of a difference. In any case, the actual numbers and sources can be seen at http://home.att.net/~rdavis2/cbobud04.html

"the following graph shows the results of a CBO study that estimated the cost of Bush's 2004 budget proposals using the conventional "running of the numbers" and various supply-side models:"

Are any of these models supply-side models? If so, which ones?

"I do know that the government's process of "running the numbers" is much more accurate than simply doubling the revenues to estimate the result of a doubling of the tax rate."

I will grant that there is some access to, and reliance upon, economic models. Though I think most budget analysts still fall back to a simple toting of sums. The assumptions of the economic models are critical. I saw no evidence that suppy-side assumptions were incorporated in any of the projections shown in the charts. This may pertain to your observation that:

"As you can see, there was not that huge of a difference."

Thanks for providing the information. Frankly, it seems designed to impress, and had somewhat the opposite affect on me. It is my understanding that neither CBO forecasts, nor econometric models, have a great track record. I enjoyed your discussion of the Laffer curve. I gather you think we are to the left of the maximum revenue point. I think it would be very hard to sort this out using econometric models. How much of today's prosperity, and tax revenue enhancement, is due to an increase in entrepreneurial activity fostered by the Reagan tax cuts? This is not so easy to test or "prove" one way or the other. The big picture is easier to see. Low tax eras and countries tend to outperform high tax eras and countries. Control of Government spending is a big help too!

Post 5 identified the maximum revenue point as the "Equilibrium Point." This suggests that there is a tendency to adjust tax rates until we reach that point. Once at the Equilibrium, we would try to remain there. Perhaps. Some view this point as "optimal." If it is optimal, it is optimal from the vantage of Government. Not everyone believes the purpose of life, or economic behavior, is to maximize government revenues. If point A gives us greater economic growth and freedom, I might prefer point A. If point B gives us greater economic equality, even at the cost of depressed growth, some would prefer point B.

Individual income tax revenues did drop sharply from 1982 to 1984 so they did not appear to increase in the short-term.

Really? You have the actual revenue numbers for this period?

Given the limitations of the Laffer curve that I listed in the previous message, I don't think there is enough historical data to answer those questions.

You're kidding about this part, right? Did that reduction in taxes help the economy to grow faster and did it result in higher after tax income for America's citizens?

You want to try again? I don't think you even need to know what the Laffer Curve is to admit that lower tax rates would increase after tax income.

               RECEIPTS BY SOURCE AND SELECTED TAX RATES: 1940-2011
                             (in billions of dollars)

                                               Estate  Customs                           Top
        Individ Corporate    Social               and   Duties      Misc     Total  Marginal     FICA
 Year    Income    Income Insurance   Excise     Gift   & Fees  Receipts  Receipts      Rate     Rate
----- --------- --------- --------- -------- -------- -------- --------- --------- --------- --------
  1979   217.841    65.677   138.939   18.745    5.411    7.439     9.252   463.302               6.13
 1980   244.069    64.600   157.803   24.329    6.389    7.174    12.748   517.112               6.13
 1981   285.917    61.137   182.720   40.839    6.787    8.083    13.790   599.272        70     6.65
 1982   297.744    49.207   201.498   36.311    7.991    8.854    16.161   617.766        50      6.7
 1983   288.938    37.022   208.994   35.300    6.053    8.655    15.600   600.562        50      6.7
 1984   298.415    56.893   239.376   37.361    6.010   11.370    17.060   666.486        50      6.7
 1985   334.531    61.331   265.163   35.992    6.422   12.079    18.571   734.088        48     7.05
 1986   348.959    63.143   283.901   32.919    6.958   13.327    20.008   769.215               7.15
 1987   392.557    83.926   303.318   32.457    7.493   15.085    19.518   854.353               7.15
 1988   401.181    94.508   334.335   35.227    7.594   16.198    20.259   909.303        33     7.51
 1989   445.690   103.291   359.416   34.386    8.745   16.334    23.328   991.190               7.51
 1990   466.884    93.507   380.047   35.345   11.500   16.707    27.978  1031.969        33     7.65
 1991   467.827    98.086   396.016   42.402   11.138   15.949    23.623  1055.041        31     7.65
 1992   475.964   100.270   413.689   45.569   11.143   17.359    27.284  1091.279        31     7.65
 1993   509.680   117.520   428.300   48.057   12.577   18.802    19.465  1154.401        31     7.65
 1994   543.055   140.385   461.475   55.225   15.225   20.099    23.164  1258.627        31     7.65
 1995   590.244   157.004   484.473   57.484   14.763   19.301    28.561  1351.830      39.6     7.65
 1996   656.417   171.824   509.414   54.014   17.189   18.670    25.534  1453.062      39.6     7.65
 1997   737.466   182.293   539.371   56.924   19.845   17.928    25.465  1579.292      39.6     7.65
 1998   828.586   188.677   571.831   57.673   24.076   18.297    32.658  1721.798      39.6     7.65
 1999   879.480   184.680   611.833   70.414   27.782   18.336    34.929  1827.454      39.6     7.65
 2000  1004.462   207.289   652.852   68.865   29.010   19.914    42.826  2025.218      39.6     7.65

 2001* 1072.927   213.069   689.656   71.148   31.072   21.442    37.632  2136.946
 2002* 1078.789   218.786   725.798   74.020   28.699   22.537    43.105  2191.734
 2003* 1092.290   227.293   766.045   76.254   26.639   24.281    45.438  2258.240
 2004* 1117.881   235.497   806.049   78.300   28.297   24.961    47.831  2338.816
 2005* 1157.044   244.152   855.842   80.543   24.897   25.989    49.316  2437.783
 2006* 1196.607   252.159   896.367   82.346   22.498   27.724    51.010  2528.711
 2007* 1255.200   259.900   942.000   84.800   20.400   29.300    51.600  2643.300
 2008* 1330.400   268.100   984.400   87.300   15.700   30.700    54.100  2770.600
 2009* 1410.200   275.800  1030.800   90.000   13.400   33.000    56.800  2909.900
 2010* 1499.600   283.500  1087.900   92.800    0.700   34.500    59.500  3058.400
 2011* 1598.200   294.300  1145.100   95.700    0.700   36.200    62.400  3232.600

Individual income tax revenues did drop sharply from 1982 to 1984 so they did not appear to increase in the short-term.

You do have the actual revenue numbers for this period. You want to revise this answer? Or do you believe that going from $297.744 billion to $298.415 billion is a sharp drop?

The source you cite states:

"The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. At 99.6 percent, revenues did nearly double during the 80s. However, they had likewise doubled during EVERY SINGLE DECADE SINCE THE GREAT DEPRESSION!"

Why leave out the Great Depression? Doesn't revenue always double every ten years? Does this not apply worldwide? France, Italy, Russia? South Africa? Wouldn't an extension of Carter's stagflation for 10 or 20 years would have produced successive doubling of tax revenues? Is this not an immutable law of nature - tax revenues double every decade, day follows night?

Tax revenue growth is not due to the calendar. It's not something that we should take for granted. I would like to see evidence that high sustained tax rates yield permanently high tax revenues. I think FDR, and various socialist countries have tried and failed.

I think it important to note that, by and large, the US is a low tax environment. Our economy grows, even tax revenues. It's no coincidence.

27 ...the Laffer curve is too simplistic to describe the economics of taxation with very much accuracy."

We don't need accuracy. Another word for simplicity is elegance.

You said the endpoints are correct. There are two possibilities for the points in-between, one is that there is at least one maximum revenue point greater than zero; the second possibility is all in-between revenue is zero or negative. I can demonstrate historical cases where the first possibility is more realistic. Unless you can explain the how the second possibility exists, then current federal revenue has to be

1.		way to the left of the max
2.		near the max
3.		far to the right.

Bowyer shows how increased revenue has followed tax-cuts. This suggests that revenue rates have been in excess of maximum. While it is always possible to offer conjecture for alternate causes, serious fiscal policy must conform to observable reality and not to conjecture.

Consider also the consequences. We can cut tax rates more; if revenue continues to increase then we are successful. Even if revenue were to decrease then we can always tax the increased wealth. However if we were to increase tax rates and find revenue falling with shrinking wealth, then we're stuck with a larger deficit and a savaged economy. The responsible, sensible choice is a further reduction in tax rates.

Individual income tax revenues did drop sharply from 1982 to 1984 so they did not appear to increase in the short-term.

Really? You have the actual revenue numbers for this period?

I see that you posted those numbers from a table that I posted at http://home.att.net/~rdavis2/recsrc02.html. No fair using my own numbers against me! The fact is, in trying to answer all the questions from you, expat, and ChessExpert, I got a little sloppy in my answer to you. I looked quickly at the following graph and saw that individual income tax revenues did drop sharply from 1982 to 1984 as a percentage of GDP:

The actual numbers and sources are at http://home.att.net/~rdavis2/recsrc.html. I also glanced at the second graph at that URL and noted that, corrected for inflation, total revenues dropped for two years (though I see now that it was from 1981 to 1983). In any case, I didn't qualify my statement as a percentage of GDP or corrected for inflation. So you're correct that, in current dollars, individual income tax revenues only dropped from 1982 to 1983, not 1982 to 1984. Still, the graphs and numbers do not suggest to me that Reagan's first tax cut "paid for itself" in the sense of tax revenues being higher than they would have been otherwise.

Given the limitations of the Laffer curve that I listed in the previous message, I don't think there is enough historical data to answer those questions.

You're kidding about this part, right? Did that reduction in taxes help the economy to grow faster and did it result in higher after tax income for America's citizens?

You want to try again? I don't think you even need to know what the Laffer Curve is to admit that lower tax rates would increase after tax income.

Once again, in answering your message too quickly, I misread your question about "did it result in higher after tax income for America's citizens" as "did it result in higher tax revenues". Of course, a tax cut will result in higher after tax income. That's its chief goal. It's not a free lunch but it is a lunch, so to speak.

Anyhow, I cannot keep up with all of the questions from you, expat, and ChessExpert. If you have any questions you really want answered, perhaps the three of you can confer and put one or two questions or points into a common posting. Otherwise, I'll just have to pick and choose among your questions and answer a few of them as I have time.

I see that you posted those numbers from a table that I posted at http://home.att.net/~rdavis2/recsrc02.html. No fair using my own numbers against me!

Yeah, sorry about that.

The fact is, in trying to answer all the questions from you, expat, and ChessExpert, I got a little sloppy in my answer to you. I looked quickly at the following graph and saw that individual income tax revenues did drop sharply from 1982 to 1984 as a percentage of GDP:

Just because we're all nipping at you shouldn't cause you to rush your answers. Relax. This isn't homework. There's not a deadline.

I also glanced at the second graph at that URL and noted that, corrected for inflation, total revenues dropped for two years (though I see now that it was from 1981 to 1983).

How much of the tax revenue during Carter's term was due to inflation pushing people into higher brackets? Reagan fixed that and now you blame him for indexing?

Still, the graphs and numbers do not suggest to me that Reagan's first tax cut "paid for itself" in the sense of tax revenues being higher than they would have been otherwise.

I have a different definition of "paying for itself". If you cut the rate from 70% to 50% and don't lose money, it's "paid for itself". I never claimed a tax cut would raise more revenues, except for capital gains tax cuts.

Of course, a tax cut will result in higher after tax income. That's its chief goal.

Now you're beginning to understand!! So, Reagan cut rates, people kept more of their own income and tax revenue didn't drop by 28% (even though rates did, from 70% to 50%). You'll have to agree that if no one changed their behavior in reaction to the rate cut, revenues should have dropped close to 28%.

Anyhow, I cannot keep up with all of the questions from you, expat, and ChessExpert.

I apologize again if we've been too rough on you.

Otherwise, I'll just have to pick and choose among your questions and answer a few of them as I have time.

No hurry. Take your time. How about answering this one?

Did that reduction in taxes help the economy to grow faster?

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