Saturday, November 17, 2007

The Laffer Curve


Gene Sperling, Hillary Clinton's chief economic advisor, rhetorically asked on a National Press Club panel discussion not so long ago: "The question is: Should we be giving an extra $120 billion to people in the top 1%?" Such is the arrogance of Hillary's gaggle of socialists that they believe any money you earn that they don't tax is a gift of the government to you. In their view, government has the first claim on your income. You have the last claim on the money you make.
That kind of thinking has led to the current status quo where the top 1% of wage earners pay almost 40% of all federal income tax while the bottom 50% of earners only kick in 3%. That's up from 34% of all federal income tax the top one percent paid in 2003 and way up from 25% in 1990. Hillary thinks they should pay even more.
You enter the top one percent by making $313,469. Now that's a pretty hefty income, an income very few people earn without working their ass off and taking considerable risks to provide goods and services their customers want. Sperling's question reeks of envy, a base motive for taking the fruit of somebody else's hard work, but a core value of Hillary's taxation scheme. Simply put, they think like thieves.
Michael Boskin, Rudy Giuliani's economic advisor, said, "There is no -- let me repeat -- no example in the last quarter-century of a large, complex economy that has been successful with high taxes. ... The Western Europeans have seen their standards of living decline by 30% in a little more than a generation because of their high taxes."
Europe's sick economy is caused partly by high taxes to sustain a bloated welfare state. It is the dysfunctional European model which Hillary's team holds up as an example to be emulated by the USA. It's the wrong road to follow for America.
The liberal impulse to overtax the rich is not only morally flawed, but self-defeating in that it diminishes total tax revenue by killing the geese who lay the golden eggs. To understand why, we need to revisit the Laffer Curve from the Reagan era, as shown in the illustration above.
Laffer says, sensibly enough, that you collect no taxes if your tax rate is zero. That anchors the left side of the curve. Likewise, you collect no taxes if your tax rate is 100% because no free person works if they don't get paid. That anchors the right side of the curve. In between those two anchor points is a curve which represents the amount of total amount of tax revenue for each tax rate. You might argue about the specific shape of that curve but it is indisputable that such a curve exists.
As you raise the tax rate from 0% to 1%, the tax revenue collected is directly proportional to the tax rate. The curve is probably a 45 degree slope for the first few percent increases in tax rates because it's too small for the taxed to notice. However, as the tax rate increases, the taxed take notice and begin changing their behavior. If you worked a job where you were paid less and less for each subsequent hour of overtime, it's unlikely you'd want to work much overtime.
In general, government gets less of anything it taxes and more of anything it subsidizes. When you tax work, you get less work. When you subsidize single mothers, you get more single mothers. When you tax the rewards for the extraordinary effort it takes to create a successful business, you get fewer successful businesses. For example, Congress slapped a luxury tax on yachts in 1990 which killed yacht sales and put 25,000 boat builders out of a job. Likewise, Hillary wants to soak successful businesspeople who create the small businesses which are the engines of wealth creation.
The Laffer Curve neatly illustrates that there is an optimum point of tax rates beyond which total tax revenues decline. That's why Bush can cut the tax rates and collect more taxes. It's the same principle Walmart uses to sell cheaper yet make a greater total profit. By contrast, liberals operate on a kind of cartoon economics that holds that greater profits can be had by simply increasing prices.
Liberals always push the tax rate beyond the optimum point to the back side of the Laffer Curve. The irony is that when conservatives like Reagan and Bush pull the tax rate back to the optimum point, tax revenues increase while liberals act like scorched cats. Their class warfare costs the government. They are more committed to punishing the successful than funding their own programs.
The First Republican, Abraham Lincoln, said it best: "You cannot help the poor by destroying the rich. You cannot lift the wage earner by pulling down the wage payer."
We can't vote for Lincoln, but we can vote for an economically literate candidate like Giuliani while rejecting the cartoon economics of Hillary and her economic illiterates.

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3 Comments:

Blogger Jezla said...

Excellent post! But doesn't the Laffer curve date to the '20s?

Sat Nov 17, 05:32:00 PM 2007  
Blogger Tantor said...

Hmmm, Jezla, you might be right. I thought Arthur Laffer from Reagan's Economic Policy Board invented it, but he claims he got it from John Maynard Keynes, who wrote about it in 1935 in his book, "General Theory of Employment, Interest, and Money." So Keynes actually thought of an economic principle that was true. Whodathunkit?

The concept predates Keynes, too. The Arab historian Ibn Khaldun wrote about it in his book, "The Muqqadimah," in 1377 AD. It's such a simple and obvious idea, there are probably many originators.

Jean-Baptiste Colbert, the French minister of finance in the back half of the 1600s for King Louis XIV, the Sun King, famously said,
"The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." That implies Colbert recognize a limit on the amount of taxes harvested.

Sat Nov 17, 11:23:00 PM 2007  
Blogger Dee said...

Excellent post and great quote by Lincoln.

Thu Nov 22, 12:49:00 AM 2007  

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