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Laffer Curve Warning about the Economy and Tax Revenue for President Obama and other Class Warriors ^ | November 29, 2012 | Daniel J. Mitchell

Posted on 11/29/2012 8:27:08 AM PST by Kaslin

Being a thoughtful and kind person, I offered some advice last year to Barack Obama. I cited some powerful IRS data from the 1980s to demonstrate that there is not a simplistic linear relationship between tax rates and tax revenue.

In other words, just as a restaurant owner knows that a 20-percent increase in prices doesn’t translate into a 20-percent increase in revenue because of lost sales, politicians should understand that higher tax rates don’t mean an automatic and concomitant increase in tax revenue.

This is the infamous Laffer Curve, and it’s simply the common-sense recognition that you should include changes in taxable income in your calculations when trying to measure the impact of higher or lower tax rates on tax revenues.

No, it doesn’t mean lower tax rates “pay for themselves” or that higher tax rates lead to less revenue. That only happens in unusual circumstances. But it does mean that lawmakers should exercise some prudence and judgment when deciding tax policy.

Moreover, even though I’m a strong believer in the importance of good tax policy, it’s also important to understand that taxation is just one of many factors that determine economic performance. So lower tax rates, by themselves, are no guarantee of economic vitality, and higher tax rates don’t necessarily mean the world is coming to an end.

With those caveats in mind, take a look at this table from the Congressional Budget Office’s most recent Budget and Economic Outlook. Taken from page 109, it shows what will happen if the economy grows just a tiny bit less than the baseline projection. Not a recession, by any means, just a drop in the projected growth rate of just 1/10th of 1 percent.

As you can see, the 10-year impact is $314 billion, mostly due to lower tax receipts, though there is some impact on outlays because of  higher interest costs and a bit of additional entitlement spending.

So why am I sharing these numbers? Because let’s now think about President Obama’s proposed class-warfare tax hike. He wants higher tax rates on investors, entrepreneurs, small business owners and other “rich” taxpayers. And he wants more double taxation of dividends and capital gains. And a higher death tax rate, even higher than the ones imposed by France and Venezuela.

I think some opponents are exaggerating when they claim that this tax hike will cause a recession and cripple the economy. But I do think that it’s reasonable to contemplate the degree to which the Obama tax hikes will slow growth. More than 1/10th of 1 percent? Less than that? Would the damage occur in the first few years? Would it be spread out over time?

Those questions are hard to answer. Ask five economists and you’ll get nine answers, but there is compelling evidence that higher tax rates do have a negative impact.

But some people assume that taxes don’t matter at all. Using models that, for all intents and purposes, naively assume a simplistic linear relationship between tax rates and tax revenue, the number-crunching bureaucrats in Washington estimate that Obama’s proposed tax hikes will generate about $800 billion over 10 years.

I’m not going to pretend I know the economic impact of those higher tax rates, but for the sake of argument, let’s assume that the impact is minor. Indeed, let’s assume that it’s only 1/10th of 1 percent. Based on the CBO sensitivity analysis above, that means that about 40 percent of the projected deficit reduction will fail to materialize.

And that’s not even considering the fact that politicians will probably increase the burden of government spending because of the expectation of additional tax revenue.

Just something to keep in mind as this debate unfolds.

P.S. I actually shared this exact same data when testifying to the Senate Budget Committee earlier this year. Needless to say,  in some cases I think my testimony went in one ear and out the other.

P.P.S. The revenue-maximizing tax rate is not the ideal point on the Laffer Curve.

TOPICS: Business/Economy; Culture/Society; Editorial; Government

1 posted on 11/29/2012 8:27:15 AM PST by Kaslin
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To: Kaslin
President Cloward-Piven doesn't want the economy to improve and he doesn't want more revenue.

He merely wants to "overwhelm the system" so that he and his fellow travelers can impose the totalitarian socialist dictatorship they have always dreamed of.

Ubama's buddy Bill Ayers' stated goal is to murder 10% of the US population to show us who's boss.

2 posted on 11/29/2012 8:39:14 AM PST by E. Pluribus Unum (Labor unions are the Communist Party of the USA.)
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To: Kaslin

From presidential primary debate on 4/16/08:

Charles Gibson: “...And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28%, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected”?

Obama: “Well. Charlie, what I’ve said is that I would look at raising the capital gain tax for purposes of fairness”.

3 posted on 11/29/2012 8:45:53 AM PST by SunTzuWu
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To: SunTzuWu
The CBO has stated that the money raised from this proposed tax hike will only bring in 82B which is enough to run the government for 8+ days. Its not about the tax but that they want to raise taxes on the rich on principal. They will never lower spending. The bigger the government the better.
4 posted on 11/29/2012 9:15:16 AM PST by HOYA97 (twitter @hoya97)
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To: Kaslin

Years ago, in another life, I was an Inside the Evil Beltway lobbyist for the FairTax.

In that capacity, I worked with a number of conservative economists (Dan among them) and think tanks (Heritage & CATO primarily, but there were other, lesser known conservative groups) to among other issues, try to get the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) to switch to dynamic modeling vs static modeling when rendering their opinions re: changes to the tax code.

We were not successful.

Therefore, when a tax proposal is “scored,” human behavior is not taken into account. And, in every case, the CBO and JCT will show increased tax rates as generating more federal revenue and lower tax rates as generating less federal revenue.

They have never got it right, BTW. That’s right, the (”non-Partisan”) CBO and the JCT are ALWAYS are wrong in their estimates of the revenue consequences of tax changes!

[”Non-Partisan” is a misnomer for the CBO and JCT — they are bi-Partisan, with the major party having a few more members on each committee than the minority party. In reality, they are firmly for growing the government; each member is indifferent to every issue that does not increase the power of the Federal government, despite loud protestations to the contrary.]

Because they do not take into account human behavior when faced with Internal Revenue Code changes that affect their ability to work, earn, save and invest.

Well, every one of us knows that rational people make every effort to legally reduce their tax burden. In anticipation of higher taxes in 2013, I personally know folks who are taking their capital gains before Jan 1.

I, myself, am doing so.

I would wager that there are a lot of Democrats who are doing the same thing: they are giving lip service to the Obama tax plan while in the meantime using their insider contacts and knowledge to protect their assets.

They really don’t give a tinkers damn about the American people or the country, for that matter.

It is a matter of “progressive” (nee Marxist) ideology to impose steeply progressive income tax rates and confiscatory estate (death) taxes. Cf. the Communist Manifesto.

Until we conservatives are able to make our case to the American people, and prevail in several election cycles, we will have to suffer the slings and barbs of those who live by the Communist Manifesto.

If we are lucky, and we work hard, we might prevail.

But I doubt it.

5 posted on 11/29/2012 12:13:24 PM PST by Taxman (So that the beautiful pressure does not diminish!)
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To: Kaslin

libtards know raising taxes decreases the taxed activity/behavior, they know it means less revenue coming in.

they know this because they use taxes to punish behavior they don’t like and want to see decrease. they admit it in interviews. smoking is a huge one they admit they use taxes on to decrease the activity.

the surprise they appear tohave when revenues fail to hit expected predictions is totally phony. they knowtheywon’t hit their projetions, it’s just a way to look surprised and be able to call on MORE taxes, larger taxes, increasing thetax, to make up for the losses they secretly knew were going to happen.

and, realize that they will never make up for the losses, so this cylical game just keeps raising taxes more, and more, and more. ad infinitum.

6 posted on 11/29/2012 12:54:12 PM PST by Secret Agent Man (I can neither confirm or deny that; even if I could, I couldn't - it's classified.)
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To: Kaslin
For the USA, I believe, from all that I have read that a according to the Laffer Curve a tax rate of 17.5% would yield the greatest prosperity to the Individual, Business and Government. Every tax increase above 18.5% results in less for everyone. Where are we now? I figure that as a country we are in the 35 to 38% range (as a average for the whole USA).
7 posted on 11/30/2012 6:20:10 AM PST by 2001convSVT (Going Galt as fast as I can.)
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