Laffer Curve
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Author Topic: Laffer Curve  (Read 1922 times)
WilliamStone1776
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« on: November 17, 2017, 09:53:06 PM »

discuss please
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136or142
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« Reply #1 on: November 17, 2017, 11:58:09 PM »
« Edited: November 18, 2017, 12:00:02 AM by 136or142 »

I think it's only regarded as a big deal because it came from a conservative/supply side economist and conservatives seem to hype every perceived conservative intellectual.

1.The concept that taxes could be so high as to discourage economic activity so that governments raised less revenue was well known before Laffer drew his curve.  

2.His curve really is just a drawing. It doesn't provide any numbers or the inflection point or suggest different scenarios of where the inflection point would be under different circumstances.  It's useless.

It literally added nothing new.
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TPIG
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« Reply #2 on: November 18, 2017, 01:17:26 AM »

Freedom curve.
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True Federalist (진정한 연방 주의자)
Ernest
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« Reply #3 on: November 19, 2017, 03:39:40 PM »

OC: Overhyped curve.

It's real, but we're nowhere near the part of the curve where one can increase government revenues by cutting taxes.  Not even the Reagan-era cuts did that.  Arguably, the Kennedy-era cuts may have done that, but at this point it's just technobabble used by so-called conservatives to provide an invalid justification for the self-serving tax cuts they want.
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Tintrlvr
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« Reply #4 on: November 20, 2017, 09:08:51 AM »

OC: Overhyped curve.

It's real, but we're nowhere near the part of the curve where one can increase government revenues by cutting taxes.  Not even the Reagan-era cuts did that.  Arguably, the Kennedy-era cuts may have done that, but at this point it's just technobabble used by so-called conservatives to provide an invalid justification for the self-serving tax cuts they want.

Basically this. I did recently have a discussion with someone who actually tried to argue that governments were revenue maximizing, so taxes had to be at the ideal level for revenue because government would always set it that way. It was a baffling demonstration. I should add that this individual is an executive at one of the larger financial institutions in this country.
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Kingpoleon
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« Reply #5 on: November 20, 2017, 01:45:22 PM »

The main thing to note is that applies less/more gradually to income taxes than it does to sales/VAT or corporate taxes.
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Southern Senator North Carolina Yankee
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« Reply #6 on: November 26, 2017, 05:00:18 AM »

OC: Overhyped curve.

It's real, but we're nowhere near the part of the curve where one can increase government revenues by cutting taxes.  Not even the Reagan-era cuts did that.  Arguably, the Kennedy-era cuts may have done that, but at this point it's just technobabble used by so-called conservatives to provide an invalid justification for the self-serving tax cuts they want.

Yes and this gets back to what I said about the push for tax cuts eventually being the modern day version of Smoot-Hawley. An economic policy designed for a previous situation, that has little to no benefit in the modern era and a good number of potential consequences.
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« Reply #7 on: November 26, 2017, 05:07:59 AM »

OC: Overhyped curve.

It's real, but we're nowhere near the part of the curve where one can increase government revenues by cutting taxes. Not even the Reagan-era cuts did that.\Arguably, the Kennedy-era cuts may have done that, but at this point it's just technobabble used by so-called conservatives to provide an invalid justification for the self-serving tax cuts they want.

Revenues in the 1980s grew nearly at the same rate in the 1980s as they did in the 1990s . The large deficits were due to the loss of revenue in the first couple years after the initial tax cut and large spending increases in defense. After 1984 the tax cuts no longer were a problem, and by then most of the deficit was due to increases in defense spending.

 
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136or142
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« Reply #8 on: November 26, 2017, 03:33:21 PM »
« Edited: November 26, 2017, 03:40:24 PM by 136or142 »

OC: Overhyped curve.

It's real, but we're nowhere near the part of the curve where one can increase government revenues by cutting taxes. Not even the Reagan-era cuts did that.\Arguably, the Kennedy-era cuts may have done that, but at this point it's just technobabble used by so-called conservatives to provide an invalid justification for the self-serving tax cuts they want.

Revenues in the 1980s grew nearly at the same rate in the 1980s as they did in the 1990s . The large deficits were due to the loss of revenue in the first couple years after the initial tax cut and large spending increases in defense. After 1984 the tax cuts no longer were a problem, and by then most of the deficit was due to increases in defense spending.

 

The deficit was also lower than it would have been otherwise thanks to the various tax increases after 1981.

http://www.politifact.com/virginia/statements/2012/jun/25/gerry-connolly/rep-gerry-connolly-says-reagan-raised-taxes-during/

https://en.wikipedia.org/wiki/Tax_Equity_and_Fiscal_Responsibility_Act_of_1982 was one of the three major tax increases.  The second was the increase in payroll taxes that fall mostly on 'middle class' taxpayers.

What Reagan did, more or less, was cut taxes for the wealthy and then later increase them on the 'middle class.'  This was somewhat offset by the increase in the Earned Income Tax Credit which especially removed the payroll tax increase for the 'lower middle class.'

Of course, I'm far from arguing that cutting taxes on the wealthy was a bad idea at that time given the top income tax rate, but there should be a fuller understanding of what Reagan ended up doing.  Of course, cutting the top rate from 70%, and cutting it during his Administration to ultimately 28% are two entirely different arguments.
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Bismarck
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« Reply #9 on: January 05, 2018, 11:49:14 AM »

I think the laffer curve has some merit but GOP politicians often forget that it is a curve, that at some point you lose revenue by lowering taxes.
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Kingpoleon
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« Reply #10 on: January 05, 2018, 11:50:52 PM »

I'm not an economist, but I suspect it's probably wrong and useless. The idea that the entire tax code and it's effect on the economy (and therefore the revenue taxes bring in) can be put into a neat little curve is preposterous.
You really don’t understand mathematics? At the end of the day, quantifiable data has correlation and causation. The curve is not comparative from year to year: it is relative to one budget year only, and as such is completely accurate due to the fact that it lacks specific numbers and is based upon a relatively similar economic situation regardless of taxes.
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jfern
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« Reply #11 on: January 06, 2018, 12:00:58 AM »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
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Kingpoleon
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« Reply #12 on: January 06, 2018, 12:08:54 AM »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
If we went to 7%/12%/25%/35%/45%/50%, then we would see higher revenue - partially from the cuts in the lowest tax brackets. Corporate rates could be 12%/23%/34%/45%, and it would do something similar.
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mvd10
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« Reply #13 on: January 06, 2018, 06:12:28 AM »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
If we went to 7%/12%/25%/35%/45%/50%, then we would see higher revenue - partially from the cuts in the lowest tax brackets. Corporate rates could be 12%/23%/34%/45%, and it would do something similar.

I really don't think a 45% top corporate tax rate is a good idea.
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YE
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« Reply #14 on: January 06, 2018, 02:16:26 PM »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
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Kingpoleon
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« Reply #15 on: January 08, 2018, 01:14:08 AM »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
If we went to 7%/12%/25%/35%/45%/50%, then we would see higher revenue - partially from the cuts in the lowest tax brackets. Corporate rates could be 12%/23%/34%/45%, and it would do something similar.

I really don't think a 45% top corporate tax rate is a good idea.

Goldman Sachs and other multibillion dollar companies could afford it.
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True Federalist (진정한 연방 주의자)
Ernest
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« Reply #16 on: January 08, 2018, 07:19:33 AM »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
If we went to 7%/12%/25%/35%/45%/50%, then we would see higher revenue - partially from the cuts in the lowest tax brackets. Corporate rates could be 12%/23%/34%/45%, and it would do something similar.

I really don't think a 45% top corporate tax rate is a good idea.

Goldman Sachs and other multibillion dollar companies could afford it.

The question isn't whether they can afford it, but in the context of the Laffer curve, what rates )and other factors of taxation) will maximize government revenue in the long-term.
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mvd10
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« Reply #17 on: January 08, 2018, 10:06:13 AM »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
If we went to 7%/12%/25%/35%/45%/50%, then we would see higher revenue - partially from the cuts in the lowest tax brackets. Corporate rates could be 12%/23%/34%/45%, and it would do something similar.

I really don't think a 45% top corporate tax rate is a good idea.

Goldman Sachs and other multibillion dollar companies could afford it.

The question is whether they want to afford it. A 45% corporate rate in the US puts the US at an enormous disadvantage compared to other developed countries. The UK will cut it to 17%, France will cut it to 25%, the Netherlands will cut it to 21%, even Germany's 30% rate suddenly looks very attractive. Sure, the corporate tax isn't the only thing corporations take into account while relocating (infrastructure and an educated workforce also are very important, they're probably even more important) but a 45% rate would be extremely far outside the mainstream. It also raises the cost of capital and it would increase excessive borrowing (interest on corporate debt is deductible, while there is no such deduction for equity. Corporations with excessive debt would see a much lower tax increase than more "healthy" corporations). I think I've read somewhere that a 10% hike in the corporate income tax rate would lead to a quite significant increase in debt-financing because the gap between debt-financing and equity-financing would widen. Corporations would still pay a 0% effective rate on debt-financed investment because of the deduction (no matter the normal rate) while they'd pay the new 45% effective rate on equity-financed investment (instead of the old 35% rate).
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Tintrlvr
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« Reply #18 on: January 08, 2018, 01:09:43 PM »
« Edited: January 08, 2018, 01:11:28 PM by Tintrlvr »

Obviously you gain revenue from going from 99% to 98% tax rates, but our rates are nowhere near where you'd gain revenue by lower tax rates.
If we went to 7%/12%/25%/35%/45%/50%, then we would see higher revenue - partially from the cuts in the lowest tax brackets. Corporate rates could be 12%/23%/34%/45%, and it would do something similar.

I really don't think a 45% top corporate tax rate is a good idea.

Goldman Sachs and other multibillion dollar companies could afford it.

I think this is misplaced anger. Demand higher taxes on wealthy shareholders and CEOs, not on the corporations themselves.

Anyway, the Laffer Curve is a triviality but also more or less useless for any purpose. The individual income tax Laffer point is probably somewhere in the 70-80% or so range - certainly much, much higher than almost anyone proposes raising the top marginal rate. Corporate tax has its own problems and IMO the Laffer point for corporate tax is probably at 0% but there's an emotional attachment to corporate tax also that is hard to shake (see above).
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TheLeftwardTide
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« Reply #19 on: January 08, 2018, 04:41:27 PM »

Fake news.
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mileslunn
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« Reply #20 on: January 11, 2018, 11:53:26 AM »

It absolutely exists and most agree on its existence.  The controversy is where its peak is located.  Most on the left argue it's peak is much higher than where taxes are today while many on the right argue its lower.  There is also the short term vs. long-term impact.  If the US raised the top tax rate to 60%, they would likely get more income in the short-term, but long-term due to slower economic growth it might result in less. 

While no consensus it does seem that 45% is a common tax rate or close to that for top marginal so there probably is some reason for that.  Back in the 80s when Canada had tax reform, the top rate was set at 29% federally (It's now 33%) which would mean the average provincial + federal would have been close to 45%.  Likewise in the US, under Clinton and Obama, the top federal rate was 39.6% which if you combine local and state taxes (and the SALT is not used, which most in high brackets probably did use it) it would come to around that.  Looking abroad it is 45% in several countries

Germany (Actually 47.5% due to solidarity surtax which was supposed to be eliminated but hasn't)
UK (47% if you include NI payments)
France (Actually around 54% when you include CSG Payments which are essentially a tax)
Spain (some autonomous communities are higher like Catalonia and Andulusia others like Madrid lower

Italy (It is 43% nationally, but if you include municipal and regional tax it is close to 45%)
Greece (It is closer to 55% with the surcharges but supposedly once the debt is under control those will come off)

South Korea (It is now 44% if you include municipal taxes)
Luxembourg (It is 42%, but 45.8% if you include 9% surcharge)
Australia (47% soon to be 47.5% when you include medicare levy)
Japan (Actually 55.6% if you include prefecture 6% and municipal 4% taxes plus surcharge)

So the fact a lot of countries try to put their top rates close to 45% probably suggests long term the maximizing rate for both growth and revenue is around that.  The IMF even suggests 44% as ideal rate.  And it sort of makes sense, 50% is a psychological barrier in that you are working for the government so acts as a disincentive so 45% is just below that.

If you look at past US tax cuts even there you could suggest the optimal top rate is probably close to 40% federally.  When Kennedy dropped the top rate from 91% to 70%, the impacts were quite positive.  When Reagan dropped it from 70% to 50% also positive while so was dropping from 50% to 28%, however when George HW Bush raised it to 31% and Clinton to 39.6% the negative impacts many on the right warned would happen never materialized and in fact the economy grew.  Likewise George W. Bush tax cuts to 35% provided little benefit and Obama raising it back to 39.6% did little harm and with the economy humming along well, its unlikely Trump tax cuts to 37% will benefit much.  Now it may harm some states due to changes to the SALT (state and local tax deductions) as top rates will rise in high tax states like California (47.6% before at 39.6% with SALF to 50.3% at 37% without SALT).

So in sum, it exists the question is where it should be.  Also the short-term peak is higher than the long-term peak as its not just about the rich working less or moving elsewhere, it also has to take into impact economic growth.  In addition the complexity of the tax code matters since if it is full of loopholes and deductions, those with money are more likely to aggressively use those to lower their tax burden if the rate is high whereas if low many will find hiring an accountant or spending more time doing their taxes to find every deduction a waste of time and money.  Here in Canada when Trudeau raised the top rate, many CEOs switched from salaries to stock options as stock options are only taxed at 50% of the regular rate (If top rate is 53.5%, then stock option is 26.75%) thus reducing government revenue there.
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mileslunn
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« Reply #21 on: January 11, 2018, 12:02:08 PM »

Also rates relative to others and ability of capital to move matters.  Part of the reason the US could have top rates over 70% in the past is all developed countries had similarily high rates, but when France tried to introduce the 75% millionaire's tax under Francois Hollande many just packed up in left.  If you have a metro area that crosses state lines, that is when having a higher rate on one side can have a negative impact.  For example, many wealthy who work in the Portland area live on the Washington state side where there is no state income tax vs. Oregon which has the third highest rate of 9.9%.  So within a country that is when there is the greatest danger if rates are uncompetitive.

Next is a common market that allows free mobility of labour.  Having uncompetitive rates within the EU where one can freely live and work in another country is more damaging than say in NAFTA where there isn't free mobility of labour.  There is also language and cultural barriers.  Since English is a widely spoken second language, an English speaking country couldn't get away with the high rates Japan could as outside Japan no one speaks Japanese and in Japan knowledge of a second language is low thus why they can get away with a 55.6% rate which say Canada and the US probably couldn't.  In the EU, high rates are only possible as pretty much all Western European countries have top marginal rates over 45% (often those with the highest rates counter this with lower corporate rates), but in most Eastern European countries the top rates are generally under 30% but since incomes are significantly lower, you might pay less tax moving from Germany to Poland, but your income would decline significantly thus reducing the brain drain.  If standards of living in the Eastern European countries rise to comparable levels of Western European countries and rates don't go up you could see a brain drain then.
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