Wednesday, October 17, 2007

Not just one rate 

It appears that a conservative magazine spiked an editorial by an economist because she said the Laffer curve "didn't apply at American levels of taxation." Mark Thoma runs down liberal blog reaction and adds
The supply-siders are enforcing a big lie - that tax cuts pay for themselves - a lie that helped them to push through huge tax cuts. Show me where liberal publications are enforcing message discipline based upon a lie about unions.
Unless a liberal economist wants to tell us of a story spiked we can't answer the latter. But as to the former, the truth is those of us there at the beginning of the Reagan administration did not say that all tax cuts pay for themselves, or that the income tax rate ever was in the range that puts you on the wrong side of the Laffer curve. What we do know (say, from the work done in this book, on which I was an editorial assistant) is that some forms of investment did face punitive rates that reduced revenues to the point that a lower rate would increase revenues. See also this essay by Jim Gwartney, which discusses in part his results from looking at income tax avoidance behavior of individuals. The current top-end effective marginal tax rate on labor income is about 60% combined state and local (source in .pdf), which I think is probably below the peak in the Laffer curve. But the taxation of Social Security benefits at the time Bush took office exceeded 100% for a 64-year-old senior who earned $44,000. Is that part of "the big lie"?

If Thoma is referring to politicians or campaign managers inflating claims about tax cuts, fine. It's the same thing that can be said about Keynesians and their political audiences. But if he is discussing the economists who have provided such evidence as above, he's overstating his case. Particularly in the case of capital income, the tax code provides a plethora of effective tax rates and, now as then, there are at least a few whose rates near 100%.

The growth effects, by the way, seem to be most correlated with corporate tax rates, not individual, and in 1985, the height of Reagan, the marginal corporate income tax rate was 46%, above the median for countries around the world. (The current rate is 39%.) Cutting corporate rates is far less attractive politically, as is just cutting the top rates on individual income taxes.

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