The Laffer Curve? (Not Related To Cars)

[Jesda]

NICO's scholars seem to hang out here the most, so I wanted to discuss this with you folks.This is an e-mail I sent to my economics professor this evening:

Quote »Dr Kwan:

Briefly tonight we discussed the Laffer curve regarding government revenue in the context of GDP.I was surprised at how quickly you cast it aside, covering only the political motives behind supporters of the theory.

It seems reasonable to me to conclude that taxation on income, at 100%, would theoretically result in no production.The only difference, in real-world applications, might be the shape of the curve. I believe it was originally drawn as a hemisphere with the ideal tax rate in the middle/on top with revenues gradually decreasing with higher tax rates beyond that. I however think of it as a rising slope that quickly drops after a certain point where workers and businesses lose their motivation to produce.

From The Economist:"Legend has it that in November 1974 Arthur Laffer, a young economist, drew a curve on a napkin in a Washington bar, linking AVERAGE tax rates to total tax revenue. Initially, higher tax rates would increase revenue, but at some point further increases in tax rates would cause revenue to fall, for instance by discouraging people from working. The curve became an icon of supply-side ECONOMICS. Some economists said that it proved that most governments could raise more revenue by cutting tax rates, an argument that was often cited in the 1980s by the tax-cutting governments of Ronald Reagan and Margaret Thatcher. Other economists reckoned that most countries were still at a point on the curve at which raising tax rates would increase revenue. The lack of empirical evidence meant that nobody could really be sure where the United States and other countries were on the Laffer curve. However, after the Reagan administration cut tax rates revenue fell at first. American tax rates were already low compared with some countries, especially in continental Europe, and it remains possible that these countries are at a point on the Laffer curve where cutting tax rates would pay. "

Based on the above, it would seem that the Laffer curve hasnt been "debunked" but instead did not apply to the US in the 80s, as its place on the curve could not be determined due to a lack of prior information. So it seems that the supply-siders were wrong not because they believed the theory, but were mistaken only because they had no point of reference to help in its application to the US government.

Agree or disagree?

-Jesda Gulati[/quote]Here's an example of a standard Laffer Curve:

Attached is my crude drawing of an adjusted laffer curve.

[Q451990]

However, after the Reagan administration cut tax rates revenue fell at first. American tax rates were already low compared with some countries, especially in continental Europe, and it remains possible that these countries are at a point on the Laffer curve where cutting tax rates would pay

Didn't work? The revenue decreased at first.... but then dramatically increased! As with most economic stimuli, there's a lag time. The same thing happened with JFK's tax cuts in the 60's. Tax cuts work every time they've been tried!

Unfortunately, the increased revenue of the 80s was met with even faster spending (much of it on social programs) which was the payoff to the Dems. that controlled congress for passing the cuts. While the policy was more fair, and the increased military spending (that the Dems. use as a scapegoat for the deficit) ended the Cold War - we still didn't get any meaningful deficit reduction.

Good to see that Dr. Kwan is open minded enough to actually have a discussion about this without taking it out on your arse later... at least that's what you're counting on!

Heath

[squeefoo]

Laffer curve depends on the reality of a dynamic model vs. static model. That's why you always hear the cry of "how are you going to pay for those tax cuts!?" The OMB is supposed to be changing to dynamic modeling -Someday?... tic-toc... tic-toc...I think static modeling is from Keynes -a Socialist, Anyone?

E.G. : As revenue drops in the NYC subway the "cure" is to raise the cost, the ridership drops, the "cure" is once again enacted, the ridership drops, to the point of it not being self-funding and requiring "subsidies" (the general populace pays) examples abound. AD Infin.

Good Basics at: http://www.economyprofessor.com

[squeefoo]

WTF: Nobody can top that -C'Mon !!!!!!Or are you too challenged to think beyond some stupid 18" rims, or some pie-in-the-sky HP Mod. Economic GIRLIE-MEN!

[Q451990]

WTF: Nobody can top that -C'Mon !!!!!!Or are you too challenged to think beyond some stupid 18" rims, or some pie-in-the-sky HP Mod. Economic GIRLIE-MEN!

Well, it is a car forum

[Jesda]

LOL squeefoo.

Here's the reply I got from my professor:

Quote »Jesda,

I agree with the quotation from The Economist (What issue-date is itfrom?). And I'm glad that you found it, to clarify what I meant by myresponse to you in class. When I decided not to spend time discussingthe Laffer Curve in class too much, it was because of the reason statedin the quotation -- making it not a very useful analytical tool for theUS at the moment. The curve may be there, but Reagan-era data onhindsight did not provide ample support for the Supply-Siderevenue-arguments based on the curve. That's why I said that not toomany mainstream economists are eagerly discussing and using the LafferCurve as a policy support in the US these days. Don't get me wrong,though, there ARE a few economists who are doing this. But not many inthe mainstream.

Two things underlying my response to you in class: First -- scarcity oftime. If I spent class time discussing the Laffer Curve, I would havehad to sacrifice other more important topics (related to GDP), and I wasnot ready to do that. We're running out of class-time. Second -- theLaffer Curve had an interesting role in policy discussions in the US inthe past, but like I said in class (and which the article you quotedalso states), the US is not on the "right" side of the Laffer mound yet.Therefore, for policy discussions, it hasn't been a hot topic these daysanymore. And this is usually how a theory or model is judged -- on itsrelevance on actual experience. You may not agree with the word"debunked", but you get the idea....

I don't know much about the economies of other nations, if that's whereyour interest lies. So I cannot tell you how relevant the Laffer Curvemight be in other economies. But you are certainly welcome to dofurther reading on the topic, and discuss it with me through email, asyou are doing. A related topic that you might want to read about (fromthe Reagan era): "trickle-down effect". [/quote]-Jesda