Wolf Howling: tax rates

Tuesday, January 8, 2013

The Attack Of The Laffer Curve

Art Laffer is an economist famous for his rule, the Laffer Curve. Unlike Paul Krugman, who is a NOBEL prize winning economist, Laffer has, one, actually had his theories work in the real world, two, he hasn't been proven horribly wrong by advocating for a near trillion dollar stimulus as the school solution to our economic meltdown, and three, unlike Krugman, he hasn't yet been economic advisor to a failed criminal enterprise like Enron. I realize these things render Laffer less than qualified to the left, but let's listen to him explain the Laffer Curve anyway:

The Laffer Curve is at the heart of supply side economic theory. Under his theory, tax policy is dynamic. The opposite of that is the claim of the left, that tax policy is static - that raising rates by x percent will always yield x dollars. When the left claimed that the Bush tax cuts caused our deficit, they did so using the canard that, if only we had left taxes high, we would have taken in that much more revenue. The reality was that the Bush tax cuts raised government revenue significantly.

The Laffer curve applies equally in the positive and negative at the state level. Just compare Texas and California.

In response to the Great Recession, Texas resisted the urge to raise taxes and instead cut its spending "to the bone." Today, its economy is "humming," with revenues up over 20% over 2011 and sales tax receipts at an all time high.

California, on the other hand, did not cut spending, it raised taxes to the highest in the nation, fully expecting the money just to roll in. The opposite has occurred. After the vote on increasing tax rates, tax revenues actually fell 10% by a billion dollars.

I wonder how many times the Laffer Curve has to be proven before someone on the left finally admits to its validity. Ha ha - just joking.

At any rate, we are going to get another chance to test it this year, with Obama tax rates taking us back to the Carter era. Anyone want to bet against the curve - that the government will actually collect the $600 billion in new revenues over the next ten years. Only Krugman, Pelosi and a few others living in a fantasy world of socialist economics would ever take that bet. But we as a nation will pay for it.

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What Is Wrong With Republicans???

Who didn't watch with amusement yesterday as Republicans refused to vote for Boehner's bill to make permanent the Bush era tax cuts for all Americans earning less than $1 million per year. It would seem that the Keystone Cops are alive and well in the Republican wing of Congress. As Gerard van der Luen of American Digest is wont to say, "Republicans, they thirst for death."

Republicans have precisely zero leverage on tax rates. Come January 1, all of the Bush era tax cuts expire and all the tax rates will go up automatically - and quite unfairly, Republicans will get the blame. Moreover, the centerpiece of Obama's tax plan was to raise tax rates on "the rich." It is time to give the people what they voted for. If four years of gross economic incompetency wasn't enough to convince the electorate, well, let's let them have the next four years good and hard indeed. Obviously, more lessons are needed.

In this instance, Republicans prepared to die on the hill of stopping higher taxes is much like Picket's charge - a suicidal act that did nothing beyond sealing the doom of Lee's Army of the Potomac. One of the first rules of warfare - don't reinforce failure, reinforce success - or at least where you have the greatest likelihood of success.

Where House Republicans hold absolute power is on spending. Give Obama whatever tax increase he wants, but then shut down the government over the budget ceiling. Moreover, refuse to pass anything but a life support budget until all sides agree on - and pass into law - a grand bargain that in real terms, sans the usual accounting gimmicks, will decrease the debt by 25% over the next four years.

Debt is where the real issue lies. Sure, Obama's tax increases will hurt the economy - but they won't kill it. Our continued accumulation of debt will. Between Obama's world record profligate spending and Fed Chairmen Ben Bernanke, who is keeping our printing presses spinning at a record pace, they are placing our nation in mortal peril. Obama and Bernanke are setting the stage for runaway inflation and the devaluation of the dollar. That is where Republicans need to draw the line in the sand - this far, and no further.

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