Green Room

Prager U: The Laffer Curve and the key to efficient tax collection

posted at 3:11 pm on February 3, 2014 by

“Efficient,” in this case, is the maximum revenue for the least impact on taxpayers. Prager University presents Tim Groseclose to explain the Laffer Curve, the basis for Reagan’s tax reforms, and the need to find the “hump” in the curve in order to determine how to squeeze the most money out of the economy without killing economic activity. The hump is a lot lower on the curve, Groseclose explains, and confirmation comes from an unexpected source:

Should Taxes Be Higher? It’s the million dollar question! Up? Down? No change? Where in the world should taxes go? In election years, the question of tax rates fills the airwaves. In non-election years, the question of tax rates, again, fills the airwaves. So what’s the answer? UCLA Professor of Economics Tim Groseclose explains his research on the topic. Basically, there’s a certain point at which higher tax rates actually reduce the amount of revenue the government collects. What’s that point? When are tax rates too high? Learn a valuable lesson in economics, and public policy.

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That’s TOTAL tax rate; federal income tax, state income tax, local income tax and all the other taxes that take a bite out of income, such as sales taxes. There are no states where that total is less than 33%.

InterestedObserver on February 3, 2014 at 3:31 PM

The argument for no higher than 33% presupposes that politicians won’t use the tax code for punitive effects for enemies, or rent-seeking for friends. And that they’re rational…

Meric1837 on February 3, 2014 at 4:55 PM

InterestedObserver, it is not just total tax,or even total government inflicted costs, but total costs.

Government raises employee costs to mandatory Obamacare costs and higher minimum wage? Move right on the curve.

Government raises EPA regulatory compliance costs of Energy? CFIB costs so you lobby Congress in self defence? Move right on the curve.

Foreign sources of rare earth ores and lithium raise prices of needed elements for mandatory EnergyStar compliance? Move right on the curve.

Any action as well as every government action that push the total costs higher has exactly the same deleterious effects (but without even the fig leaf of higher individual tax collection elements)

jhnone on February 3, 2014 at 5:59 PM

The video mentions the Reagan Tax Cuts, but did not mention the Bush Tax Cuts, which also produced results confirming the Laffer Curve… Tax rates went down, and tax revenues went up.

President George W. Bush “inherited” the Dot Com bust and the 9/11/2001 attacks, both of which hurt our economy and decreased employment (increased unemployment).

The second part of the “Bush Tax Cuts” were signed May 28, 2003, and turned the economy around… both employment and revenues went UP as a result of the Bush Tax Cuts.

For employment numbers, use the Employment-population ratio: http://data.bls.gov/timeseries/LNS12300000
For Revenue numbers, use: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist01z1.xls

Let’s look at the Employment-population ratio in the last month of each Fiscal Year (September) from 2000 onward:

Year Employment-population ratio in September
2000 64.2%
2001 63.5%
2002 63.0%
2003 62.0%
2004 62.3%
2005 62.8%
2006 63.1%
2007 62.9%
2008 61.9%
2009 58.7%
2010 58.5%
2011 58.4%
2012 58.6%
2013 58.6%

And let’s look at Receipts (Revenues) from 2000 onward:

Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2017

Year Total Receipts (in millions of dollars)
2000 2,025,191
2001 1,991,082
2002 1,853,136
2003 1,782,314
2004 1,880,114
2005 2,153,611
2006 2,406,869
2007 2,567,985
2008 2,523,991
2009 2,104,989
2010 2,162,706
2011 2,303,466
2012 2,450,164

Starting with Fiscal Year 2000, note how both employment and revenues went DOWN in FY 2001, DOWN again in FY 2002, and DOWN again in FY 2003. That’s the effect of the Dot Com bust and the 9/11 terrorist attacks.

But the Bush Tax Cuts turned the economy around. Note how both employment and revenues went UP in FY 2004, UP again in FY 2005, UP again in FY 2006, and while employment dropped slightly in 2007, revenues were UP again that year.

The Bush Tax Cuts improved employment and improved revenues… Revenues in FY 2007 were 44% larger than FY 2003 revenues!

It wasn’t until the Democrats took majority control of the House and Senate, in January 2007, that the economy really started to tank. The Democrats have been in majority control (holding 2+ out of 3 of the House, Senate and Presidency) for 7 years and 1 month, and they spent the first nearly 3 years of that driving the economy in the ditch and the last 4+ years leaving the economy in the ditch.

FACT: The Bush Tax Cuts lowered tax rates for everyone who pays taxes.

FACT: Tax revenues went UP, not down, after the passage of the 2003 Bush Tax Cuts.

FACT: FY 2007 revenues were a whopping 44% larger than FY 2003 revenues!

FACT: Employment increased from 62.0% of the civilian non-institutional population age 16+ in September 2003 to 63.4% in December 2006 (the last month that Republicans controlled the House, Senate, and Presidency).

FACT: In the wake of the 2003 Bush Tax Cuts, both employment and revenues improved every year for serveral years. (Tell that to any Liberal who tries to say that the Bush Tax Cuts “Cost” us money!)

FACT: It was not until Democrats took majority control of Washington, D.C. that employment and revenues decreased.

FACT: Employment has been below 59% since September 2009, 52 consecutive months, and shows no sign of improving.

OPINION: If employment and revenues both improved in the wake of the 2003 Bush Tax Cuts, isn’t it logical to assume that reversing any of those cuts will have a reverse outcome? I.E., if tax rates are allowed to go up, then both employment and revenues will get worse, not better.

ITguy on February 3, 2014 at 6:33 PM

Whether it’s 70% or 33% leaves out the issue of what time frame you are looking at. 33% maximizes revenue over what time period? Over the course of a 10-year budget analysis? Over an infinite horizon? Ironically, even Lafferites generally still think in static terms when it comes to this.

theperfecteconomist on February 3, 2014 at 11:36 PM

What if it is not (at this stage of the takeover), higher taxes the left seeks, but only concern their political blitzkrieg with the continued agenda of Cloward Piven (the taking down of all institutions via overload)?
Certainly, insufficient funds to repair and maintain the over load would be the most desirable thing of all.
We lose every time because we assume them to be like us–to want the good things to happen. We naively assume they are failing and being irrational or inept because they are really trying to make things work.
THEY AREN”T!
Think evil in our midst, otherwise we can never save what’s left of our nation, our freedom, and quite possibly, our very lives.

Don L on February 4, 2014 at 5:38 AM

The left care less about actual revenue than they do about abstract notions of “fairness.” The proof is the fact that, regardless of what revenue comes in from taxes, they will always cover the shortfall (or even expand spending) via government debt.

The fig leaf is the argument that the higher taxes they champion will bring in more money. The reality is that the higher tax rates will punish those who they think are doing “too well.”

Revenant on February 4, 2014 at 8:14 AM

The left care less about actual revenue than they do about abstract notions of “fairness.”

Revenant on February 4, 2014 at 8:14 AM

Exactly.

Obama admitted, in a debate with Hillary Clinton,
his tax policies are not based upon what they will do to revenues,
but rather are based upon imposing his idea of “Fairness”.

ITguy on February 4, 2014 at 8:58 AM

Whether it’s 70% or 33% leaves out the issue of what time frame you are looking at. 33% maximizes revenue over what time period? Over the course of a 10-year budget analysis? Over an infinite horizon? Ironically, even Lafferites generally still think in static terms when it comes to this.

theperfecteconomist on February 3, 2014 at 11:36 PM

You have several sets of numbers to go by. The one above, or you can even use Ronald Reagan- President of the United States (1981 – 1989). Having to clean up another fine mess of jimmmy carter.

From what I recall, it took about 2-5 years for this “effect to occur”. Which falls in line with what is documented above.

I’m not sure what YOUR POINT is, since all that really matters is the next year. Because there isn’t anything “STATIC” in finances or outlays either, it’s a snap shot.

Human nature in itself causes eb and flows of the market and nothing last forever.

-west

mr_west on February 4, 2014 at 2:10 PM

The Laugher Curve is probably the single fact I’ve argued over and over that sadly gets lost on all the pro-government, pro-taxation crowd. This curve accounts for a majority of human behavior which isn’t modeled in our tax structure. People don’t exist in a vacuum where raising rates results in an increase in revenue. Also, as others pointed out, models in general don’t account for taxation being used as a weapon to punish or reward segments of special interest groups.

At some point, individuals will be compelled to act against the law or at least spend a significant amount of resources (time, money, risk) to keep as much cash as possible. As you lower rates, it becomes less and less appealing to engage in risky or time consuming behavior to save a few bucks. That’s how receipts go up!

Eliminate deductions and flatten the tax code. Sure you’re going to put the IRS, H&R Block and an army of tax lawyers out of jobs but that’s progress and they will adapt. The end result will be serious government savings and probably the same or more tax money than we’ve got now.

Sadly, congress will never surrender their power of taxation by removing deductions because that’s a serious weapon able to be wielded to crush foes and reward “friends”. So, we’ll have to work within the states and take it from them.

Flashwing on February 5, 2014 at 3:27 AM

My apologies, it is the Laffer curve, not laugher. Too late in the evening for me :-(.

Flashwing on February 5, 2014 at 3:28 AM