WILLisms.com: The Laffer Curve Lives!

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The Laffer Curve Lives!

Lowering taxes increases tax revenues.

You read that right. When the government LOWERS taxes, it generates MORE money.

So sayeth Arthur Laffer.

Counterintuitive?

Maybe.

Dead on?

Absolutely.

The SocialSecurityChoice.com blog explains the Laffer curve and how Bush's tax relief has actually increased revenues coming into the government.

"The answer is simple: above some optimum tax rate, every tax becomes counterproductive. When sketched as a graph on a cocktail napkin, this economic truth is known as 'the Laffer Curve'.
If you think about it, the Laffer Curve is just common sense. Taxes discourage (which is one reason we tax things like cigarettes so heavily). Whenever you tax something, you get less of it. An economist would state this as, 'The higher the tax rate, the lower the tax base.' As you increase the tax rate, there comes a point where the tax base falls so much that the higher tax rate actually generates less revenue for the government."

Click for larger version.

Larry Kudlow noted this phenomenon more than a month ago:

"Here’s one story you won’t find on tomorrow’s front pages: 'The U.S. Budget Deficit Is Shrinking Rapidly.' The headline would be accurate, but the mainstream media is much more interested in talking down this booming economy than telling it like it is. This week’s Treasury report on the nation’s finances for December shows a year-to-date fiscal 2005 deficit that is already $11 billion less than last year’s. In the first three months of the fiscal year that began last October, cash outlays by the federal government increased by 6.1 percent while tax collections grew by 10.5 percent. When more money comes in than goes out, the deficit shrinks.
At this pace, the 2005 deficit is on track to drop to $355 billion from $413 billion in fiscal year 2004. As a fraction of projected gross domestic product, the new-year deficit will descend to 2.9 percent compared with last year’s deficit share of 3.6 percent."

William P. Kucewicz, in National Review, writes:

"By now, the effects of the Bush tax reforms should be obvious to all but the most obtuse observers. From the beginning of 2002 to mid-2003, private investment’s GDP share was flat at 15.3 percent to 15.5 percent. After the June 2003 tax cuts, though, the percentage rose steadily, reaching 17 percent in 2004. As a result, the growth rate of private domestic GDP (i.e., GDP less trade and government) has almost doubled, accelerating from 2.8 percent in the second quarter of 2003 to a year-on-year average of more than 5 percent since then.
Democrats, however, aided by a pliant (and largely economically illiterate) Washington press corps, continue to foist the fiction that the Clinton tax hikes produced the 1990s boom by closing the federal budget deficit. This is patent nonsense."

The Laffer Curve Lives!

Posted by Will Franklin · 15 February 2005 03:46 PM

Comments

You were smart to make your own version of their chart -- their version is an 800k bitmap file that takes forever to load. (I emailed them about it through the Club For Growth site, and told them something you might also want to know, that if you change your image to a gif you can show the file as about 6k, even lower than the savings you've already realized with your jpg here). It just makes it a lot easier for your visitors.

Now a substantive remark -- as I wrote in my post about Louis Woodhill's analysis (at http://www.samueljohnson.com/blog/archives/0502b.html#16a ), if you start the line graph easier you can see how Clinton's 1993 tax increase led to more tax revenues; there's no reason to conclude that increasing taxes will lead to lower tax revenues. (Also, I think that some have estimated that the tax rate at which the Laffer Curve is at its peak may be in the 80% range, and we're nowhere near that point. For tax reductions to increase tax revenues, we have to be past that point on the Laffer Curve.)

Posted by: Frank at February 16, 2005 10:05 AM

An important typo in my previous comment: "if you start the line graph easier" should have read - -

"if you start the line graph earlier"

Sorry...

Posted by: Frank at February 16, 2005 10:16 AM

Thanks for your comments, Frank. I will work on the images so they are smaller and easier to read, although the one I have now is a .gif already.

The version on Club for Growth's blog was horrible. It was also in .bmp format, which is not all that useful anymore.

And good point on the 1993 tax hikes.

Posted by: Will Franklin at February 16, 2005 11:10 AM