The Laffer Curve in real life
Ever since the Reagan administration, supply-side economics has been at the core of Republican economic philosophy. Every GOP candidate, at every level of politics, has to swear allegiance to the theory if he or she hopes to retain credibility with the party base.
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.
The first began with the Reagan tax cuts in 1981 and ran to 1993. The second began in 2001, with passage of the Bush tax cuts. And in between of course, we had the Clinton administration, which took a very different approach. In 1993, President Clinton pushed a major tax hike into law in order to close the deficit, the very antithesis of supply-side theory. And by the end of his term, the deficit had indeed been eliminated, if only temporarily?
So how do we gauge the effectiveness of supply-side theory in practice? I propose we look at three specific measures:
(Note: All data below have been adjusted to account for inflation.)
Private investment:
After the ‘81 Reagan tax cuts, private nonresidential investment over the next seven years grew at an annual rate of 2.8 percent.
After the ‘93 Clinton tax hike, private investment over the next seven years grew annually at 10.2 percent.
After the 2001 Bush tax cut, private investment grew annually at 2.7 percent.
(Data source: CAP/EPI study, Sept. 2008,, based on Bureau of Economic Analysis data.)
Federal revenue:
From 1981-1993, federal revenue increased by 20.7 percent over 12 years.
From 1993-2001, federal revenue grew by 46.6 percent over 8 years.
From 2001-2009, federal revenue decreased by 13.9 percent. (Even if you don’t include the deep recession year of 2009 — you might say we’re invoking the mercy rule — revenue increased just 3.3 percent over the eight years of Bush’s presidency.
GDP growth
From 1981-1993, real GDP grew by an annual average of 2.97 percent.
From 1993-2001, real GDP grew by an annual average of 3.56 percent.
From 2001-2009, real GDP grew by an annual average of 1.56 percent.
(Source: U.S. Bureau of Economic Analysis)
In conclusion, in all three categories central to the claim of supply-side proponents, the economy performed significantly better in the wake of tax increases than it did in the wake of major tax cuts.
Confronted with such data, the first word out of a supply-sider’s mouth is usually “But ….,” followed by a series of rationalizations for why the economy didn’t perform in real life as supply-side theory dictates it should have. Some of those excuses, such as the fact that the economy under Clinton benefited by the high-tech boom, are legitimate. Others, such as the claim that Bush had to deal with the economic fallout of Sept. 11, are not. There was no major economic fallout in the wake of the terror attacks.
And the excuses themselves, whether lame or legitimate, further undercut the lofty claims of supply-side advocates. If the economic benefit of major tax cuts is so weak that it can be washed away by larger trends, to the point that you can find no real evidence of it in the data, and if the economic damage of tax increases is so minor that it too can’t be found in the data, then what exactly is this supply-side theory about in the first place?
I mean, other than to serve as a handy rationalization for perpetual tax cuts.
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367 comments Add your comment
Vinny
September 16th, 2010
8:05 am
“Since they already do, thank you for agreeing with me” No, all people earning a paycheck DO NOT pay Federal income taxes – only about half do. Some of those that don’t pay federal taxes actually get some of the money that someone else earned (socialist income redistribution) through the EITC.
You libs crack me up. Your ship i sinking – it’s time to bail.
stands for decibels
September 16th, 2010
8:05 am
I also rather like the presumption that if you combined the value of those well-publicized tax scofflaw cases (your Rangles, your Geitners) together, you could pay for something beyond, say, a couple of Apache helicopter rotor blades.
Soames
September 16th, 2010
8:07 am
Jay,
I have to disagree with you regarding the economic fallout (or lack thereof as you claim) post 9-11. Did you hapen to look at the NYSE for the year following the attack? To claim that there was no economic fallout associated with the 9-11 attacks is silly.
Also, There is plenty of peer-reviewed economic science to support the assertation that tax cuts stimulate economies more than spending. Alesina did a study on 92 occurences since 1970 where countries tried to stimulate via spending and those attempts failed miserably. Running a defecit to attempt to stimulate the economy is the worst idea since the flobee haircutting system.
If anyone is truly interested in learning more about this subject, I suggest you google the following items.
Growth in a time of debt – Carmen Reinhart & Kenneth Rogoff
The macroeconomic effects of tax changes: estimates based on a new measure of fiscal shocks – Christina & David Romer
Large changes in fiscal policy: taxes versus spending – Alberto Alesina & Silvia Ardagna
Jay would rather dazzle you with a few figures that support his stance rather than make a whole-hearted attempt to discuss this in length. I understand Bookman….you’re just feeding the masses via half-truths…kinda like those wingnuts you criticize.
Vinny
September 16th, 2010
8:07 am
sfb – If the Obama administration and the corrupt dems don’t have to pay their federal taxes, why should I?
Vinny
September 16th, 2010
8:10 am
” just what beyond the FICA/Med witholdings that begin with the first dollar, the excise taxes, and a bunch of other stuff beyond Federal Income Taxes that virtually every working person already pays, would you consider a “fair share” for America’s peasant class?”
sfd – Everyone should have to pay federal income taxes to suppor our infrastructure. period.
Vinny
September 16th, 2010
8:13 am
More House Democrats call for tax cuts for all
http://news.yahoo.com/s/ap/20100916/ap_on_bi_ge/us_tax_cuts
stands for decibels
September 16th, 2010
8:13 am
If the Obama administration and the corrupt dems don’t have to pay their federal taxes, why should I?
You know, that’s a great argument. Probably is, it didn’t work for me when I tried it after Bush administration officials had committed similar-scale scofflawin’…
stands for decibels
September 16th, 2010
8:15 am
Everyone should have to pay federal income taxes to suppor our infrastructure. period.
Of course they have already, every year that FICA ran a surplus for the trust fund.
Face facts–this has to be the lamest argument righties have going. You really want to try to sell underpaid working Americans on the notion that they’re a bunch of tightwads and should be forking over more money in taxes so that the Paris Hiltons of this world can live a little higher? really? go for it!
TaxPayer
September 16th, 2010
8:15 am
Well, let’s hope that every time those Dems try to introduce legislation that cuts taxes, after the Bush/Republican temporary tax cuts expire, for the middle class, the Republicans stand their ground and not only say no but hell no. That’ll show us.
stands for decibels
September 16th, 2010
8:16 am
probably = problem @ 8.13.
And I’d love to stay and watch righties concede Jay’s argument by distraction about sideshow issues, but other stuff awaits. Later, all.
Vinny
September 16th, 2010
8:16 am
sfd – “You know, that’s a great argument. Probably is, it didn’t work for me when I tried it after Bush administration officials had committed similar-scale scofflawin”
b-b-b-b-b-b—-Bush! Great comeback, sfd. Never saw that one coming!
Point being – if it’s not such a big deal if a few feds don’t obey the law, then it shouldn’t be a big deal if the rest of don’t either. Heck, lets all just cheat on our taxes and see what happens. No big deal -
TaxPayer
September 16th, 2010
8:18 am
Go for it, Vinny.
Vinny
September 16th, 2010
8:23 am
“You really want to try to sell underpaid working Americans on the notion that they’re a bunch of tightwads and should be forking over more money in taxes so that the Paris Hiltons of this world can live a little higher? really? go for it!”
Typical Lib – demonize the rich at every turn. The heart really bleeds.
Vinny
September 16th, 2010
8:24 am
Taxpayer “Well, let’s hope that every time those Dems try to introduce legislation that cuts taxes, after the Bush/Republican temporary tax cuts expire, for the middle class”
Are you serious?
Normal
September 16th, 2010
8:26 am
Vinny=Too much coffee on an empty stomach…
Normal
September 16th, 2010
8:32 am
Living in Woodstock, I’m surrounded by conservative, almost tea partyish, Republicans, and from talking to them, most have told me that if the Republican party keeps insisting on tax cut for the rich at the expense of them, then they would; One, not vote, or Two, vote Democratic as their “gotcha”. They see tax cuts for the rich as also filling the Congressmens pockets, too. One said, “It’s like voting for a pay raise, only they hide it better.” I think there might be a bigger surprise coming in November than one thinks…
Bosch
September 16th, 2010
8:35 am
Yeah Vinny, nothing like your right to fight for serfdom. Have fun with that.
JKL2
September 16th, 2010
8:43 am
Obama’s hope for a new world government means we have to lower our average income per household to $14.4k. This will allow the Chinese to compete with us on an even basis. We don’t want to look greedy while their making us nike’s for $.50 a day.
Now that’s change we can believe in!
Doggone/GA
September 16th, 2010
8:44 am
“demonize the rich at every turn”
But you don’t seem to have any problems demonizing the poor. Seems to me the rich can afford to be demonized.
TaxPayer
September 16th, 2010
8:47 am
MaGog! Who’s demonizing the rich now!
Serious about what, vinny.
TaxPayer
September 16th, 2010
8:47 am
Who would dare demonize those poor rich!
Bosch
September 16th, 2010
8:48 am
JKL2,
Yeah, nothing like real world facts there to base your argument on
~~~~~~~~~~~~~~~
As Executor of my mom’s estate, I met with the local Probate judge who happens to be on of the most conservative yahoos in my area and he was telling me all kinds of ways I could not pay my mom’s debts, but could instead, pay a lawyer to try and fight those, which as I figured would cost more than the actual debt. I told him well, I could just pay the people who she owed money to instead of a lawyer and not have the year or two headache of working with him/her said lawyer. Funny reaction from said judge.
So much for “libs” not wanting to be responsible, huh?
AmVet
September 16th, 2010
8:50 am
sfd – Everyone should have to pay federal income taxes to suppor our infrastructure. period.
Agreed. And tell it to these “people”:
The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005.
More than half of foreign companies and about 42 percent of U.S. companies paid no U.S. income taxes for two or more years in that period, the report said.
During that time corporate sales in the United States totaled $2.5 trillion…
Income redistribution UP the ladder, or as I correctly call it, welfare for the wealthy…
Bosch
September 16th, 2010
8:52 am
AmVet,
But, but, but those companies pay their employees such good wages, you know, $20000/year is alot! And they provide such good benefits for everyone like health insurance….oh wait.
AmVet
September 16th, 2010
8:53 am
You libs crack me up. Your ship i sinking – it’s time to bail.
This after the cons lost 65 out of 71 contested races for high office in the past two elections. A combined 93% losing rate including a never to be replicated ZERO for 36 in 2006.
How in the hell can a major American political party even pull off a clusterf&ck like that one?!
By being that gawdawful abysmal, that’s how.
You’d think these guys were the NY Yankees to listen to them though…
Bosch
September 16th, 2010
8:54 am
AmVet,
But, but, but the backlash is coming in November! And they have learned their lesson and they have come to Jesus and realized the error of their ways!
Tools.
TaxPayer
September 16th, 2010
8:57 am
And all those companies probably do a most excellent job of sending out W-2’s and 1099’s and such just to make sure that all those individuals know how much they have to pay taxes on. Don’t no one tell that Kyle Wingfield fella about it though because I don’t know if he knows about all them 1099’s.
USinUK
September 16th, 2010
8:57 am
Normal – “Her prognosis is great for a complete cancer free recovery!
Life is good in Normalville.”
HOORAY!!! and hugs to you and your family – how wonderful!!! I’m just so pleased for you.
I think I told you about my mom-stand-in who was diagnosed with leukemia about 6 weeks ago – her son is a strong bone-marrow match, so they’re starting that prep either this week or next … let’s hope the Bookmaniac winning streak continues
Bosch
September 16th, 2010
8:58 am
The cons crack me up giving the keys of the kingdom back to the ones who more than not helped trash the place based solely on misconstrued information to justify their prejudices.
AmVet
September 16th, 2010
8:58 am
Bosch, corporate welfare is larger than ALL of more than the money paid out annually for the core programs of the social welfare state: Aid to Families with Dependent Children (AFDC), student aid, housing, food and nutrition, and all direct public assistance (excluding Social Security and medical care).
Yet the GOP’s fiscal liberals consider these utterly unnecessary entitlements, handouts, give aways and subsides all perfectly natural. But then they were gullible enough that they believed (and still do) in trickle-down as a viable economic model.
And they and their families are the ones footing that bill. Which is more evidence that one has got to be pretty much near brain dead to be a con…
Bosch
September 16th, 2010
8:59 am
Normal! Good news. I missed that post earlier! Good thoughts to your family!
LeeH1
September 16th, 2010
9:00 am
So, the Laffer Curve is really a hockey stick, like the gloabal warming graph? Has someone been manipulating the economic graphs for political purposes? If so, they should be investigated and prosecuted!
USinUK
September 16th, 2010
9:00 am
Bosch – 8:54 – never underestimate the power of the American Memory Hole …
oy.
JKL2
September 16th, 2010
9:02 am
Bosch-
I’ll give you props for your personal responsibility. Now if we could just get the government to do the same thing.
Our socialist president campaigned on “redistribution of wealth’ (remember Joe the Plumber?). His close advisor Andy Stern says we need to unionize globally. That means we have to equalize with the Chinese since they make up 1/4 of the world population. The median income for this new world order in Obama’s socialist utopia is $14.4K per household.
Quit being so greedy and start paying your fair share. The poor people of the world need your help.
Doggone/GA
September 16th, 2010
9:02 am
“American Memory Hole ”
Hole? More like a CRATER!
Bosch
September 16th, 2010
9:03 am
AmVet,
Yeah, well, I’ve always considered giving money to kids so they can eat, and money to college kids so they can get educated a waste of time. I’ve always wanted my money to go to CEOS and wealthy shareholders so they can play more gold and vacation in the Caribbean — don’t worry, I’ll be willing to put in lots more hours and lower wages so they can do that. I mean, they deserve it right? They work harder than me, right?
Tools.
[Yall like my wingnut impressions today?]
FinnMcCool
September 16th, 2010
9:04 am
Elizabeth Warren for Prreznit 2016
Bosch
September 16th, 2010
9:04 am
USinUK,
For real, yo?
JKL2,
Again, nothing like reality to base your poutrages on.
AmVet
September 16th, 2010
9:04 am
Yes, when asked what the the lessons learned in the double decimation of the the 2006 and 2008 elections was, the fake conservatives respond, “We were not conservative enough!”
Hence the birth of the astro-turfed, Republican-aborted tea party.
It reminds me of that line in Dumb & Dumber when Lloyd says to Harry, “We’re in a hole and we’re just going to have to dig our selves out.”
Normal
September 16th, 2010
9:04 am
USinUK,
We will keep your stand in mom in our thoughts and send her our good vibes! And thanks!
USinUK
September 16th, 2010
9:05 am
“Our socialist president campaigned on “redistribution of wealth’ (remember Joe the Plumber?). ”
fairness /= redistribution.
nice try. flail.
Bosch
September 16th, 2010
9:07 am
USinUK,
I missed that point to about your substitute mom — good luck to you as well. Positive thoughts going out…………NOW!
jm
September 16th, 2010
9:08 am
Elizabeth Warren would probably require herself to be addressed as “El Presidente”
Bosch
September 16th, 2010
9:08 am
I meant to type “play more golf” earlier, but “play more gold” works too.
USinUK
September 16th, 2010
9:08 am
Bosch – 9:04 – as usual, the biggest problem with conservatives is that they vote against their best interests … they all think that ONE DAY, they’ll be rich, too!! (no, reeeeelly)
http://voices.washingtonpost.com/tomtoles/2010/09/pumpkin_or_mincemeat_maybe_the.html#more
lovelyliz
September 16th, 2010
9:10 am
People who don’t believe in science and make-up their own economic theory, just don’t have much interest in math either
USinUK
September 16th, 2010
9:10 am
thanks, Bosch-man … I can’t wait to see her in a couple of weeks when I’m in town … love her so!
(and, yes, I’m going to be in Atlanta the week of the 21st for the Crystal Hot Sauce and Biscuits Tour 2010)
@@
September 16th, 2010
9:11 am
jay’s pay must’ve been cut. He’s less productive of late.
USinUK
September 16th, 2010
9:11 am
lovelyliz – 9:10 – you missed Scout and chuckles in here yesterday making up their own history …
Bosch
September 16th, 2010
9:13 am
USinUK,
It’s because most of them are easily brainwashed and believe in mythology — the world was created in 7 days and one day Jesus is gonna come down outta the sky and take me up to heaven!! I mean, if you tend to believe that kind of stuff, you’re gullible enough to believe anything — like the POTUS before birth participated in a global conspiracy to hide where he was born just to carry out his quest for global domination.
JKL2
September 16th, 2010
9:13 am
bosch-
Clinton admits that if the election would have been held a month later, he would have lost because the Bush Sr economy had recovered by the time he took office.
Obama has said he want to redistribute wealth and radically transform America. Obamacare and taking over private companies “in the public interest” is just the start. If you think things are getting better under this administration you are just a lemming charging toward the cliff.
Bosch
September 16th, 2010
9:15 am
Upstairs yall! Then I’m out for the day………
USinUK
September 16th, 2010
9:16 am
ahhhh … fresh Deal upstairs …
Bosch
September 16th, 2010
9:16 am
JKL2,
Again, like any of that actually happened. Get a clue.
jm
September 16th, 2010
9:17 am
USinUK 9:08 – I’m of the opinion you’re wrong. They’re thinking is one step ahead of yours. They’re not voting against their economic interests at all.
jm
September 16th, 2010
9:17 am
@@ 9:11 – or slow news cycle.
JKL2
September 16th, 2010
9:19 am
USinUK
Social Justice is not Equal Justice. MLK campaigned for equal justice. Our president does not.
Don’t you have a riot you need to go to? We still have a couple years before we get to that over here, but we’re trying to follow your European model the best we can now the Demwits are in charge.
California is the new Greece…
JKL2
September 16th, 2010
9:24 am
bosch-
you have the time, so do some googling. It shouldn’t be too hard to find since it’s common knowledge and they don’t try to hide these facts.
Enjoy some more koolaid, cause everything is rainbows and unicorns here in Obamaland.
retiredds
September 16th, 2010
9:50 am
Jay, when the Laffer Curve was touted by Reagan and company there were many of us in the financial world who looked at it and laughed so it became known as the “laugher” curve. It didn’t work back then, it doesn’t work today, it won’t work in the future … it’s a laugher. The main reason it doesn’t work is there is no control on the spending side of the ledger. And if the Republicans think that the Democrats are the culprit, go look at the record. The deficit that we have today is there because NO Republican or Democrat will cut spending. Oh yes, we will hear all sorts of pious statements about being the party of fiscal discipline and taxes being too high. It’s bull as it was then, and will be in the future. If you believe the Republican (and Tea Party) line on reigning in the deficit you believe in the tooth fairy and other mythical illusions.
Michael
September 16th, 2010
3:49 pm
History shows it wasn’t until the Republicans gained control of congress in 1995 that the economy really grew. The first two years after the Clinton tax increase, the economy grew at only 2 to 3 percent, inflation rose and the budget deficit was near $200 billion. The Republican congress brought fiscal restraint (slowing of growth in domestic programs and defense spending cuts), capital gains tax cuts, free trade promotion and welfare reform. This caused the budget surplus in 1998 and 1999, lowered inflation and a roaring stock market. These pro-growth measures by Clinton and the Republican congress cancelled out the tax hikes of 1993.
buck@gon
September 16th, 2010
9:11 pm
And during the Obama-Pelosi years private investment has grown by __________.
–an inconvenient truth.
buck@gon
September 16th, 2010
9:18 pm
Jay,
Even the CAP website indicates that tax policy may or may not be the answer to changes in revenue, investment and other economic indicators.
Fortunately, I happen to know what is the solution to correcting the economy. 1) Repeal Obamacare. That 2000 page piece of legislation is largely an unknown commodity, and will require millions of pages of ink to establish actual policy and costs that are now entirely unformed.
2) Don’t threaten cap and trade. Talk about costs! Cap and trade would be a disaster. Businesses are holding out to see what their crazy government is going to do next.
Wayne Clemmons
September 17th, 2010
8:29 am
Jay, slow down man! You’re killing em’ with logic and facts.
The Reagan-Bush Tax Cuts: What Reporters are Supposed to Do #4376 | theworldnet.info
September 17th, 2010
7:11 pm
[...] Bookman, at the Atlanta Journal Constitution did a very simple analysis of the benefits of Reagan-Bush style tax cuts. He compared the growth of investment and growth in [...]
wellbasically
September 17th, 2010
9:19 pm
Bill Clinton cut capital gains taxes from 28% to 20% (and to 0% on most homes) in 1997 leading to several boom years.
Obama might raise the top income tax rate from 35% to 39% — whoop de doo. But he also wants to raise investment taxes from 15% to 39%, which will effectively kill off any investment from the top bracket, who are the only people who might have the money to invest.
That’s what’s killing the economy. The way to raise wages and salaries is to more efficiently connect capital and labor. That is the essence of supply side economics, not “cut taxes”.
James Bradley
September 19th, 2010
6:02 am
Dot com boom. Period.
Supply Side Does Not Work | luna-canus.com
September 21st, 2010
5:31 am
[...] You can read the whole post here. [...]