[quote=denverite]I find it interesting that some on the board are trotting out the old Laffer curve. It has been thoroughly discredited. [/quote]
The Laffer Curve has not been “thoroughly discredited.” The Laffer Curve merely states that there is a point on the tax rate/total revenue curve where increasing tax rates reduces total revenue (and vice versa). This is both theoretically and empirically correct. The problem is exactly WHERE on the curve the OPTIMAL tax rate/total revenue combination lies. And that is more of a political issue than an economic one. An important observation is that regardless of marginal tax rates, total income taxes paid as a percentage of GDP have remained within a pretty steady band (a couple of percentage points) over many decades. (Government spending is a different story.) This suggests that folks change their behavior as tax rates change. My issue with Laffer, the person, is that it seems like his answer to EVERY problem is to lower taxes… regardless of where tax rates are at the time or what the objective is. He’s a Johnny One-note in that regard and I find it a bit irritating. (And I’m as opposed to paying higher taxes as the next guy.)
[quote=denverite]
Here are some data points:
National Debt as % of GDP
1947 – 120%
1960 – 55%
1980 – 33%
1990 – 66%
2000 – 55%
2010 – 90%
Please note that the big tax cuts came in 1981, 1983, 2001 and 2003.
Also note that the big tax increase occurred in 1993.
If tax cuts equate to higher revenues (and tax increases result in lower revenues), as Laffer has always proposed, then the deficits would not demonstrate this historical pattern. I’m aware that some try to explain away the US deficit history as being totally influenced by exogenous events, rather than by fiscal tax policy, but for me the overriding and obvious answer is that, generally, higher taxes = higher revenue and lower taxes = lower revenue. Of course, this bit of logic breaks down at some higher tax rate, but we haven’t met that threshold in at least 70 years.
You allude to it but it bears repeating: correlation does not necessarily suggest causation. Tax receipts as a percentage of GDP haven’t changed a whole lot over the years. Government spending as a percentage of GDP, however, has. It’s generally increased… and here we are.
