The Laffer Curve debunked; Part One

It all began, back in the day, with the Laffer Curve.

In the early ’70s, economist Arthur Laffer and his acolytes began preaching a very simple idea: By cutting taxes — always a politically popular move — it was possible to actually increase government revenue. As the story goes, Laffer illustrated the seemingly magical concept for Dick Cheney, among others, by drawing the curve on a cocktail napkin in a Washington hotel bar. (The versions published here, created by yours truly, attempt to honor the original in their crudeness. At least that’s my excuse.)

lafferone

Figure One

The idea was quickly seized upon by leading Republican conservatives, who used it to justify major tax cuts in the early ’80s and have continued to do so ever since, under the rubric “supply-side economics.” And under the right conditions, the argument behind the Laffer Curve does make some sense.

Without a doubt, excessively high taxes can strip needed capital from the private economy, reducing investment and spending and thus curtailing growth. By cutting taxes, you can theoretically free up capital and encourage investment, and the resulting growth will generate more government revenue than you had in the first place.

The theory is illustrated by Figure One, to the right. Pay particular attention to the part of the curve labeled C. As the tax rate moves to the left and gets lower, you see government revenues rising. That process continues until you reach the sweetspot, labeled Point A, which in this illustration is at roughly 25 percent.

Point A represents nirvana, the point at which you have both the highest possible government revenue generated by the lowest possible tax rate.

But there’s a downside to the Laffer Curve as well. Note that if you move beyond Point A into the region marked B, tax rates continue to fall but this time revenue plummets. Region B represents the part of the curve where cutting taxes does NOT generate enough growth to compensate, and in fact may not generate any growth at all.

lafferb

Figure Two

So the trick, it would appear, is to identify where Point A is. But that’s difficult to impossible, in part because the location of Point A probably varies wildly from country to country, era to era and tax system to tax system.

Figure Two, for example, offers just as plausible a depiction of the tax rate’s impact on revenue as Figure One.  In this example, Point A, the sweetspot, is at roughly 60 percent; any reduction in rates below that point would put you into Region B, where government revenues would drop. (NOTE: The percentages used here are for discussion purposes only and are not intended to reflect actual taxation or its impact).

But the problem is, something very destructive happened in the translation of this economic theory into political language and policy. In the popular conservative version of the Laffer Curve, no debate over the location of Point A is even tolerated, because cutting tax rates is said to ALWAYS generate more government revenue.

In effect, Region B, the part of the curve in which lower tax rates produce sharply lower government revenue, has simply been banished from the discussion.

Figure Three

Figure Three

Once you do that, however, the Laffer Curve no longer functions as a curve at all (see Figure Three). If lower rates always produce more revenue, as the right likes to claim, the Laffer Curve becomes the Laffer Line, and Point A, the sweetspot, stands at a tax rate of zero.

While that makes no sense mathematically, politically it is an enormously appealing notion. It’s like telling someone with an obesity problem that the best way to lose weight is to always eat more ice cream — more times than not, their eagerness to believe overwhelms any skepticism.

Or to paraphrase the argument:

“Cutting taxes doesn’t add to the deficit, it’s how we fight the deficit!! Less is more, don’t you see?? Reagan proved it. Oh, and hand me that chocolate sauce and whipped cream, will you?”

Coming tomorrow: The search for Point A.

285 comments Add your comment

Grumpy

September 14th, 2010
7:28 pm

You’ve debunked nothing.

AmVet

September 14th, 2010
7:30 pm

Miami, Florida (CNN) – The ex-chairman of the Republican Party of Florida, Jim Greer, is now apologizing for stoking fears about President Obama’s address to school children last year.

Greer, now under indictment on fraud and money-laundering charges after being drummed out of the state party, also accused “many within the GOP” of having “racist views.”

Ya think?

Chuck E. Employee

September 14th, 2010
7:31 pm

“The ex-chairman of the Republican Party of Florida’

ex being the key word there.

tm

September 14th, 2010
7:31 pm

jewcaboy “If your taxes go up by 5%, you’ll be paying an extra $12.5k out of $250k…on a family earning $45k that would be $2250.”

Same proportion…but greater impact on lower wage earners

How many people am I supporting with my non deductible payment of 125k per year fof education costs with the additional 12.5k in taxes. I think the peerson at 45k can pay an additional 2250 if Clinton thought it was ok,

Chuck E. Employee

September 14th, 2010
7:31 pm

Dem aides could face massive layoffs

If Republicans sweep the House and win key Senate seats in November, it’s not just elected Democrats who will be unemployed — more than 1,500 Democratic staffers could lose their jobs, with layoffs stretching from low-wage staff assistants to six-figure committee aides.

Read more: http://www.politico.com/news/stories/0910/42115.html#ixzz0zYABwT94

Chuck E. Employee

September 14th, 2010
7:32 pm

TaxPayer

September 14th, 2010
7:33 pm

Let’s see if I recall Chuckee’s numbers correctly,

Unemployment change under Bush = -4.4 – (-8.1) = 3.7% decline

Unemployment change under Obama = -8.1 – (-10.0) = 1.9% decline

Bush loses by 3.7 – 1.9 = 1.8 and Obama still has another 6 years to improve on that score, just to be fair.

Fly-on-the-wall

September 14th, 2010
7:33 pm

Chuck,

Now you’ve gotten a taste of how us so called ‘liberals’ see most of the comments made by conservative such as you. Too many times it is nothing but name calling and put downs without any real discussion of the relevent points in the article that Jay wrote. It basically breaks down into a food fight which to me serves no purpose whatsoever. I rarely post comments here but I felt this time would be good in an attempt to prove a point and hopefully all of us could use it as a lesson on how NOT to have a civil discussion. Now if you don’t want civil discourse then that is your prerogative.

Chuck E. Employee

September 14th, 2010
7:34 pm

Gee, what in the world could make America hate Democrats?

The public hates almost everything Congress has done

Gallup has released a new poll asking respondents to assess the major accomplishments of Congress in the last two years: the national health care bill, the stimulus, the bailout of auto companies, the bailout of major banks and financial institutions, and the financial regulatory reform bill. The pollsters found majority opposition to all those measures, with the exception of financial reform.

http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/The-public-hates-almost-everything-Congress-has-done-102761814.html

F. Sinkwich

September 14th, 2010
7:34 pm

Chuck:

“Oh well, life is good.”

Judging by the mood of the electorate, you’re right. Kam, Saul, Tax, etc., will never concede the errors of their ways. They think they are entitled to other people’s money.

Wealth envy. Kinda pathetic.

As John Wayne said, “Life’s tough. it’s even tougher when you’re stupid.”

Chuck E. Employee

September 14th, 2010
7:35 pm

“Bush loses by 3.7 – 1.9 = 1.8 and Obama still has another 6 years to improve on that score, just to be fair.”

Yeah, with Obama’s falling poll numbers and Democrats losing elections, he’s sure to win another term!

Gotta love left wing non-logic.

AmVet

September 14th, 2010
7:35 pm

No, I’d say “having racist views” are the key words.

Notwithstanding that yet another of the countless con crooks gets caught with his hands in the American cookie jar…

Del

September 14th, 2010
7:35 pm

Chow time…why don’t we have a real discussion like about Imam Rauf’s association with the truther Faiz Kahn and his contention that 9-11-01 was an inside job as well as his comment that A. Q. had nothing to do with the attack.

Chuck E. Employee

September 14th, 2010
7:36 pm

Fly-on-the-wall

The Bookman blog bozo’s have absolutely no effect on me whatsoever. I envision them as tiny little chihuahuas nipping at my ankles.

F. Sinkwich

September 14th, 2010
7:37 pm

Chuck:

“The pollsters found majority opposition to all those measures”

Libs —–> La, La, La, (hands over ears), I can’t hear you! La, La La.”

Chuck E. Employee

September 14th, 2010
7:38 pm

“No, I’d say “having racist views” are the key words.”

Robert Byrd used to say that, too. Great klanner he was and a great democrat.

AmVet

September 14th, 2010
7:39 pm

LA, he was one of your beloved “conservatives”. Back before they all high-tailed it to the GOP…

Chuck E. Employee

September 14th, 2010
7:39 pm

F. Sinkwich

Yeah, and their anger is growing by the day. Can’t wait until November when left wingers heads explode simultaneously.

Chuck E. Employee

September 14th, 2010
7:40 pm

“LA, he was one of your beloved “conservatives”. Back before they all high-tailed it to the GOP…”

Like I told Bosch earlier, lay off the acid man. It’ll save what little brain cells you have left.

tm

September 14th, 2010
7:41 pm

So every one is in agreement, Cllinton was the greatest in reducing the deficit and we should return to ALL of the tax bracket that he had before the Bush tax cuts.

Chuck E. Employee

September 14th, 2010
7:41 pm

“Libs —–> La, La, La, (hands over ears), I can’t hear you! La, La La.”

Election day 2010 is gonna be a bad day for the bozo’s on the left.

Kamchak

September 14th, 2010
7:42 pm

Yeah, and their anger amusement is growing by the day.

Fixed your typo, Commie.

Fly-on-the-wall

September 14th, 2010
7:43 pm

Chuck, your 7:25 is exactly what we’re pointing out. You pull childish crap like that but if someone else calls you out on it you get all defensive and say the libs did it first.

Like has been said with other bloggers like Chuck – nothing to see here folks, please move along.

getalife

September 14th, 2010
7:43 pm

“I know we can’t do comprehensive immigration reform,” Reid said at a news conference. “But those Republicans we had in the last Congress have left us.”

The plot thickens.

He put immigration in the defense bill.

Chuck E. Employee

September 14th, 2010
7:43 pm

Imam Rauf is the left’s new found hero. Anyone who hates America as much as he does is welcomed in their world. If only the left knew that Muslims hate gays and women. I also can’t understand why the left would welcome someone who worships at the feet of a pedophile.

Chuck E. Employee

September 14th, 2010
7:44 pm

“Fixed your typo, Commie.”

Oh, and how am I a commie? I hate communism as much as I hate liberalism.

AmVet

September 14th, 2010
7:44 pm

The guy who is fixated on LSD, in lieu of cogent answers, still hasn’t backed up that insane claim that the south has more money than anywhere else in America.

Where’s your data to support that nonsense, LA?

Where are the facts?

Where is the first scintilla of evidence?

Are you moving your lips as you read this?

Del

September 14th, 2010
7:45 pm

Spirited debate lads. There doesn’t appear to be any lasses here this evening, so apart from the “laffer curves” don’t you think Inez from Aztek TV has great curves?

Chuck E. Employee

September 14th, 2010
7:45 pm

“Chuck, your 7:25 is exactly what we’re pointing out. You pull childish crap like that but if someone else calls you out on it you get all defensive and say the libs did it first.”

And when did I get defensive, Fly? Again, quit making up stuff.

| Jay Bookman

September 14th, 2010
7:46 pm

[...] In a post yesterday, we took a look at the theory behind supply-side economics and the Laffer Curve. So I think it’s time to look at how the theory has worked in practice, focusing on two separate experiments with supply-side economics in the past 30 years. [...]

Chuck E. Employee

September 14th, 2010
7:47 pm

“The guy who is fixated on LSD, in lieu of cogent answers, still hasn’t backed up that insane claim that the south has more money than anywhere else in America.”

AmVet, you’ve been too busy calling people racist etc to read what I wrote. Now, with that said, anything I write will result in you claiming that I am someone else.

“Where’s your data to support that nonsense, LA?”

Bush did it. Blah blah blah.

“Where are the facts?”

Bush did it.

“Where is the first scintilla of evidence?”

Bush did it.

“Are you moving your lips as you read this?”

Bush did it.

Chuck E. Employee

September 14th, 2010
7:48 pm

Del

Turns out the Aztec Princess lied about being harassed.

godless heathen

September 14th, 2010
7:48 pm

Taxpayer: “Whatever floats your boat, godless.”

It does indeed float my boat to call you out for saying conservatives in the discussion had not read Jay’s post, when in fact it was you that had not.

Float boat, float.

Del

September 14th, 2010
7:49 pm

Chuck E.

Bless her anyway!

Chuck E. Employee

September 14th, 2010
7:50 pm

“Bless her anyway!”

And her crooked teeth.

Chuck E. Employee

September 14th, 2010
7:51 pm

AmVet

When you were in the Coast Guard, did you rescue a lot of Cubans?

Del

September 14th, 2010
7:51 pm

Chuck E.

Somehow missed her teeth. Off to chow, y’all play nice.

AmVet

September 14th, 2010
7:53 pm

Not to worry, Grand Forks, I just like seeing you get all worked up.

And to laugh at the fact that when you are asked to corroborate any of the weird stuff you say, you get even weirder.

But I’ve already grown tired of your unevolved sophomoric nonsense.

I’m sure others will be glad to keep feeding you, but I do not suffer fools gladly.

So until we meet again, when you have yet another new moniker, au revoir gophare…

F. Sinkwich

September 14th, 2010
7:54 pm

Chuck, AmVet is as delusional as he is hopeless.

He is a brilliant observer, philosopher, and unbiased arbiter of the American politic.

If you don’t believe me, just ask him.

Mick

September 14th, 2010
7:54 pm

del

She had on some tight jeans, her curves were no laffer. I have no sympathy for her, you go into a room full of jocks and well…..you get a room full of jocks. If you can’t handle the jockstraps, get the hell out of the locker room…

Chuck E. Employee

September 14th, 2010
7:56 pm

“But I’ve already grown tired of your unevolved sophomoric nonsense.”

You wrote the book on sophomoronic nonsense, Am.

“Not to worry, Grand Forks, I just like seeing you get all worked up.”

I feel sorry for the folks that will have to take care of you once those last few brain cells are gone from your constant used of Lucy in the sky with diamonds.

Chuck E. Employee

September 14th, 2010
7:56 pm

“He is a brilliant observer, philosopher, and unbiased arbiter of the American politic.”

Yeah, in his own drugged out mind.

Chuck E. Employee

September 14th, 2010
7:57 pm

Mick

Turns out she lied about the whole thing. I think the dead giveaway was when she went on 6 different talk shows to talk about it and her story changed every time.

Mick

September 14th, 2010
7:57 pm

sink

amvet runs circles around moronic conservative drivel. Mostly because he’s one of the sharper tools in the shed but mainly because your arguments are pretty lame.

Chuck E. Employee

September 14th, 2010
8:00 pm

“amvet runs circles around moronic conservative drivel.”

That’s the best lie I’ve read all day!

Mick

September 14th, 2010
8:02 pm

chuck

She loves the attention and knows the power of her sex appeal. I must admit, she’s hot… the hell with political correctness – yes, boys will be boys.

Chuck E. Employee

September 14th, 2010
8:06 pm

Mick

True, but making it up to get attention is just dumb.

Mick

September 14th, 2010
8:08 pm

**True, but making it up to get attention is just dumb**

Dumb blonde? no way – way….

Chuck E. Employee

September 14th, 2010
8:09 pm

“Dumb blonde? no way – way….”

She’s not a real blonde.

Mick

September 14th, 2010
8:10 pm

**She’s not a real blonde.**

Who is?

Kamchak

September 14th, 2010
8:13 pm

Oh, and how am I a commie?

You are not “a” commie.

You are:
Communist/AJC
LA
Who Dat?
Grand Forks
Tuesday Vandy Girl
Roller Girl
I’m here…
Mr. Charlie
Alatsea
CAIR Bears
Pullet Surprise

and quite a few others that I haven’t figured out yet.

It’s why I created the “Commie has a new sock-puppet” drinking game.

Disgusted

September 14th, 2010
8:36 pm

You’re living on borrowed time, Chuck E. In another week, Jay will be banning your new ISP, and you’ll be back on Tucker’s blog. You’re like the big bad wolf in that sheepskin, but your ears stick out for all to recognize. Too bad you lack the IQ to change your style.

TaxPayer

September 14th, 2010
8:40 pm

It does indeed float my boat to call you out for saying conservatives in the discussion had not read Jay’s post, when in fact it was you that had not.

Float boat, float

Feel free to back up your claim with fact at any time. zzzzzzz.

I Report (-: You Whine )-: mmm, mmmm, mmmmm! Just sayin...

September 14th, 2010
8:49 pm

Buh bye Mike Castle, RINO-

http://www.politico.com/2010/maps/

See ya, wouldn’t want to be ya…

@@

September 14th, 2010
8:52 pm

Oh my!

schnirt

TaxPayer

September 14th, 2010
8:54 pm

Kamchak at 8:13,

I suspect that is only a partial list.

TaxPayer

September 14th, 2010
8:56 pm

Who’s Mike Castle. Did he invent that cheap northern imitation of Krystals or something.

mike

September 14th, 2010
8:57 pm

“But the problem is, something very destructive happened in the translation of this economic theory into political language and policy. In the popular conservative version of the Laffer Curve, no debate over the location of Point A is even tolerated, because cutting tax rates is said to ALWAYS generate more government revenue.”

All of that windup to throw out a straw man? This argument is pathetic, even by Jay’s standards. Unfortunately, Jay is describing an extreme viewpoint to which few conservatives subscribe.

@@

September 14th, 2010
8:59 pm

Kamchak:

You are:
Communist/AJC
LA
Who Dat?
Grand Forks
Tuesday Vandy Girl
Roller Girl
I’m here…
Mr. Charlie
Alatsea
CAIR Bears
Pullet Surprise

Have you ever asked yourself “Have I stayed too long at the fair?”

If not, you should.

Kamchak

September 14th, 2010
9:03 pm

Have you ever asked yourself “Have I stayed too long at the fair?”

Haven’t you already declared that you have stayed too long at the fair?

On four separate occasions?

getalife

September 14th, 2010
9:04 pm

What kind of idiot was looking at her teeth when she poured into those jeans.

Not fair for the Jets.

getalife

September 14th, 2010
9:12 pm

That will be a dem win in the primary Andy.

Check the polls.

It will not be close.

Kamchak

September 14th, 2010
9:14 pm

getalife

The word that you are looking for is callipygian

@@

September 14th, 2010
9:14 pm

Kamchak:

You may wanna go back to this morning’s thread and count forward.

@@’s posts=???

Kamchak’s posts=???

I only take an occasional ride on the Tilt-A-Whirl. You’re stuck on the Ferris Wheel.

Your life. Have fun.

Kamchak

September 14th, 2010
9:18 pm

You may wanna go back to this morning’s thread and count forward.

Pass.

getalife

September 14th, 2010
9:24 pm

Callipygian indeed.

New thread.

TaxPayer

September 14th, 2010
9:24 pm

Before President Bush signed the 2003 tax cuts, the nonpartisan Economic Policy Institute (EPI) released a statement signed by ten Nobel prize laureates entitled “Economists’ Statement Opposing the Bush Tax Cuts,” which states that:

Passing these tax cuts will worsen the long-term budget outlook, adding to the nation’s projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.

That may be true but what does that matter to a ……………. conservative. Not to worry though. I see there is no mention of any threat to the long-term viability of that (current) one trillion dollar annual DoD budget. By the time that thing has finished growing, we’ll likely all be able to find work for the government in some branch of the military. I don’t think it’s called socialism in that scenario though. Maybe Republicanism is a good word for it.

Scout

September 14th, 2010
9:25 pm

Jay:

Seriously ……… if you took all of the energy you spend trying to make a “silk purse out of a pig’s ear” you could really make a difference out there.

Scout

September 14th, 2010
9:27 pm

P.S.

I know he’s your Democrat President but at some point your going to have to admit that you made a terrible mistake.

It happens.

I Report (-: You Whine )-: mmm, mmmm, mmmmm! Just sayin...

September 14th, 2010
9:30 pm

Gitmo- Scott Brown didn’t stand a chance either.

We are cleaning our house and we will soon be cleaning yourn.

Mick

September 14th, 2010
9:34 pm

scout

I know that you refuse to believe it but he is your president too and at some point you are going to have to admit that you have gone over the edge in your post tramatic stress over the election of a half white, half african who bested all the major politicians of this day to grab the brass ring. It really is OK.

Scout

September 14th, 2010
10:05 pm

Mick:

Of course he is my president, and Bush’s and McCain’s and everyone else but he has experienced much, much less of the virtriol thown at Former President Bush.

However, he is more than just “a” president.

He is not our first black president, our first Muslim president or even our first socialist president.

No, Barack Hussein Obama is our first foreign president and that is truly scary”

Mick

September 14th, 2010
11:14 pm

scout

I don’t see how you come to that conclusion. I’m really getting turned off by politics and all its collateral implications. Anyway, keep up the good fight because the truth is we want you or someone on that wall…

paleo-neo-Carlinist

September 14th, 2010
11:40 pm

ever hear the “take two” from the White Album (Revolution)? let’s say this urban myth is true. let’s say Laffer, a pointy-headed intellectual economist scribbled some notes on a cocktail napkin, which presented a half-baked theory about reduced taxes actually benfiting Americans through a more robust economy. do you think the pathetic, draft-doding up and coming GOP operative had a “moment of clariity” and said; “wow, prosperity for all! this is great!”? OR, do you think like Simon Bar Sinister (Underdog) he rubbed his hands and said, “this illusion is perfect. We can use the formula on this napkin to sell Americans on the idea that tax cuts will benefit ALL Americans! yeah, that’s the ticket, we can sell Americans on the idea that cutting taxes and taking the national debt to new heights is actually patriotic!” OR, do you think he saw the napkin as a “roophie” he could slip into America’s drink so he and a hanful of his closest friends could date rape a nation?

I Report (-: You Whine )-: mmm, mmmm, mmmmm! Just sayin...

September 15th, 2010
4:30 am

The Nevada Democrat said at a Capitol news conference that the legislation known as the DREAM Act is long overdue. But he wouldn’t say whether he has the votes for the amendment. The act allows young people who attend college or join the military to become legal U.S. residents. -Urinal

Yep, the dummycrats can give the savage hordes of the world a DREAM of living all up in your neighborhood for free and we can give the dummycrats a NIGHTMARE of being totally powerless for fifty freaking years.

Saul Good

September 15th, 2010
7:34 am

Scout… I felt an obligation to inform you that Hawaii is NOW a state and is part of the USA…has been since 1959. Please try to read/purchase history books that a bit more up to date.

Scout

September 15th, 2010
11:20 am

Saul Good:

It has nothing to do with where he was born and everything to do with his unpatriotic anti-American policies.

The Laffer Curve in real life | Jay Bookman

September 15th, 2010
1:23 pm

[...] In a post yesterday, we took a look at the theory as it illustrated in the Laffer Curve. Now it’s time to look at how the theory has worked in practice, focusing on the two separate experiments with supply-side economics that we’ve run in the past 30 years. [...]

Jay

September 15th, 2010
4:26 pm

Actually, Dave, the tax-cut mania is itself a form of Keynesian theory. It says that if you dump a lot of made-up money into the economy, it’s like priming the pump (a metaphor that is sadly losing its relevance for most.) The GOP just likes to pretend that because they do it through tax cuts, it’s not really Keynesian.

Jay

September 15th, 2010
5:03 pm

Leg Lamp, quit spamming the site.

Jay

September 15th, 2010
5:16 pm

Except that I didn’t “pick” the years, Big One.

The years in question were the years the presidents in question took office, and also the years in which they signed major tax legislation. The years selected themselves in other words.

Jay

September 15th, 2010
5:26 pm

And Grumpy, if I’m wrong, it should be easy to demonstrate that fact.

The National Bureau of Economic Research concludes that a minor recession began in March 2001 but by November 2001, less than two months after 9/11, that recession had ended and the economy began to recover.

http://www.nber.org/cycles/july2003.html

If you have economic data to the contrary, please post it. Oh, and cc the NBER as well.

Jay

September 15th, 2010
7:12 pm

Phil, I noted my sources in the post.

I also noted that my numbers are adjusted for inflation, and I don’t believe yours take that into account.

Jay

September 15th, 2010
7:15 pm

And RB, your post suggests that in the absence of any factual rebuttal, you stoop to personal attack.

That’s fine, I suppose, if that’s all you’ve got.

Which it clearly is.

Jay

September 15th, 2010
8:12 pm

Niells, take a look at Part One.