Wednesday, January 04, 2006

Note to KAR 

Listen, guys. My biggest problem with correcting people getting the Laffer curve wrong is that we've been trying to do this for twenty-five years. Why in the hell would you think they'd get it this time?

Jerry Bowyer disproved the hypothesis three weeks ago. Steven Moore, six months ago. But let's make a couple more points for the Portland Avenue piddlebrains.

First, you assert that the Reagan administration was using the Laffer curve to sell tax cuts. That's not true. Laffer's point is that high tax rates distort the incentives to work, save and invest. (It does not say spend, as you state. That's your confusion of the Keynesian benefit of tax cuts with Laffer.) CBO does understand distortion: Its recent report on corporate income taxes shows that our corporate income taxes are more distortionate than most of Europe.

Second, nobody argued during Reagan, and nobody argued during the 2003 Bush tax cuts, that all of the tax cut would be paid back. This is a canard that the StarTribune continues to toss out, and it's simply wrong. Had you taken the effort to read what was written at the time, it might have helped. Your second pillar of the Laffer theory never existed.
The Laffer Curve itself does not say whether a tax cut will raise or lower revenues. Revenue responses to a tax rate change will depend upon the tax system in place, the time period being considered, the ease of movement into underground activities, the level of tax rates already in place, the prevalence of legal and accounting-driven tax loopholes, and the proclivities of the productive factors.

Third, I don't really care about what lowering taxes does to the budget -- I care what it does to output, and what I get to take home. As the analysis shows, GDP is 1.1% higher under some assumptions in the model. You say so yourself:
Laffer's theory really breaks down into two assertions. The first is that tax relief will stimulate the economy by encouraging people to spend more, work harder and save more, an idea accepted by most economists. In a new study, the CBO modeled a 10 percent cut in federal taxes on all individual income and found that it would raise the nation's economic output over a decade by up to 1 percent, or many billions of dollars.

That would be $120 billion or more a year, every year. Wouldn't that seem good to you, Mr. Boyd? Why are you focused so much on the size of the deficit in what government spends and care so little about what people have to spend? Why is it more important to be sure government collects enough to spend what it desires than to give taxpayers more to spend on what they desire?

I could make other points (there's a rather difficult assumption about how the increased deficit would reduce investment, which I could argue at length about but doesn't fit the spirit of what KAR wants me to do.) But the basic argument has long been over CBO's insistence against dynamic scoring, of recognizing the benefits of tax cuts on work effort and capital formation. Let's give CBO credit for finally trying to get at the question under Douglas Holtz-Eakin. They didn't diss the Laffer curve -- they took it seriously.

Two quotes for the KAR kids:
"It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments." -- Ibn Khaldun, 14th century.

"...reducing taxes is the best way open to us to increase revenues." --John Kennedy, 1961.

So the StarTribune disses instead a Democrat and a famous Islamic writer. Who'd'a thunk it?