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Where does the Laffer curve bend?

By Dylan Matthews

With the Bush tax cuts due to expire soon and debates about raising top rates further to cut the budget deficit soon to follow, the Laffer curve is bound to come up again. The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away. Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

I decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks -- that is, what that revenue-maximizing rate is. The responses were varied, to say the least. Let's start with the experts.

The Tax Experts

Emmanuel Saez, E. Morris Cox professor of economics, University of California at Berkeley:

"The tax rate t maximizing revenue is: t=1/(1+a*e) where a is the Pareto parameter of the income distribution (= 1.5 in the U.S. and easy to measure), and e the elasticity of reported income with respect to 1-t which captures supply side effects. The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. Then t=1/(1+1.5*0.25)=73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed."

Joel Slemrod, Paul W. McCracken Collegiate Professor of Business Economics and Public Policy, University of Michigan:

"I would venture that the answer is 60% or higher.... The idea that we're on the wrong side has almost no support among academics who have looked at this. Evidence doesn't suggest we're anywhere near the other end of the Laffer curve.... The elasticity of response, which is the key parameter here, isn't some absolute parameter that we just have to deal with. It depends on policies. Let me be specific. There's an article about how the IRS has reorganized itself to crack down on tax evasion of high-income people and corporations moving their operations or assets offshore. That's the kind of policy initiative that can affect the elasticity of response by closing up a loophole. You want to raise tax rates at the same time you look at these kind of initiatives.... If we're talking about just deficit variations, we're not talking about what the government spending, the answer is no. It doesn't matter what this response is. If you're not changing government spending, any change in revenue now will have to offset by some change in revenue in the future. If that's the case, then if the responsiveness is high now, it's going to be high later, too."

Read Saez, Slemrod, and Seth Giertz's latest paper (PDF) on the subject.

The Left

Brad DeLong, professor of economics, University of California at Berkeley:

"At 70%."

Dean Baker, co-director, Center for Economic and Policy Research:

"It would be somewhere around 70 percent and possibly a bit higher. It is important to realize that you can have many different rates so we can have only a very small fraction of people actually paying the top rate and even then only on a small portion of their income."

The Right

Larry Kudlow, host, CNBC's The Kudlow Report:

"Personal income tax of 15-20%, business, sales tax rate of 8-10%. I can make some generalizations which would suggest, in terms of just the personal income tax rate, 91% was too high, Reagan cut it to 28.... We've done pretty well in the economy these last three decades, apart from this Great Recession, which is more financial related. Maybe it's a range of 35-40%, it seems like that worked pretty well. If you started encroaching on 50, that would cause trouble.... Once you get into the 40 or 45% range, in my view, you're risking a long-term revenue slowdown and a long-term growth slowdown."

Pat Buchanan, syndicated columnist, former presidential candidate:

Would prefer not to be quoted exactly, but says the revenue-maximizing combined state and federal rate is about 33 percent.

Donald Luskin, columnist, SmartMoney.com, National Review:

"19%... I am saying that the way to maximize the take from personal wage income tax is with a 19% rate on that tax."

Stephen Moore, senior economic writer and editorial board member, Wall Street Journal:

"The revenue maximizing rate is probably around 40 or 50 percent. But the growth maximizing rate, even given the current deficits, is probaby about 20 percent. So the goal is to get the rate down to 20 to 25 percent. For cap gains the revenue maximizing rate is between 15 and 20 percent."

Amity Shlaes, senior fellow, Council on Foreign Relations; author, The Forgotten Man:

Declined to answer.

Bruce Bartlett, columnist, Forbes.com; former adviser to Reagan and Bush I:

"I would hate to venture a specific number.... I would, however, say that I think the top rate could be quite a bit higher than it is without significantly impairing incentives or leading to excessive amounts of tax avoidance. I think 50 percent is an important threshold and I would be very reluctant to go higher even if it raised net revenue.... Anthony Atkinson, probably the leading public finance economist in England, estimates (PDF) that the top rate could go as high as 63% to 83% before it became counterproductive in terms of revenue...The European Central Bank...finds that only two European countries are on the wrong side of the Laffer Curve. All other countries could raise substantial additional revenue by raising tax rates."

"Since our rates are much lower than those it Europe, it suggests that we have a very long way to go before the top rate became counterproductive."

Andrew Samwick, professor of economics, Dartmouth College:

"I would not hazard a guess. Even a guess requires a careful study of the data on high income taxpayers, which I have not done."

Greg Mankiw, Robert M. Beren professor of economics, Harvard University; former chairman, Council of Economic Advisors:

"My guess is that that the short-run answer and the long-run answer are quite different. For example, if you raised the top rate from 35 to, say, 60 percent, you might raise revenue in the short run. Over time, however, you would get lower economic growth, so the additional revenues would fall off and eventually decline below what they would have been at the lower rate.... I will pass on offering a specific number, as it would require more time and thought than I can offer just now, but I will opine that I think the long-run answer is actually more important for policy purposes than the short-run answer."

Edward Lazear, Jack Steele Parker Professor of Human Resources Management and Economics, Stanford University; former chariman, Council of Economic Advisors:

"Sorry, no."

Martin Feldstein, George F. Baker Professor of Economics, Harvard University, former chairman, Council of Economic Advisors:

"Why look for the rate that maximizes revenue? As the tax rate rises, the "deadweight loss" (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue.... I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living."

Republican Politicians

Senate Minority Leader Mitch McConnell (R-KY):

His office declined to answer.

Sen. Jim DeMint (R-SC):

His office declined to answer.

Rep. Mike Pence (R-IN):

His office declined to answer.

Rep. Thaddeus McCotter (R-MI):

His office declined to answer.

By Dylan Matthews  |  August 9, 2010; 3:24 PM ET
Categories:  Taxes  
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Comments

I like Feldstein's take. Frankly, the question itself is enough to raise my hackles, and probably send Tea Party activists into convulsions.

The purpose of government should not be to perpetuate itself. It should be the benefit of the community. Judging tax revenue impacts without measuring impacts on the economy (such as GDP) reveals a very skewed mindset.

Mankew's points is also very well taken. Even if you have an answer on this question asked, you haven't looked at the long-term impact of higher tax rates.

Posted by: WEW72 | August 9, 2010 3:56 PM | Report abuse

So, it's around 70% if you're an expert on the issue. Or upwards of 50% if you're a Republican expert who would like to soft-sell the real number for political reasons. Or 20% if you play an expert on TV/conservative rag/country club newsletters.

Posted by: michaelh81 | August 9, 2010 4:02 PM | Report abuse

There is a useful chart at http://www.ctj.org/pdf/regcg.pdf of top tax rates from 1916 when the income tax came in (as a substitute for the revenue that would be lost if Prohibition succeded, thus making it more likely) to the present. The top income rates have varied from 15% to 94%. The Kennedy tax cut lowered the top rate from 91% to 70% and is said to have stimulated growth and thus more revenue. The first Reagan tax cut slashed top rates from 70% to 50%, where they stayed until the comprehensive tax reform of 1986 lowered them to 38.5% with the expectation that this rate would actually be the rate people paid (which the others weren't, given all the loopholes).

Even assuming the first Reagan tax cut stimulated growth (the evidence is that it reduced revenue) it should be obvious that the law of diminishing returns sets in below the 38.5% level, and probably above it as well.

One observation that needs to be emphasized was made by James Galbraith in "The Predator State": Above 50% it doesn't make a whole lot of sense for a corporation to have high executive compensation, since over half will go to the gov't. So corps retained earnings and plowed them back into the corp. But when rates dropped to 50% and then 38.5% a large amount of corporate wealth began to be paid out in compensation to top management. I'd call this "redistributionist" myself. It coincides with the stagnation of income for the bottom 90%, something which has led us to the current collapse in consumer demand that Ezra has written so much about.

Posted by: Mimikatz | August 9, 2010 4:07 PM | Report abuse

Technically, Saez is correct, but I think Mankiw/Feldstein have the most reasoned responses. I think Bartlett's answer is good as well, because there is something psychological about 50%.

Posted by: novalifter | August 9, 2010 4:10 PM | Report abuse

Just curious: what was Laffer's response?

The most revealing answer from the left was that "National income is a goal in itself" -- the left truly believes that all money belongs to 'the government' and we all should be compliant subjects. That's a difference of political philosophical, not an economic policy difference... and I think that difference is at the core of the current "economic" debates.

The only true way to resolve the issue is to reassert freedom -- to modify Congressional taxing and spending powers which guarantees the individual liberties of taxpaying citizens.

Posted by: rmgregory | August 9, 2010 4:10 PM | Report abuse

"Reagan cut it to 28.... We've done pretty well in the economy these last three decades, apart from this Great Recession"

I like the fact that this subject is explicitly about tax revenue and implicitly about the debt, and he forgets to mention that those Reagan cuts coincide with when the national debt all off a sudden exploded uncontrollably. Also, no mention of the utter lack of real wage growth, rising inequality, or anything else. Everything has just been peachy since Reagan saved us!

Also, I think this debate would benefit from a nice explanation (and simple example) illustrating the wealth effect and substitution effect, especially since the former is entirely ignored when conservatives talk about the right hand side of the curve.

Dylan, would you be willing to do that? Readers might find it interesting to understand the mechanisms that many economists use in their reasoning (and models).

Posted by: nylund | August 9, 2010 4:10 PM | Report abuse

Also, why didn't you ask the question to any politican with a (D) after his/her name?

Posted by: novalifter | August 9, 2010 4:11 PM | Report abuse

@WEW72: I see what you mean, but I think the intent of this question was to get at the truth behind the (obviously?) false Republican meme that tax cuts always "pay for themselves".

At certain rates, tax cuts will indeed pay for themselves (e.g., reducing rates from 100% to 90%). At other rates, they will not.

Posted by: skuwamoto | August 9, 2010 4:12 PM | Report abuse

What did Nancy Pelosi say? How about Charlie Rangel?

Posted by: bgmma50 | August 9, 2010 4:22 PM | Report abuse

Matthew, FOLLOW UP QUESTION

Thanks for aggregating all of these answers in one location.

What about the Growth Maximizing Rate, or something similar?

Or, if most taxes (beyond a few basics like basic security and infastructure) have a least some negative impact on overall GDP, then what is that impact at different rates? Or for different policies?

Posted by: NickM2 | August 9, 2010 4:23 PM | Report abuse

This is a really great idea for a post, I enjoyed reading it, although I don't understand why only two people on the Left were interviewed, both respected economists, but on the right you asked a bunch of columnists and politicians who are giving partisan opinions and not informed estimates. If you're asking people who know what they're talking about, ask respected economists on both sides; if you're asking people who will give an interesting variety of answers, ask columnists and politicians on both sides.

Also, I thought the short-run versus long-run answer Mankiw gave was one of the best answers out there. It would be interesting to pose that question - what would maximize tax revenues in the long run?

Also very interesting would be to ask what the optimal tax structure would be. I suspect a lot of experts would recommend moving from income tax to something else, carbon tax or consumption tax or whatever. It would be great to get experts and politicians from both sides to get on the record about what they would recommend.

Posted by: tysonsahib | August 9, 2010 4:43 PM | Report abuse

A few comments.

You don't want to be precisely at the bend point.

Say the bend point is 70% - that means from 69% to 70%, the elasticity of taxable income is about 0.99. I'd guess the ratio of supply side effects to avoidance effects rises along with marginal rates. As some of the conservatives note, total deadweight loss to the economy deserves its own consideration, and deadweight loss rises with the square of the rate.

By the way, with the top rate going back to 39.3%, and adding in Medicare and state/local income taxes, were are already looking at top tax rates in the 50%+ range in many locations. To stay well off the bend point, this suggests that there might not be more than 5-10% extra in terms of rate hikes that can be applied.

I think Mankiw also raises a good point, that the impact of a change in marginal rates isn't static overtime. At first a high marginal rate might mostly create new tax avoidance. But on the margin it discourages work effort and human capital investment - those discouragements are likely to become a part of the culture.

Scott Sumner has argued persuasively that higher marginal tax rates in Europe have, over the course of a generation, been a key reason for Europeans 'choosing' to work less.

One other thing to consider is the 1920s tax cuts, which went from a very high tax regime to a very low tax regime (top rate of 73% to 25% over the course of several years, with the $100,000 threshold seeing a 60% marginal rate initially).

Despite tumbling top rates, the amount paid by those who made more than $100,000 (over $1 million in today's dollars) more than doubled from 1924 to 1928. I would expect liberals to be thrilled with the evolution of the tax burden by income group during the 1920s.

http://www.cato.org/pubs/tbb/tbb-0302-13.pdf

By the way, pretty sad that not one single Republican politician had the courage to answer.

Posted by: justin84 | August 9, 2010 5:17 PM | Report abuse

Stephen Moore, senior economic writer and editorial board member, Wall Street Journal:

"The revenue maximizing rate is probably around 40 or 50 percent. But the growth maximizing rate, even given the current deficits, is probaby about 20 percent. So the goal is to get the rate down to 20 to 25 percent. For cap gains the revenue maximizing rate is between 15 and 20 percent."


This is the correct answer, and it points to how to use tax policy to deftly manage economic cycles effectively---now while we're in a recession we should be be taxing now higher than 20% until growth and job grwoth catches up----the federal government will start seeing a growing revenue stream. As that stream grows we begin to temper that growth with a higher rate---up to 40% rates when the economy is zooming up again. As double-dips happen, the mechanism for lowering tax rates should be automatic and guaranteed so the market reactions are tempered accordingly.


If we want to run a modern capitalist system for the 21st century that is how we should be taxing.

American capitalism is capable of sustaining the kind of generous spending that most liberals want so long as we properly priortize growth and keeping the power of the government modular (though for mostly non-economic limited government reasons.)

Posted by: FastEddieO007 | August 9, 2010 5:23 PM | Report abuse

solid blog-stream today, guys. tight and action-packed

Posted by: jackjudge4000yahoocom | August 9, 2010 5:41 PM | Report abuse

@GREGORY - Marty Feldstein's "National income is a goal in itself" is actually a conservative statement...its pointing out that obsessing about deficit neutrality should not be the driving factor to setting rates, but rather maximizing return on investment,

as he deftly points out, who cares about a deficit of $100 million if it corresponds to a GDP growth of a billion.....

the rate should always be set for maximum revenue stream/growth stream...keeping in mind that a receding economy has a greater potential for growth and that a peaked economy has more potential for cashing out


If Obama had designed stimulus entirely focussed on tax cuts he would be riding high into the congressional election cycle with unemployment at 6%. But he'd have had to have completely eaten his ideology to do that.

Mister we could use a man like William Jefferson Clinton again!

Posted by: FastEddieO007 | August 9, 2010 5:43 PM | Report abuse

solid blog-stream today, guys. tight and action-packed

Major dittos Ezra!!!

Posted by: FastEddieO007 | August 9, 2010 5:50 PM | Report abuse

Where does the laffer curve bend? I have no idea?

What tax scheme maximizes revenue in reality? Well, the one we had in 2000.

What's the problem? Well, between the PPACA tax and state/local governments hiking taxes, we will go beyond the 2000 scheme next year.

Posted by: krazen1211 | August 9, 2010 6:13 PM | Report abuse

nice response by Mankiw, time period is absolutely critical.

Found Saez's answer rather interesting... Says 69% would be top inclusive of state, payroll, etc., much higher than what is currently contemplated... Aren't we pushing 60% right now for some earners in California and New York State, factoring in all those separate taxes on top of a 36 or 39 marginal rate?

Posted by: cdosquared5 | August 9, 2010 6:17 PM | Report abuse

"By the way, with the top rate going back to 39.3%, and adding in Medicare and state/local income taxes, were are already looking at top tax rates in the 50%+ range in many locations..."

That estimate will always be 1-3% too high. State and local taxes, income, excise and sales, are all deductible against federal income tax. Say 0.4 * 6% = 2.4%., assuming federal top bracket.

Posted by: davis_x_machina | August 9, 2010 6:38 PM | Report abuse

Fasteddie, I agree with your comments about counter-cyclical policy. However, most of the economics literature, in particular Christine Romer's work, shows that spending has a much larger multiplier than tax cuts. If you want a potential theoretical explanation, Krugman's blog had one recently that was based on Milton Friedman's analysis.

Anyways, I suspect that this curve only applies to "rich" people, anyone else can't really afford to stop selling their labor. And really, if it actually got high enough to discourage normal people, I suspect it would get repaid in social services (see the Nordic countries). But I also doubt it discourages investment by the elites. More likely they just shift resources into sheltering their income. After all, if the financial crisis has taught us anything, it is the power of greed.

Another point about tax rates, Warren Buffet famously quipped that he payed a lower effective tax rate than his secretary. As long as the capital gains tax is 15% we aren't approaching any of the numbers given.

But I find the fixation on the Laffer Curve unfortunate. Even as a liberal, the point of government is not to maximize revenues.

Posted by: awcarr | August 9, 2010 8:00 PM | Report abuse

There is a bit of ridiculousness in all this Laffer Curve business. I mean most people decide to do some sort of work because they must do something. Once they choose that they take the package deal that comes with it including the work hours and pay.

The Laffer Curve is largely a tool used by wealthy people to push tax rates down, not for the good of growth or government or efficiency but because they are greedy.

Posted by: bcbulger | August 9, 2010 8:06 PM | Report abuse

@awcarr:However, most of the economics literature, in particular Christine Romer's work, shows that spending has a much larger multiplier than tax cuts.


A bunch of liberal write down in their little text books that spending has a much larger multiplier....

THEY ARE LYING!!!!


Tax cuts which----during a recession----provide immediate loose money to the most fertile parts of the economy, i.e. the parts of the economy that would benefit from over aggressive investment activity...THAT IS HOW YOU CREATE JOBS DURING A RECESSION!


But instead idiots like Obama allow a polarizing partisan like Nancy Pelosi write a bunch of blank checks to her best Union, Trial Lawyer, and Environmental Activsts friends and we wonder why unemployment will hit over 10% in the next few months!!!


GUYS WAKE UP!!!!

OBAMANOMICS = Cloward-Piven, i.e. violent Communist revolution.....

6,000 pages of complex legislation written by Trial Lawyers, Environmental Activists, and Union Mobsters....YEAH...that is the kind of CERTAINTY that Small Business long for!

Posted by: FastEddieO007 | August 9, 2010 9:44 PM | Report abuse

One assumption that I would like to challenge is that people would work less under a higher tax regime. I'll use an idealized me as an example, and let's assume everything is inflation-adjusted for simplicity.

I am 35. Given my current salary and education, I expect to average about $100,000 in income for the rest of my life. Under current law, I would be paying about $15k in federal taxes, $5k in state taxes, and $5k in local and excise taxes each year, leaving me with $75000. Of this, I save $20,000, leaving me with a disposable income of $55000 per year.

Now let's ask what happens if the feds raise my taxes by a third, from $15k to $20k. Do I throw a hissy fit and quit my job? Highly unlikely. Indeed, it is much MORE likely that I work some OT or pick up a side job to make up for the loss. But in the most likely case by far, I just continue what I am doing, and simply adjust my spending and saving. My guess is that my response would be to save $1500 less and spend $3500 less, resulting in $18500 in annual savings and $51500 in annual spending.

What does this mean in the long run? Well, the loss of $1500 per year in savings for 30 years means I will be about $100,000 short of where I otherwise would have been at age 65. This probably means I will have to work one extra year before I can comfortably retire.

Despite the rhetoric, it seems very plausible to me that there are some very valid reasons for a person to work MORE in a higher tax world, not less. In my personal situation, I am almost sure I would work both harder and longer.

Posted by: brickcha | August 9, 2010 10:10 PM | Report abuse

Because, you know, maximizing tax revenue is what America is all about.

We want to steal as much as possible, so we can spend just a little bit more than that. We want to bleed that goose for all we're worth, because that's what floats our little collectivist boats.

Posted by: msoja | August 9, 2010 11:02 PM | Report abuse

@msoja: That's not the point. The point is not to bleed people for all they're worth. The point is to try to pin down politicians on what they actually believe.


Many Republican politicians say that increasing the tax rate will decrease tax revenue (because of reduced incentive to work) and that decreasing tax revenue will increase tax revenue.

This seems crazy.

Economists say that increasing tax revenue might theoretically decrease tax revenue, but only if you raise the rate to something like 70%.

That's what this question is about.

Posted by: skuwamoto | August 9, 2010 11:19 PM | Report abuse

@skuwamoto

You say, "That's not the point," but then you argue the point.

Personally, I'm tired of arguing whether X% of guns pointed at my head brings in more money to Uncle Chuckles or not. I want the government to quit spending my money on its idiotic schemes NOW.

Posted by: msoja | August 10, 2010 12:19 AM | Report abuse

Feldstein's complaint that we shouldn't look for max revenue but rather max GDP is the wrong target. Raw national income may be concentrated at the top. For fairness and for national strength we should shoot for what works best for the middle. IF laissez-faire is not kind to the middle then progressive taxes spent on infratructure, health care, and things that help all including the middle is needed for balance. So forget max revenue or max GDP, what is best for the middle and working folk? We've already run several versions of that experiment in our history and the New Deal worked best by far.

Posted by: TomCantlon | August 10, 2010 12:54 AM | Report abuse

@msoja: I have no problem with your perspective. I don't agree with it, but at least it's honest.

If politicians were saying, "Lowering tax rates means less revenue, but I believe that's the right thing to do," that would at least be honest.

Instead, they say, "we should lower tax rates on principle AND we'll get more tax revenue as a result". That's just dishonest.

Posted by: skuwamoto | August 10, 2010 1:16 AM | Report abuse

It's an odd question to ask in this way- why not just ask people what the minimum amount they would be willing to work for is and divide that by their actual wage?

In reality, it's bad to think of this is terms of salary. One thing is that for business owners, the recognition of income can be moved around quite a bit- waiting for favorable tax conditions. Even for people like me, if it looks like I am going to recognize too much revenue, I can pile on the liabilities, acquire other businesses, keep putting off the taxes until some window where I can cash out occurs. Many times, we actually see businesses doing crazy things, usually taking on lots of debt, to limit taxes paid.

If I have to pay 90% on my income over some threshold, with no end horizon, I am pretty sure I would not bother earning any money above that threshold, it's not worth the risk. Every dollar I make has some investment cost, and some risk. If I have about a 10% profit margin, I make 10 cents on a one dollar investment. After taxes, that's a 1% profit margin. That is razor thin and not worth the chance of losing the dollar. 5% is rough, I'd be happy in 7-8% range, which implies a 20-30% tax rate, basically what I pay in AMT.

Overall though, I get really upset with people that don't want to raise taxes across the board, and only on the "rich", especially when it is to fund transfer payments from the rich to other people. If we're just moving money around from me to you, it doesn't really feel like that's giving you the proper incentive to be more productive.

Posted by: staticvars | August 10, 2010 1:28 AM | Report abuse

I think the major take-away from this is that Liberals need to stop propagating the BIG LIE that government spending has a bigger multiplier than tax cuts.

It simply does not.

Bush's tax cuts resulted in a quick economic turnaround for the better.

Reagan's tax cuts resulted in a quick economic turnaround for the better.

Obama & Pelosi's government spending resulted in a quick economic turn around FOR THE WORST.


The best the government can ever due to turn around a nation's economy is to hand loose money ovyer to the people in the economy who are making money hand over fist---it sounds unfair, but despite all the rhetoric to the contrary they quickly hire more and more people to help them try and get more and more money.

The WORST the government can do is hand a big blank check to a polarizingly partisan person like Nancy Pelosi and have her write a bunch of big checks to her Trial Lawyer, Union, and Environmental Activist friends----and JOBLESSNESS and UNEMPLOYMENT outside those special interests skyrockets!!!

Talk about UNFAIR!

Posted by: FastEddieO007 | August 10, 2010 6:31 AM | Report abuse

Marty Feldstein and Stephen Moore understand more about how to generate economic prosperity in this nation more than any single person inside the Obama White House.

No one in the Obama White House ever had a real responsible job outside of the virtual reality of academia.

Posted by: FastEddieO007 | August 10, 2010 6:33 AM | Report abuse

It would have been hysterical to see you ask Nancy Pelosi this question though!!

: )

She would have been just as delusional as when a reporter outside Ezra's Journo List got to ask her a real question about healthcare....they asked her "isn't it unconstitutional for the federal government to command a citizen to purchase a product" and she was just a big dear in the headlights, responding, "you're kidding right?"

That wouldve been how she responded to this question as we'all know she thinks that "the rich" should pay 110%...unless of course their her inner circle---you know like the Sandlers who walked away from the global financial meltdown with a hunky 50 billion check from Wachovia!


To Pelosi, the Sandlers don't have to pay a thing!

Posted by: FastEddieO007 | August 10, 2010 6:38 AM | Report abuse

In actual practice, most Democrats follow China's tax model where the rate of taxation is based solely on party affiliation.

Charlie Rangle doesn't have to pay taxes.

Timothy Geitner doesn't have to pay taxes.

Nancy Pelosi's friends the Sandlers don't have to pay taxes.

But those greedy small business who participate in the Chamber of Commerce's anti-Obama propaganda....they should be flogged and taxed until it hurts!

Posted by: FastEddieO007 | August 10, 2010 6:42 AM | Report abuse

@awcarr: I suspect that this curve only applies to "rich" people, anyone else can't really afford to stop selling their labor.


Actually this applies to most middle class families when the breadwinner needs to decide whether or not to work those extra overtime hours.

Imagine a UPS worker who is pulling in 75k a year. He thinks, yeah I like to get double-time by putting in a 9th and 10th hour in today...BUT that will come in right off the top---he ends up working to make more for uncle sam than he does for his own family....

He says, "screw this" and goes home.

Posted by: FastEddieO007 | August 10, 2010 7:07 AM | Report abuse

"There is a bit of ridiculousness in all this Laffer Curve business. I mean most people decide to do some sort of work because they must do something. Once they choose that they take the package deal that comes with it including the work hours and pay.

The Laffer Curve is largely a tool used by wealthy people to push tax rates down, not for the good of growth or government or efficiency but because they are greedy."

bcbulger,

The one group of people who have a lot of control over what they do, or whether or not they do anything, and have fancy ways of hiding the results of what they do, are the wealthy.

If you look at the history of across the board marginal rate cuts, tax collection for the bottom 90%-95% or so tends to fall as expected, and tax revenue collection from the wealthy tends to rise. People always complain about more income going to the wealthy during these periods, but the whole purpose of lower marginal rates is that either by less avoidance or supply side effect, there is more revenue had by the wealthy to tax. The surprise would be if the wealthy weren't reporting higher and higher incomes.

Take 1989-1994 and 2001-2006. These periods are fairly equivalent - each have about two slow years (1990/1991 and 2001/2002) and the rest of the years show moderate but not red hot growth. 1994 and 2006 are both years in which the Fed concluded a post-recovery rate hike campaign. The difference we are concerned with here is that marginal rates rose during the first period and fell during the second period.

The top 1% paid $109 billion in taxes in 1989 and $154 billion in 1994, a growth rate of 7.2% annually.

Now 2001-2006. The top 1% paid $301 billion in 2001 and $408 billion in 2006, a growth rate of 6.3%.

That's pretty close to the same rate. However, inflation ran about 1.5%/yr higher from 1989-1994 than 2001-2006, and so in inflation adjusted terms the 2001-2006 period actually saw greater increases in tax revenue from the top 1%. This is despite falling marginal rates during 2001-2006 and rising marginal rates from 1989-1994.

This is why conservatives care about the top marginal rate - the elasticity of taxable income is pretty low for people who have 9-5 jobs. As you say, they have to do something and are more limited in their options.

By the way, I don't think cutting taxes necessarily brings in more total revenue. I don't think going from 39.3% to 35% necessarily has a huge supply side effect on incentives. There is also a timing effect due to when the recessions occur which certainly matters as well. At the same time, I think it is interesting that during periods with similar macroeconomic performance, one characterized by tax hikes and the other by tax cuts, the tax cut period saw slighly higher inflation adjusted revenue growth for the top 1%.

Posted by: justin84 | August 10, 2010 9:42 AM | Report abuse

"Feldstein's complaint that we shouldn't look for max revenue but rather max GDP is the wrong target. Raw national income may be concentrated at the top. For fairness and for national strength we should shoot for what works best for the middle. IF laissez-faire is not kind to the middle then progressive taxes spent on infratructure, health care, and things that help all including the middle is needed for balance. So forget max revenue or max GDP, what is best for the middle and working folk? We've already run several versions of that experiment in our history and the New Deal worked best by far."

The New Deal worked best by far? I guess it did for the "middle" - assuming of course that the "middle" excludes the (massive) ranks of the unemployed during the 1930s. Unemployment was still over 20% in 1935 despite several years of the New Deal. The annual unemployment rate never fell below 14.8% during the entire decade.

Note that government spending was slashed during the early 1920s, and a recession which saw unemployment rise from 1.4% in 1919 to 11.7% in 1921 saw it fall back to 2.4% in 1923.

http://www2.census.gov/prod2/statcomp/documents/CT1970p1-05.pdf

Posted by: justin84 | August 10, 2010 10:07 AM | Report abuse

When capitalism works, the rich will always get richer faster than the poor.

Can we live with that?

The alternatives are nobody gets richer at all.

And every shade in between.


We need to decide what amount of prosperity(capitalism) and what amount of absence of prosperity (Marxist totaltarianism) we want.


I vote for 100% capitalism. Maximizing prosperity is always the best choice, no matter how much richer some people end up being!

Posted by: FastEddieO007 | August 10, 2010 11:04 AM | Report abuse

--If politicians were saying, "Lowering tax rates means less revenue, but I believe that's the right thing to do," that would at least be honest.--

It's just as dishonest as saying, "We need to raise taxes so we can reduce deficit later," and the fact that both sides are inherently dishonest across the board is a swell argument against allowing to play with even a miniscule amount of the fruit of other people's labors.

Posted by: msoja | August 10, 2010 11:25 AM | Report abuse

It baffles me that any free American can believe that it is a good idea for someone to surrender 60% of their income to the government, UNDER ANY CIRCUMSTANCES.

We're not here to further the goals of the government; it is here to further our goals and facilitate our pursuit of same.

Who's serving whom? It just infuriates me.

Posted by: DaveyNC | August 10, 2010 11:32 AM | Report abuse

Luskin is a hedge fund manager. I'm surprised that his answer was above zero. I'm impressed by Bartlett's answer. Feldstein has an important point.

Posted by: weiwentg | August 10, 2010 11:42 AM | Report abuse

Let's be clear on what constitutes income tax ... income tax includes all payroll taxes (at least when you model it) ... so those totals need to include:
15.3% Social Security and Medicare tax
5+% Average State income tax

So when you see any of these rates above, knock 20% off.

It's interesting that a 'tax expert' like Emmanuel Saez reduces 73% to 68% after adding in the 20% above, PLUS another 5% for sales tax. If you added all these, you'd end up with 48% .. not 68% ... great maths from an 'expert'.

The truth is if you look at some of those 'liberal' rates, and include the aforementioned taxes, you're generally below 50%, and in some cases much lower.

People like to forget about payroll taxes ... but they are taxes like all other taxes and are part of the calculus people use to decide how much to work/not work. If that weren't the case, why don't the just create a 10% 'general fund' payroll tax, and it'll have zero impact on output.

Posted by: marco_lugon | August 10, 2010 2:09 PM | Report abuse

FastEddie: "I think the major take-away from this is that Liberals need to stop propagating the BIG LIE that government spending has a bigger multiplier than tax cuts.

It simply does not."

And you haven't supplied a bit of data, while the other side has tons of it. You can't just believe something just because you want to. (Well, you can, but you won't be right.)


"Bush's tax cuts resulted in a quick economic turnaround for the better."

Ah, it was just about the most sluggish "recovery" in recent history, hardly the gangbusters growth they said would occur. Median household income barely budged. That's a turnaround for the better?

"Reagan's tax cuts resulted in a quick economic turnaround for the better."

No, it resulted in huge deficits which required raising taxes--which did not tank the economy, as I recall.

"Obama & Pelosi's government spending resulted in a quick economic turn around FOR THE WORST."

Have you looked at the jobs chart? Things have turned around markedly for the better since Obama took office. Things aren't great, but they're at least not the extremely dire situation we were heading towards. http://www.businessinsider.com/chart-of-the-day-jobs-lost-in-the-bush-and-obama-administration-2010-2. And if you think tax cuts drive the economy, then you should credit the Democrats for creating the lowest rates in decades. But if you think things aren't going well, you should admit that the tax cuts didn't apparently help.

And you ignore that H.W. Bush raised taxes, and Clinton raised taxes, and conservatives predicted an economic disaster...and we had the best, most sustained growth in decades even if one discounts the tech bubble.

But it must be nice to live in a world where one doesn't have to consider any countervailing evidence and all the facts conform to one's own predetermined beliefs.

Posted by: dasimon | August 10, 2010 4:44 PM | Report abuse

msoja: "Personally, I'm tired of arguing whether X% of guns pointed at my head brings in more money to Uncle Chuckles or not. I want the government to quit spending my money on its idiotic schemes NOW."

Again, as someone else pointed out, I think you're missing the point of the question. Many Republicans have touted tax cuts as economic stimulus that don't have to be paid for. But the assumption that tax cuts pay for themselves requires being on the right side of the high point of the Laffer Curve where tax rates maximize revenue. So it's fair to ask people at what rate they think that point is, because if we're on the other side of the curve then we will have to pay for that lost revenue unless there are offsetting spending cuts--which tax-cut proponents have refused to specify. Otherwise, it just adds to the debt and your own future tax burden.

This debate is not what the tax rate should be, or how it should be distributed across income groups. It's about whether the call for permanent tax cuts without any spending offsets is responsible governance.

Posted by: dasimon | August 10, 2010 4:54 PM | Report abuse

During my working years tax rates had no effect on how hard or how much I worked. I never had enough income for my family to live to our aspirations and save sufficiently for the future. I guess tax rates could have been 90% and I would have toiled away. But I was a corporate employee, not a small businessman or an entrepreneur. I suspect the answer would be different for them.
Once I had accumulated some savings my view of the savings was different. Tax planning and sensitivity to transaction costs were paramount. We make a mistake to tax capital at high rates.
Maybe the "rich." although Obama would have considered me thus during my active years, are more influenced by tax rates. Or have the ability to characterize their income according to tax rates, but not the average worker.

Posted by: Underwriterguy | August 10, 2010 6:07 PM | Report abuse

Clinton's increase of tax rates led to the election of a fiscally responsible congress that borough about the greatest spurt of prosperity this nation has seen!

Lets hope Obama & Pelosi's stimulus can have that same effect.

As it stands now, people see endless government spending as a pending tax increase on all Americans since we all know it has to be paid for eventually. The more spending, the more painful the tax increases and even government austerity we will see later....


But tax cuts NOW will always be seen as...well tax cuts now!

There is no greater MULTIPLIER for stimulus spending than that!

Posted by: FastEddieO007 | August 11, 2010 7:28 AM | Report abuse

"The most revealing answer from the left was that "National income is a goal in itself"-- the left truly believes that all money belongs to 'the government' and we all should be compliant subjects."

The most revealing comments from the right are those that demonstrate that animus trumps all in what is supposed to be a rational dialog. Please look up "national income" in any introductory economics textbook. It is NOT the income of the federal government, and the comment in question was from someone questioning the narrow premise of the original question.

PS: the reason the author didn't ask any Democrats is that Democrats have been railing against laffer curve rationalizations for years and all but the professional ideologues admitted that higher marginal tax rates will increase government revenue, unlike many GOP politicians that are still peddling the gross falsehood that raising taxes doesn't really help with the deficit. Funny how every economic problem for the past 30 years has had the same solution: tax cuts for the rich! Yay!

Posted by: goodstrategy | August 11, 2010 10:12 AM | Report abuse

Feldstein and Mankiw have the right answer -- the long-term impact on national income is far more important than short-term revenue impacts. High tax rates -- particularly high marginal rates and the expectation of such -- patently suppress economic growth. We're witnessing that today.

The government's objective should not be to figure out how to extract maximum wealth from productive Americans -- the way an occupying power would look at tax policy -- but rather how to grow national income and how to protect our liberty from a metastasizing federal government.

Posted by: eoniii | August 11, 2010 1:25 PM | Report abuse

brickcha
The problem with your analysis is you are forgetting how income taxes work. It is not a matter of the government saying "Mr. Brickcha give us $5,000 more this year." When tax rates are increased it means that for each dollar earned the government takes a bigger bite. So if last year they took 20% and this year they take 25% you'll bring home 5 cents less per dollar than you did last year. Certainly, you could work more hours to make up the shortfall. But eventually, when rates go high enough, your time becomes more valuable than your diminishing returns. If marginal rates were 90%, govermnent taking 90 cents out of every dollar, would you really work that much harder and longer to make up the difference than when rates were 20%?

Posted by: Tom1963 | August 11, 2010 1:49 PM | Report abuse

I'm shocked how oblivious to the effect of marginal tax rates on behavior are those who claim the revenue maximizing rate is 50 percent or more. Perhaps we should go back and triple the luxury tax on airplanes, yachts and automobiles imposed by the U.S. in the early 1990s. That raised a lot of revenue -- for other countries.

Posted by: joebarnett | August 11, 2010 2:32 PM | Report abuse

I'm shocked how oblivious to the effect of marginal tax rates on behavior are those who claim the revenue maximizing rate is 50 percent or more. Perhaps we should go back and triple the luxury tax on airplanes, yachts and automobiles imposed by the U.S. in the early 1990s. That raised a lot of revenue -- for other countries.

Posted by: joebarnett | August 11, 2010 2:33 PM | Report abuse

It's interesting people are bringing up long term effects due to marginal tax rate. I took the time to look at this, and a high marginal tax rate seems to promote GDP growth over the long term, as long as that marginal rate isn't higher than the theoretical maximum. Low tax rates (70%) both have detrimental effects on long term GDP growth.

More information here: http://logicsearch.blogspot.com/2010/08/laffer-curve-and-marginal-tax-rate.html

Posted by: truthinnumbers | August 11, 2010 3:35 PM | Report abuse

Hmm, chopped my post. Tax rates under 30% and Tax rates over 70% seem to have detrimental effects on long term GDP growth.

Posted by: truthinnumbers | August 11, 2010 3:37 PM | Report abuse

Another excellent post! Good work Dylan!

Posted by: zosima | August 11, 2010 3:55 PM | Report abuse

truthinnumbers, it's silly to compare national GDP growth rates for different eras because of obvious confounding factors. You might instead compare growth rates of high tax U.S. states to low-tax states or high tax nations, such as in Europe, to the U.S. There the dead weight costs of a high tax burden are most apparent.

Posted by: eoniii | August 11, 2010 3:59 PM | Report abuse

very surprised to see no conservative offer the compliment to the laffer curve:

hauser's law.
(really just a strong correlation, but insightful nonetheless)


"In economics, Hauser's Law is an empirical observation that, in the United States, federal tax revenues since World War II have always been equal to approximately 19.5% of GDP, regardless of wide fluctuations in the top marginal tax rate."

The implications of this observation are fantastic.

My question to the left:
How does the fact that tax revenues have remained rather constant, regardless of tax rate?

Posted by: owenmagoo | August 11, 2010 11:53 PM | Report abuse

modest correction, to a poorly worded semi-sentence...

how does the left explain the constant collection rate, coming in at 19.5%, despite the fluctuation in the marginal rate.

**************************************

modest point also:
I recently saw the 1998 clinton budget, with its surplus projections...

they projected the budget in 2008 to be 2.25 trillion.

they only missed it by 650 billion.

sad, because the actual federal revenue for 2008 was also larger than projected.

Posted by: owenmagoo | August 11, 2010 11:59 PM | Report abuse

I've created graphs for some of the responses, so visualize them.
http://blog.robertgraham.com/2010/08/visualizing-laffer-curve.html

Posted by: RobertDavidGraham | August 12, 2010 2:27 AM | Report abuse

Thank you, Ezra, for askingt this question. It's been hounding my mind but I'm not in the position to ask all these folks this question. Thank you, thank you, thank you. I'll send you some other ones that I've had too in case you can circulate those.

Posted by: CHADisBAD | August 13, 2010 2:44 PM | Report abuse

Thank you, Ezra, for askingt this question. It's been hounding my mind but I'm not in the position to ask all these folks this question. Thank you, thank you, thank you. I'll send you some other ones that I've had too in case you can circulate those.

Posted by: CHADisBAD | August 13, 2010 2:44 PM | Report abuse

My bad, Mr. Matthews. I didn't pay attention to who posted it and gave the credit to Ezra. Allow me to give credit where it is properly due... Thank you Washington Post- jk. Great job, Dylan.

Posted by: CHADisBAD | August 13, 2010 2:49 PM | Report abuse

It is depressing that most of the frame of reference in this discussion is "how much should the government allow an individual to keep of his own money." That is sorry state of affairs.

It's like asking what is the best mark-up for the Mob to get on it's drug business so as not to induce people to go through withdrawal.
This is what passes for economic thought these days. We're doomed.
BTW--I'm not in the top tax brackets but a hell of a stretch but I do recognize when we are out to kill the golden goose.

Posted by: JimJinNJ | August 15, 2010 7:58 PM | Report abuse

Listen to Martin Feldstein everyone else is a moron. Especially "economists" at UC Berkley and the Center for Economic and Policy Research

Posted by: caper29 | August 17, 2010 2:11 PM | Report abuse

Listen to Martin Feldstein everyone else is a moron. Especially "economists" at UC Berkley and the Center for Economic and Policy Research

Posted by: caper29 | August 17, 2010 2:12 PM | Report abuse

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