Re: Laffer Curve (fwd)
[EMAIL PROTECTED] wrote: Congress imposed something like a 100% tax on luxury boats (as I recall, as part of the tax hike of 1990), and found that they collected zero revenue from the tax. So we do have empirical evidence that higher marginal tax rates can produce less revenue. It was only a 10% tax. See http://differentriver.com/archives/2005/01/28/call-it-the-botax/ and http://www.fee.org/vnews.php?nid=2842 --Robert Book [EMAIL PROTECTED]
Re: Laffer Curve
In a message dated 4/29/05 2:05:25 PM, [EMAIL PROTECTED] writes: David ([EMAIL PROTECTED]) writes: It's funny, during the 1970s people commonly attributed the excellent rates of economic grown in Taiwan and Hong Kong to the "Confusion work ethic" while completely ignoring the poverty of the hundreds of millions of Chinese right next door in Communist China. I usually heard this as an argument against communism -- as in, "Chinese prosper everywhere int he world -- Taiwan, Hong Kong, Singapore, Malaysia, America -- EXCEPT in Communist China. So it's obvious that the problem of poverty in China is with Communism, not with anything inherent in the Chinese people." Of course, there may be some selection bias involved in emigration, but it's still a good point. --Robert Book [EMAIL PROTECTED] Indeed. And thanks also for the material on the luxury yachet (are there non-luxury yachets?) tax from the 1980s. It's remarkable that a 10% rate nearly eliminated the US industry. Imagine what would have happened had my failing memory been accurate, and Congress had indeed passed a 100% tax! David Levenstam
Re: Dickens on the Laffer Curve
In a message dated 4/23/05 4:42:26 PM, [EMAIL PROTECTED] writes: Peter C. McCluskey wrote: Mancur Olson claims in his book Power and Prosperity that the marginal income tax rate was effectively zero. The effective taxes were near 100% of what a typical worker in any given position could produce, but workers producing more than expected kept all the unexpected wealth. That created stronger incentives on each person to work hard than in the west, strong incentives to prevent others from working hard, and some incentives for each industry to deceive the system about what a typical worker can produce. There were few problems with the total amount of economic activity under Stalin. The problems were with the goals which that activity satisfied. Much as I admire Olson, this is crazy. Collectivization didn't just costlessly move resources from agriculture to industry/military production. There was an enormous deadweight cost in reduced production *per farmer*. Not to mention massive destruction of human capital - i.e. death. He has a slightly better case for industry - Stalin did firmly back unequal pay. But a 0% marginal tax rate cuts against everything I've ever read about Soviet economics under Stalin. I'd been wondering how to express the very same thoughts--I do admire Oslon a great deal, and I do find the idea crazy. Is it possible he was employing irony?
Re: Dickens on the Laffer Curve
Yes. It suffers a bit from the historians' If you don't have a document, it didn't happen bias, but it's good. Anton Sherwood wrote: Speaking of Communism, is The Black Book worth having? I saw several copies yesterday at a secondhand store in San Leandro, marked about $8 if memory serves. -- Anton Sherwood, http://www.ogre.nu/ -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] http://econlog.econlib.org [M]uch of the advice from the parenting experts is flapdoodle. But surely the advice is grounded in research on children's development? Yes, from the many useless studies that show a correlation between the behavior of parents and the behavior of their biological children and conclude that parenting shapes the child, as if there were no such thing as heredity. --Steven Pinker, *The Blank Slate*
Re: Dickens on the Laffer Curve
[EMAIL PROTECTED] ([EMAIL PROTECTED]) writes: Taking the example of Stalin's war on the peasantry in general and the Ukraine in particular, we see that massive confiscations of income at marginal rates well in excess of 100% certainly detered economic activity, to put it rather mildly. Mancur Olson claims in his book Power and Prosperity that the marginal income tax rate was effectively zero. The effective taxes were near 100% of what a typical worker in any given position could produce, but workers producing more than expected kept all the unexpected wealth. That created stronger incentives on each person to work hard than in the west, strong incentives to prevent others from working hard, and some incentives for each industry to deceive the system about what a typical worker can produce. There were few problems with the total amount of economic activity under Stalin. The problems were with the goals which that activity satisfied. -- -- Peter McCluskey | Everyone complains about the laws of physics, but no www.bayesianinvestor.com| one does anything about them. - from Schild's Ladder
Re: Laffer Curve
In a message dated 4/22/05 9:55:30 AM, [EMAIL PROTECTED] writes: Quoting [EMAIL PROTECTED]: istribution. The real question, according to McCloskey, is not why does Germany have only 75% of US per capital GDP, but why does Bangledesh have only 5% of US per capital GDP. People in the countries with the top 10 or 15 per capita incomes in the world are fabulously wealthy even I believe that the reasons the Bangledeshi have been looted is explained largely by this image: http://img.photobucket.com/albums/v387/elkgrovedan/Beetle_Bailey.gif compared to half a century ago, to say nothing about compared to before 1700. People living in the poorest parts of the world, by contrast, are still poor by pre-1700 standards. Sadly, as suggested in Carrol Quigley's epic history tome, Tragedy and Hope: The History of Our World, despotism has persisted in China for nearly 5000 years, though strains of free market are enriching a select few today. Perhaps those on the subcontinent will see the light? The Beetle Bailey cartoon offers a surprisingly good insight. I've never heard any refer to China as a subcontinent, only India. It's funny, during the 1970s people commonly attributed the excellent rates of economic grown in Taiwan and Hong Kong to the "Confusion work ethic" while completely ignoring the poverty of the hundreds of millions of Chinese right next door in Communist China. I've worried about the fate of Hong Kong ever since Britain gave it to the communists. One of my brothers, the Director or International Taxation for Cisco Systems, assures me that Hong Kong has been doing just fine and that the communists have pretty much kept their hands of off the goose that lays the golden eggs. [Metaphor mine, not his.] The Chinese communists seemed to have taken seriously some lessons from their own early experiment with political liberalization in the late 1970s and the Soviet example. In the Chinese case, people who could speak out but not engage in generalized economic activity spent much of their energy simply speaking out against the communists. In the case of the Soviets, people who could speak out and vote but not engage in liberalized economic activity spoke out against the communists and then voted the communists out of power. The Chinese communists in the 1990s seemed to take care to allow some economic liberalization but not political liberalization, with the result that people turned their energies on enriching themselves rather than criticizing the communists. (It's also possible that the Chinese communists took a lesson from the early Soviet Union's NEP, characterized by Bukharin's famous admonition to "enrich yourself," which resurrected the Russian economy after war and War Communism killed it.) I doubt that we'll see free markets in China, since we don't really see free markets anywhere in the world today. I've heard though that in the late 1990s the Chinese communists started reneging on the 99-year farm leases, so I don't know if they'll be able to resist the temptation to use their power to try to control everything. Still, the last I heard, the Chinese economy was still experiencing growth in real per capital GDP exclusive of military spending, so maybe the of Soviet collapse still provides a sufficiently strong lesson in what not to do if you want to stay in power. David
Dickens on the Laffer Curve
I think Bill accidentally sent this to me privately instead of the list. Subject: Re: Laffer Curve From: William Dickens [EMAIL PROTECTED] Date: Wed, 20 Apr 2005 16:31:33 -0400 To: [EMAIL PROTECTED] I'll bite. I completely agree with Bill in the short-term. Higher taxes raise revenue. But I also have a sneaking suspicion that higher tax rates in the long run may hurt growth so much that the present value of taxes would be higher if rates were lower. And I have a sneaking suspicion that more equitable distributions of income lead to less social conflict and rent seeking and lead to higher growth. Unlike you I can point to some theoretical and empirical studies that back my suspicion up (though I wouldn't bet my life on it being true). My point is that any of us can have sneaking suspicions. Dueling sneaking suspicions aren't going to bring us any closer to agreement. Just talking to people who grew up in Scandinavia, they frequently tell me that high taxes had no effect on the older generation. But (combined with the welfare state) they raised a generation of shiftless, no-ambition slackers. If the U.S. had Swedish-level taxes during the 80's, I suspect it would have been a far less entrepreneurial and innovative economy in the 90's. Two thoughts. First, the empirical studies on the effects of distribution of income on growth suggest no such effect. But I have no idea how robust those results are and wouldn't be at all surprised if they allowed for some range of results if properly done. Personally I have little doubt that the various forms of welfare (not progressive taxation) do tend to destroy initiative among some parts of the population. I've had too much personal experience with smart, talented people getting caught up in welfare programs and not going anywhere not to suspect that this is a serious draw back of such programs. That's why I very much like to tightly time limit any generous welfare program. However, I have to admit that I don't know that there just aren't slackers in the world (some talented and bright) who would find parents, friends or some other less desirable way to support themselves if there weren't welfare programs. I don't know of any cross national study of long term welfare participation (OECD might have some aggregate study of this). The European Community Household Panel could be combined with the GSOP and the PSID or SIPP to good end to do such a study. Any graduate students out there looking for a thesis topic? - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] http://econlog.econlib.org [M]uch of the advice from the parenting experts is flapdoodle. But surely the advice is grounded in research on children's development? Yes, from the many useless studies that show a correlation between the behavior of parents and the behavior of their biological children and conclude that parenting shapes the child, as if there were no such thing as heredity. --Steven Pinker, *The Blank Slate*
Re: Dickens on the Laffer Curve
And I have a sneaking suspicion that more equitable distributions of income lead to less social conflict and rent seeking and lead to higher growth. I wonder what the Laffer Curve would have to say about the tax rates and equitable distributions of income and lesser or greater social conflict and higher or lower growth etc, that led to and constituted the socialist Wholecaust (of which the Holocaust was a part): 62 million killed in the former Union of Soviet Socialist Republics; 35 million in the Peoples' Republic of China; 21 million in the National Socialist German Workers' Party. http://rexcurry.net/socialists.html The poverty, misery, famine and slaughter were so enormous that Holocaust Museums can quadruple in size and scope as Wholecaust Museums.
Re: Laffer Curve
In a message dated 4/21/05 1:37:25 PM, [EMAIL PROTECTED] writes: By one measure, there is a big difference, in per capita GDP taking into account purchasing power parity. From the OECD site, in 1999 the U.S. had a per capita GDP of $33,836. Germany, France, UK, Italy were all between $22,000 and $24,000. Yes, the PPP per capital GDP figures for the last 15 years or so have shown a substantial gap between US and western European incomes. For that matter last I saw Canadian per capital GDP it was above European GDPs, and as I understand it, Hong Kong per capital GDP had pushed past Canadian per capital GDP into second place after American by the time the British handed the whole colony (both the leased and the non-leased portions) over to the Chinese communists. As McCloskey likes to point out, however, the gap between any of the countries the top ten or 15, for instance, shrinks into insignificance by comparison between the top 10 or 15 and the bottom 10 or 15, or even middle third of the world's per capita income distribution. The real question, according to McCloskey, is not why does Germany have only 75% of US per capital GDP, but why does Bangledesh have only 5% of US per capital GDP. People in the countries with the top 10 or 15 per capita incomes in the world are fabulously wealthy even compared to half a century ago, to say nothing about compared to before 1700. People living in the poorest parts of the world, by contrast, are still poor by pre-1700 standards.
Re: Laffer Curve
In a message dated 4/21/05 1:38:10 PM, [EMAIL PROTECTED] writes: And I have a sneaking suspicion that more equitable distributions of income lead to less social conflict and rent seeking and lead to higher growth. Unlike you I can point to some theoretical and empirical studies that back my suspicion up (though I wouldn't bet my life on it being true). My point is that any of us can have sneaking suspicions. Dueling sneaking suspicions aren't going to bring us any closer to agreement. You're raising the bar on me. I was just trying to meet your earlier challenge; But there is no reasonable argument (at least none that I've seen) that tax increases in any range we've seen in this country don't raise revenue. Disagree or not, I think my argument about long-term damage to entrepreneurship and the work ethic is a reasonable one. The Annual Reports of the Secretary of the Treasury for the early 1920s show that higher marginal tax rates did at first raise revenue, and then in succeeding years cause revenue to fall in the brackets to which the higher rates applied. People couldn't immediately adjust their much of their activities to avoid the higher rates, but over time did just that. Congress imposed something like a 100% tax on luxury boats (as I recall, as part of the tax hike of 1990), and found that they collected zero revenue from the tax. So we do have empirical evidence that higher marginal tax rates can produce less revenue. We also know that as marginal rates rise, people have more incentive to lobby for special provisions to exclude themselves or their particular activities from the the higher rates, which in turn generates hostility among people with similar incomes from non-excluded activities, generating further lobbying for expansion of the list of excluded activites. Higher marginal rates in general also raise the ire of people who see themselves as getting punished for working harder, giving more incentive to people with high incomes to work less and spend more time in leisure. Thus we had the phenomenon of doctors playing golf more often than seeing patients, etc., before Congress made large cuts in marginal tax rates during the 1980s.
Re: Dickens on the Laffer Curve
In a message dated 4/21/05 12:26:02 PM, [EMAIL PROTECTED] writes: And I have a sneaking suspicion that more equitable distributions of income lead to less social conflict and rent seeking and lead to higher growth. I wonder what the Laffer Curve would have to say about the "tax" rates and "equitable distributions of income" and "lesser or greater social conflict" and "higher or lower growth" etc, that led to and constituted the socialist Wholecaust (of which the Holocaust was a part): 62 million killed in the former Union of Soviet Socialist Republics; 35 million in the Peoples' Republic of China; 21 million in the National Socialist German Workers' Party. http://rexcurry.net/socialists.html The poverty, misery, famine and slaughter were so enormous that Holocaust Museums can quadruple in size and scope as Wholecaust Museums. Taking the example of Stalin's war on the peasantry in general and the Ukraine in particular, we see that massive confiscations of income at marginal rates well in excess of 100% certainly detered economic activity, to put it rather mildly.
Re: Dickens on the Laffer Curve
So it worked in the short run, and in the long run they were all dead! On Apr 21, 2005, at 5:10 PM, Bryan Caplan wrote: Yes, but ag collectivization in the USSR DID raise additional government revenue, at least in the short-run. The people starved, production fell, but Stalin got more grain to feed the cities and export. At least that's my recollection from Conquest. Of course, productivity growth in agriculture was very low afterwards, fitting my long-run Laffer curve story! -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] http://econlog.econlib.org [M]uch of the advice from the parenting experts is flapdoodle. But surely the advice is grounded in research on children's development? Yes, from the many useless studies that show a correlation between the behavior of parents and the behavior of their biological children and conclude that parenting shapes the child, as if there were no such thing as heredity. --Steven Pinker, *The Blank Slate* When a pitcher's throwing a spitball, don't worry and don't complain, just hit the dry side like I do. - Stan Musial
Re: Dickens on the Laffer Curve
Speaking of Communism, is The Black Book worth having? I saw several copies yesterday at a secondhand store in San Leandro, marked about $8 if memory serves. -- Anton Sherwood, http://www.ogre.nu/
Re: Dickens on the Laffer Curve
That's the trouble with the empirical testing of Laffer effects. Your selected timeframe has an inverse relationship with the revenue maximizing rate of taxation. The tax policy that maximizes revenue over the next hour is to confiscate everything. The revenue maximizing tax policy over the next century is to tax at some lesser rate that anticipates the formation of capital to expand the tax base. Depending on the time frame you chose, you can conclude that t is currently on whatever side of t* you prefer so as to make the case for a tax cut or a tax hike. jlw Stephen Miller wrote: So it worked in the short run, and in the long run they were all dead! On Apr 21, 2005, at 5:10 PM, Bryan Caplan wrote: Yes, but ag collectivization in the USSR DID raise additional government revenue, at least in the short-run. The people starved, production fell, but Stalin got more grain to feed the cities and export. At least that's my recollection from Conquest. Of course, productivity growth in agriculture was very low afterwards, fitting my long-run Laffer curve story! -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] http://econlog.econlib.org [M]uch of the advice from the parenting experts is flapdoodle. But surely the advice is grounded in research on children's development? Yes, from the many useless studies that show a correlation between the behavior of parents and the behavior of their biological children and conclude that parenting shapes the child, as if there were no such thing as heredity. --Steven Pinker, *The Blank Slate* When a pitcher's throwing a spitball, don't worry and don't complain, just hit the dry side like I do. - Stan Musial .
Re: Dickens on the Laffer Curve
It's not as funny when you explain it... On Apr 21, 2005, at 9:51 PM, James Wells wrote: That's the trouble with the empirical testing of Laffer effects. Your selected timeframe has an inverse relationship with the revenue maximizing rate of taxation. The tax policy that maximizes revenue over the next hour is to confiscate everything. The revenue maximizing tax policy over the next century is to tax at some lesser rate that anticipates the formation of capital to expand the tax base. Depending on the time frame you chose, you can conclude that t is currently on whatever side of t* you prefer so as to make the case for a tax cut or a tax hike. jlw Stephen Miller wrote: So it worked in the short run, and in the long run they were all dead!
Re: Dickens on the Laffer Curve
If you ever wondered which end of the ideological spectrum was a humorless lot... Stephen Miller wrote: It's not as funny when you explain it... On Apr 21, 2005, at 9:51 PM, James Wells wrote: That's the trouble with the empirical testing of Laffer effects. Your selected timeframe has an inverse relationship with the revenue maximizing rate of taxation. The tax policy that maximizes revenue over the next hour is to confiscate everything. The revenue maximizing tax policy over the next century is to tax at some lesser rate that anticipates the formation of capital to expand the tax base. Depending on the time frame you chose, you can conclude that t is currently on whatever side of t* you prefer so as to make the case for a tax cut or a tax hike. jlw Stephen Miller wrote: So it worked in the short run, and in the long run they were all dead! .
Re: Laffer Curve
I'm just wondering if it is even possible for the supply and demand curves to be shaped shaped in such a way that the Laffer curve does not apply to some market. Since you asked... Take an income tax and the very standard constant elasticity formulations for demand and supply (they are called constant elasticity because a one percent increase in the wage always causes the same percentage increase in labor supply (b) and the same percentage decrease in labor demand (a) no matter what the wage is): Ld=D w^(-a) Ls=S [w(1-t)]^b Doesn't this allow labor supply to be unbounded? And isn't this a problem since, for example, you can't supply more than 24 hours of labor per day per person? --Robert Book [EMAIL PROTECTED]
Re: Laffer Curve
There are lots of reasonable objections to raising taxes. You can decide that you don't think that tax revenue is put to good uses. You can believe that ethically taxation is theft. But there is no reasonable argument (at least none that I've seen) that tax increases in any range we've seen in this country don't raise revenue. - - Bill Dickens I'll bite. I completely agree with Bill in the short-term. Higher taxes raise revenue. But I also have a sneaking suspicion that higher tax rates in the long run may hurt growth so much that the present value of taxes would be higher if rates were lower. Just talking to people who grew up in Scandinavia, they frequently tell me that high taxes had no effect on the older generation. But (combined with the welfare state) they raised a generation of shiftless, no-ambition slackers. If the U.S. had Swedish-level taxes during the 80's, I suspect it would have been a far less entrepreneurial and innovative economy in the 90's. Econometric evidence? As far as I know, there's none either way, and for obvious reasons. But it makes sense to me. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] http://econlog.econlib.org [M]uch of the advice from the parenting experts is flapdoodle. But surely the advice is grounded in research on children's development? Yes, from the many useless studies that show a correlation between the behavior of parents and the behavior of their biological children and conclude that parenting shapes the child, as if there were no such thing as heredity. --Steven Pinker, *The Blank Slate*
Re: Laffer Curve
Does the following have any bearing on the Laffer Curve discussion? Hammermesh estimated that a 10-percentage point reduction in payroll taxes would lead to a short-term 3 percent increase in employment and a long-term 10 percent increase in employment United States. It sure does. A ten percentage point drop is about a 2/3rds cut in payroll taxes which would be close to a 1/3rd cut in total revenue from income and payroll taxes combined. Obviously that is not going to come close to being offset by a 10% increase in work hours since that would increase revenue by less than 10% of its original value. Further, in my experience this is towards the upper end of such estimates. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Laffer Curve
In a message dated 4/19/05 12:43:11 PM, [EMAIL PROTECTED] writes: For what it's worth, I recall a Treasury study in the late 1980s that concluded that the tax cut of 1984 was 95% self-financing. David Do you have a citation for that study (or a copy)? If "95% self-financing" means what it seems to mean, that would mean tax revenues actually declined, right? --Robert Book [EMAIL PROTECTED] No (thus the "I seem to recall"--actually I read about it on the editorial page of the Wall Street Journal) and yes (tax revenues from the affected items fell, but I don't know over what period). David
Re: Laffer Curve
I'm just wondering if it is even possible for the supply and demand curves to be shaped shaped in such a way that the Laffer curve does not apply to some market. Since you asked... Take an income tax and the very standard constant elasticity formulations for demand and supply (they are called constant elasticity because a one percent increase in the wage always causes the same percentage increase in labor supply (b) and the same percentage decrease in labor demand (a) no matter what the wage is): Ld=D w^(-a) Ls=S [w(1-t)]^b which implies w=(Ld/D)^(-1/a)=(Ls/S)^(1/b) (1-t)^(-1) If I did my algebra correctly with Ld=Ls=L L^(1/b+1/a)=D^(1/a)S^(1/b) (1-t) or L=[D^(1/a)S^(1/b) (1-t)]^(ba/(a+b)) so Revenue=twL=C t (1-t)^[b(a-1)/(b+a)] (C a constant function of D and S) If a is less than 1 (a one percent increase in the wage causes less than a one percent decline in labor demand) and you take the limit as t goes to 1 you get revenue going to infinity - - not exactly a Laffer curve. With an elasticity of demand less than 1 wages rise more than enough to compensate for the reduction in labor supply caused by the tax increase. With these demand and supply equations a little calculus yields the result that the tax rate that maximizes revenue is t (rev. max)=(a+b)/[a(1+b)] which is greater than 1 (which is impossible the way the tax rate has been defined) if a is less than 1. It asymptotes to 1/(1+b) as minus the demand elasticity (a) goes to infinity and 1/a as supply elasticity ( b) goes to infinity (and therefore zero as both approach infinity). From what I remember, typical estimates of a are (a lot) less than 1, but some come in somewhat above it. Typical estimates of b are .1 with very high estimates for aggregate labor supply coming in around .2. Being generous (a=1.5, b=.2) that would give a revenue maximizing tax rate of .94. Another calculation you see is that people assume that demand is infinity elastic in the long run (which follows for small countries in some trade models with constant returns to scale) and compute 1/(1+b) as the revenue maximizing income tax. That will give you the sort of value that one poster mentioned (.8 ish). Note what you have to assume to get revenue maximizing rates down where income tax rates are in thi! s country - - extremely high elasticities of demand along with Ls elasticities of close to 2 or more which are way out of bounds for anything anyone has computed for long run supply (think about what it would imply for what the work week should have done over the last century if elasticities were that high). Another calculation you can perform with these equations is what the effect of a tax increase will be on revenue. With a=1.5 and b=.2 and a tax rate of 33% a one percentage point increase in the tax rate causes about a 29 percent increase in revenues - - obviously not a whole lot of leakage due to decreasing labor supply and demand. The main reason why the Laffer curve takes so much abuse is calculations like this. I don't know of any serious public finance economists who believe that we are anywhere near the point of maximum revenue on most important taxes. Anyone working in public finance knew full well that additional tax revenue wouldn't equal the change in the tax rate times current wL long before Laffer drew his curve on a napkin for Jack Kemp, but those people knew better than to suggest that a tax cut could be self financing. The only cuts I've ever seen where serious arguments were made that they were self financing were capital gains cuts (for example the cut in 78). There was a fall in revenue from capital gains taxes when they were increased in 1987, but that appears to have been due to a huge flurry of selling of assets in December of 86 in anticipation of the higher rates and really says nothing about what the long run revenue effects of the higher rates would be. In my judgement reasonabl! e estimates still suggest that even capital gains tax increases are revenue increasing in the long run. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Laffer Curve
Without understanding the parts I snipped I would like to point out that if *my* tax rate was .94, I would need no more incentive to derive 100% of my income from the underground economy. Or is this just one of those counter-intuitive economic conclusions? Throw me a bone here. ;-) Perfectly reasonable. However, I wasn't trying to answer the question of what the true revenue maximizing tax rate is. Rather I was responding to the questioner who wanted to know if there was any supply and demand system that didn't yield a Laffer curve and I was showing that the very standard log-linear demand and supply curves (constant elasticity of demand and supply) give that result. I then showed what other results you can get from manipulating that model. No one believes that the world is exactly log-linear, and increasing tax evasion with higher tax rates is as good a reason as any to be suspicious of trying to forecast the effects of tax increases much beyond current tax rates. That said, the calculations I proposed that showed: 1) what the current tax yield for an increase in the tax rate is, and 2) what elasticities would be needed to get the revenue maximizing rate down into range of current tax rates, do not involve projection outside the range of our recent experience and therefore are not subject to that criticism. The log-linear demand and supply system can be viewed as first order approximations to any general demand and supply system and is therefore not likely to give you results that are very far off assuming the parameter estimates are correct. In other words, we have no idea what tax rates would maximize revenue, but we do know we are nowhere near them right now - - at least not without brining in other factors besides labor supply and demand. Some people have tried to argue that savings and investment increase substantially with income tax cuts, but I'm pretty sure that CBOs dynamic scoring takes such effects into account and shows almost no significant effect from that at current tax rates. CBO is headed by a former member of Ws Council of Economic Advisors who brought dynamic scoring to CBO and can hardly be called an ideologue of any stripe. There are lots of reasonable objections to raising taxes. You can decide that you don't think that tax revenue is put to good uses. You can believe that ethically taxation is theft. But there is no reasonable argument (at least none that I've seen) that tax increases in any range we've seen in this country don't raise revenue. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Laffer Curve
I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists. For example, from Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd You can derive R = t(bc + da - bdt)/(b + d) Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function? James
Re: Laffer Curve
In a message dated 4/18/05 3:21:40 PM, [EMAIL PROTECTED] writes: I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists. For example, from Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd You can derive R = t(bc + da - bdt)/(b + d) Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function? James For what it's worth, I recall a Treasury study in the late 1980s that concluded that the tax cut of 1984 was 95% self-financing. David
Re: Laffer Curve
James Wells wrote: I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists. For example, from Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd You can derive R = t(bc + da - bdt)/(b + d) Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function? James I'm not sure exactly what people should be objecting to. Logically, at a tax rate of 0, revenue is 0, at a tax rate of 100, revenue is zero. There exists a positive revenue for tax rates in between that range so logically, a maxima must exists within that range. Xianhang Zhang
Re: Laffer Curve
I think the debate is over the tax rate where revenue is maximized. If it is near 25%, you can argue cutting taxes will raise revenue, if it is nearer to 60%, cutting taxes will cause revenue to fall. I am sure there has been research on this, but I do not know the consensus (last I heard, the peak was at about 75%-80%). I think it gets considerably more interesting when you think of how taxes and growth can be endogenous. It is possible that even on the near side of the Laffer curve, a tax cut could cause a large enough increase in investment that the DPV of future revenue could increase. As I understand it, this is one of the arguments Republicans make when arguing tax cuts. Of course, in the 1980s, the Reagan administration did argue the highest tax rates were on the far side of the Laffer Curve. -Jeff Xianhang Zhang [EMAIL PROTECTED] 04/18/05 7:49 PM James Wells wrote: I've been reading about Laffer's idea that there is a tendency for revenues to increase with increased taxation up to a point where revenue is maximized. As one of the class notes on Caplan's site indicates, you can derive revenue as a function of the tax rate and assuming that the slopes of the supply and demand curves are constants not equal to zero, you can show that the Laffer effect exists. For example, from Pd = price paid by buyer Ps = price received by seller t = tax per unit = Pd - Ps. R = revenue = tQ Supply curve: Qs = a + bPs Demand curve: Qd = c - dPd You can derive R = t(bc + da - bdt)/(b + d) Still, a lot of people have said that the Laffer curve is bunk. Are there any Laffer detractors here? If so, what must the supply and demand curves for labor look like for R(t) to be an always increasing (or at least never decreasing) function? James I'm not sure exactly what people should be objecting to. Logically, at a tax rate of 0, revenue is 0, at a tax rate of 100, revenue is zero. There exists a positive revenue for tax rates in between that range so logically, a maxima must exists within that range. Xianhang Zhang
