Skip to comments.Laffer Curve Works Again
Posted on 12/31/2005 8:45:33 AM PST by george76
Ronald Reagan once said an economist is someone who sees something that works in practice and wonders if it would work in theory.
So why is it that when confronted with a concept that works in both practice and theory, so many people refuse to believe it?
The Laffer Curve, popularized by economist Arthur Laffer, says the government can maximize tax revenue by setting the tax rate at ...
The logic is obvious on the ends of the spectrum: if the tax rate is 0%, the government collects no money.
If it is 100%, people have no reason to earn, and the government still collects no money.
Federal tax receipts for October and November (the first two months of fiscal 2006) were $288 billion. This is up from the first two months of fiscal 2005 ...
Despite cutting tax rates in May 2003, tax receipts for this two-month period have risen for three consecutive years.
We were on the wrong side of the curve (and may still be):
Tax rates were too high.
(Excerpt) Read more at humaneventsonline.com ...
Practically speaking, the tax rate should vary and not be a fixed value, but here is how it should work.
When the economy is good, the tax rate should slowly increase until the economy starts to slow down at which point it should start to slowly drop.
Higher taxes during a good economy will increase revenue, but increasing them without concern for the impact on the economy (as Clinton did) will result in a huge gap when the economy starts to fail and taxes continue to rise.
Much like Greenspan uses interest rate to drive the economy and inflation, tax rate could be used. It just has to be understood that lowering taxes stimulates the economy and raising taxes can slow the economy from overheating.
Unfortunately, the optimum point on the Laffer curve can only be found by trial and error.
The tax rate should be fixed. It should be set at a flat 20% rate.
Yes, it is true that Income Taxes are too high.
But we are too low on the Laffer Curve for tariffs.
We should be shifting our tax policy to lower the income tax by increasing the tax on imports.
The First Federal Revenue Law
On April 8, James Madison, once again a congressman from Virginia, addressed the House. He went right to the point. Congress, he said, must "remedy the evil" of "the deficiency in our Treasury." He argued that "[a] national revenue must be obtained," but not in a way "oppressive to our constituents." He then proposed that the House adopt legislation, virtually identical to the unimplemented Confederation tariff, imposing a five-percent tariff on all imports....
...A single, uniform tariff, he insisted, had two advantages. First, it could be imposed quickly, which was important because "the prospect of our harvest from the Spring importations is daily vanishing." Second, it was consistent with the principles of free trade ("commercial shackles," he said, "are generally unjust, oppressive, and impolitic")
If the feds collect enough money to fund pork barrel projects then they have collected too much. THe less money they have the better. I would love to be able to direct my tax money to the budget items I care about; 50% military and national security and 50% to lock down the borders.
I remember skunks Clinton and Gore calling the Laffer curver the laughing stock. Laffer has been amazingly accurate with his prediction model. Much more so than clintopervert and goofus.
I agree but it doesn't really need to be optimum all the time.
The hard part is that Republicans won't admit that sometimes raising taxes is a good thing. When the economy is going nuts, raise taxes...not a lot, but enough to slow it down and increase revenues like the dickens. When the economy starts to slow, lower taxes. Depending on how fast you can respond to the economic news, it could be a controlling function.
Of course, Greenspan figured out that interest rates ARE a controlling function if used properly. I am gonna miss that man.
I might agree with you on the premise that interest rates have proven to be a good controlling function for the economy. I was arguing that tax rates *could be* but the hard part is admitting that raising taxes in a hot economic time is a good thing. (to prevent over-capitalization and the resultant reduction in profits when the market slows down).
(See the tech bubble, real-estate bubble, etc)
Laffer was on Rush last week, a guest with Roger Hedgecock or Mark Billings, I forget which.
It can't be optimum all the time because it is constantly moving.
Economics: An impractical science with a trivial theory.
President Reagan actually had a degree in economics.
Shortly after my last post, I sorta realized that.
Another shortcoming of we Republicans is that we talk about cutting programs, but never really do it.
If I were making the rules, we would cut the federal government in half, increase the state by 10% and increase the city/and/or/county by 50%. We would come out ahead on taxes, but get better service.
The problem is, nobody at the local level ever wants to fund those holes created by a federal funding cut.
IMHO, "optimum" is not "on the spot" but the average distance from the spot is minimal.
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