Republicans and/or Conservatives: Question about how Tax Cuts work?

Question

The Laffer curve principal states that at some point, tax cuts will actually reduce total gross revenues. How do you determine that point and how do you know we currently are not below that point (meaning we could raise more taxes by tax increases).

My personal belief is that we are still well above where that point is and that we could reduce taxes significantly more and still take in more gross revenues, but I have no idea at what point it would start creating less and I am wondering if any of you do.

RP McMurphy - I think you misunderstand the basis of the Laffer Curve. Yes, its logical that lowering taxes will increase the GDP (economic growth) but that doesn't not always equate to more tax revenues.

Simple sample: If the tax rate is 20% and is reduced to 5%, if the GDP doubles as a result (very positive) then tax revenues are half what they used to be because they economy needed to grow by a factor of 4 to maintain total tax revenues.

Answer 1

You'd expect the degree to which a tax cut results in increased revenues to be reduced the closer you get to the inflexion point. Since the last round of tax cuts was fairly successful, that would imply that were not too close to that point.

I think our tax code is too complex, though, for such a simple analysis.

Answer 2

This is a very theoretical question. My simple answer is I do not believe anyone really knows what point that is. I do NOT believe we have reached it yet. Evidenced by the fact that the last tax cut has led to record revenues far exceeding CBO estimates..

This number could be defined in equation, but the equation would ahve to consider a great number of factors:
Focus of economic sector being referenced: i.e. realestate, finances, heavy inductry steel, auto etc...

Current economic trends: Is the economic future for the nation going up or down. Each momentary trend would have its own unique impact on where the Laffer curve would have its foci.

Population Dynamics

Inflation

International trade

to name a few.

Answer 3

The Laffer curve principal states that at some point, tax cuts will actually reduce total gross revenues. How do you determine that point and how do you know we currently are not below that point (meaning we could raise more taxes by tax increases). >>

Postive Growth in our economy and the GDP means we are not below that point.

Answer 4

All wealth is created. Value added. Profit - as determined by the consumer (the extent to which he is willing to pay more for the finished product than the resources cost the producer is the value he added, is also the profit). The only real capital is earnings. Accumulated and current. The government can for some time fuel growth through monetary mischief but that must either be reversed (boom/bust) or it all washes up on the beach (1970s stagflation). The only real growth is achieved through reinvestment of earnings.

In the US, we have an income tax. The tax is on income - thus it reduces the amount of income the economy has available to reinvest. It doesn't just take part of the harvest, it takes part of the seeds available to plant for next year. And at the top marginal rates from the 1930s to 1981, it took most of the seeds - which is why the economy relied to an ever increasing degree on monetary mischief for growth, which is why the 1970s economic crisis occurred.

Thus the tax rate and the tax base are interrelated - if you cut the tax rates, the effect is to grow the tax base. Thus at some point - ALL OTHER THINGS BEING EQUAL - yes, cutting the tax rates will increase the tax base enough that tax revenue increases.

There ARE other factors - primarily monetary policy, but also, up until the early 1980s, since which time interest on foreign-held debt has exceeded the deficit, deficit spending fueled by foreign borrowing. Since interest on foreign debt is greater than the deficit now, the stimulating effect of fiscal policy is, despite the deficit, negative.

That leaves monetary policy. The Fed is still not perfect - it still must grow the money supply in line with growth of the economy in order to maintain price stability - otherwise there will be price deflation. And the reforms of the 1980s and 1990s, primarily free trade but also the technological innovation spurred by freer markets, reduced real prices - so the money supply had to grow rapidly to prevent deflation. And since monetary policy can produce near-term growth, it is difficult to determine exactly where rates should be - - if CPI trends closer to 3%, we conclude that the Fed should raise rates, but unless and until it does, it's somewhat gray.

Thus it is often difficult to determine in a given situation the extent to which the change in revenue was driven by the change in tax rates. Tax revenue fell in the 1980s initially after the tax cuts - but the Fed tightened the money supply to end high inflation in our time, which it did. And tax revenue grew significantly once Fed policy became neutral. The Fed tightened again in 1987, probably overshooting, and caused the stock market decline - yet tax revenue grew. The Fed tightened again in 1990, to a lesser degree, and after Bush '41's tax rate increases, tax revenue in real dollars fell - - again, both factors probably partially causing the revenue decline. In '93-'94 the Fed erred in the other direction, raising rates but coming off the brakes early, which may explain why revenue increased following the Clinton tax hike. Clinton cut corporate taxes in 1997, but again the Fed came off the brakes early, hence we again don't know if the tax cut or the Fed's looser policy fueled the increase - probably some of both. The Fed tightened more significantly in '99-'00, popping the NASDAQ bubble and ultimately causing a recession. The economy worsened as a result of 9/11 - thus the revenue decline in '01-'02 was probably largely the result of these factors. The Fed then cut rates and Bush '43 cut tax rates again in '03, and tax revenue started to come back - again, which was the immediate cause is unclear, probably both.

But the Fed has aggressively tightened since '04 and tax revenue continues to climb at 4X the rate of CPI. All other things are NOT equal - the other factors as a whole are anti-growth. Yet the tax base and tax revenue have continued to grow. This is as close to a perfect test as you can get, and the Laffer-supporters passed it.

It is possible that further rate reductions would increase tax revenue further - - - but we never ask the next question - - - many government expenditures are for programs for people who have not benefited, who have fallen through the cracks.

But as the economy grows, there are fewer such people - - not counting those poor people we import, legally and illegally, who fell through some other economy's cracks, not ours.

Thus there should be less of a need for government expenditure. Yes there is a right side of the Laffer Curve where tax rate reductions are not fully offset by the growth of the tax base - - but the tax base does still grow - - thus the need for the government expenditure should in theory fall.

And I would argue that it has - we have very low unemployment and although poverty rates persist at pre-Bush levels, they are propped up to an ever-increasing degree by the influx of poor immigrants, legal and illegal. Had we "built a fence" ten years ago, there would be 1/3 fewer households living below the poverty line. That would have to reduce the need for government programs dramatically.

And all of this assumes the validity OF a welfare state to begin with - even if we assume this role of government, one doesn't even need to answer your question to conclude that further tax cuts would be positive.

Answer 5

The "Laughter" curve is based on the concept that taxes could be maximized. Governments use this to optimize slavery.

Arguing about the position on the "Laughter" curve is useless. The real issue is taxes.

Taxes are the modern socialist form of slavery. Those who create wealth have to work hard for it while those who have the "rights" to food, health and shelter find all their needs paid by tax payers money. Meanwhile, the government bureaucracy keeps 90 cents of each dollar used for socialist programs to support itself and its entourage.
Once the government grows a class of "government supported couch potatoes" big enough to win any election, the future of the socialist democratic slavery is secured. And it's not very far now...

When you think about this, who cares where in the "Laughter" curve we are?

Answer 6

I agree with your statement but am not well versed enough in the current macroeconomic environment to give you a solid answer. I also agree that we haven't reached that number yet and likely never will. The liberal element in our country will never allow taxes to be cut that much no matter what happens to revenues. To many taxes are punitive and punish corporations and individuals for their success.