Thursday, April 21, 2011

The Laffer Curve

Kliphnote: Clueless. Didn't he hear anything Charlie Gibson said?
"Gibson began by noting that Obama has indicated an intention to raise the capital gains tax rate, and reviewed recent history: the rate fell from 28% to 20% under Bill Clinton in 1997 and fell further to 15% under George W. Bush. Then he said, "And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?"
And he hasn't learned anything in over two years. 
It's redistribution of wealth.
Punish the rich and give it to the non-working poor.

Laffer Curve

What Does It Mean?
What Does Laffer Curve Mean?
Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue collected by governments. The chart below shows the Laffer Curve:
A non-symmetric Laffer Curve with a maximum revenue point at around a 70% tax rate.
The Laffer Curve
The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
Investopedia Says
Investopedia explains Laffer Curve
Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard. 

The Laffer Curve

Some of you may share the mistaken belief that the Laffer Curve, named for Dr. Arthur Laffer, was tested and found wanting during the Reagan Administration. Nothing could be farther from the truth.

Now, let us consider whether the Laffer Curve "failed" to deliver on its promises during the Reagan administration. Remember, the Laffer Curve does not promise to balance the budget. The Laffer Curve does not promise to solve social problems. The Laffer Curve does not promise to force elected representatives to propose and enact lower spending programs. The Laffer Curve only promises that, if the tax rates are too high and they get lowered, revenues will increase. Income taxes were lowered (and "flattened") during the Reagan administration. Income tax revenues increased.  
In fact, they increased a great deal. Unfortunately, neither the Republican Reagan administration nor the Democrat-controlled Congress were interested in lowering the rate of growth in federal spending. While the income tax revenues increased substantially, federal spending increased even more. The result was that the federal government ran up a staggering national debt. But please, let's not blame it on the Laffer Curve!

According to the Washington Post, Democrats are continuing to push for an increase in marginal rates, but only on the very rich.
A faction of congressional Democrats is making a push to persuade President Obama to consider a compromise on tax policy that would leave only the nation’s 315,000 richest households facing higher taxes in January.
That’s because these Democrats still think they will be able to raise more revenue by letting marginal rates go up. But that ignores the fact that the federal government has never been able to get much more than 19 percent of GDP in tax revenues, no matter how high the top marginal tax rate goes. Consider this chart:

From the Fiscal Times:

Budget Deficit: Government Handouts Top Tax Income

By JAMES C. COOPER, The Fiscal Times April 19, 2011
* Households received $2.3 trillion in government income support in 2010.
* Government cash accounts for 79 percent of household income growth since 2007.
* Since 2007, household tax payments have fallen by $312 billion.

For the first time since the Great Depression, households are receiving more income from the government than they are paying the government in taxes… The only other time government income support exceeded taxes paid was from 1931 to 1936. That trend reversed in 1936, after a recovery was underway, and the economy fell back into a second leg of recession during 1937 and 1938…

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