@gonoles:
The laffer curve is an economic theory, usually graphically represented, that shows government revnue on the Y Axis versus tax rates on the X. The basic theory is that that there is a rate of taxation that maximizes government revenue (ie incoming tax revenue) somewhere between 0% taxation and 100%. It is very similar in concept to price versus demand curves in theory, where there is a sweet spot where you maximize demand at a good price point.
The Laffer curve was used to justify the supply side economic theory that has been the dominant part of conservative political thought for the past almost 40 years. In theory, there is a point at which the stimulous caused by tax cuts would pay for themselves, so if let’s say you cut the top tax rate by 10 percentage points, which would hypothetically decrease government tax revenue by let’s say 100 billion dollars, it would trigger an increase in economic activity that would generate new tax revenue to balance out or even exceed the loss. The reality is that as far as I know, none of the tax cuts done like that over the past 30 years or so since the 86 tax act were revenue neutral, every tax cut has ended up leaving the US in even more deficit spending. Yes, if the government cut spending to match the lost revenue, it would be revenue neutral, but there is a catch to that politicians don’t talk about, when you cut government spending you are depressing the economy, cutting government spending retards economic growth (for the very reason that government spending can stimulate the economy), and there is pretty good evidence from what I know that government spending in some cases is a lot stronger than cutting taxes.
The real problem with the laffer curve if that while we know exactly what happens at each end (0% taxation, 100% taxation, 0 revenue),in the middle has proven to be mostly conjecture.Tax cuts are a tool to stimulate the economy, but one of the problems is all tax cuts are not made equal. For example, cutting personal income taxes doesn’t always stimulate demand the way they claim it will. In theory, tax cuts to the top rate taxpayers would free up money that can be used in capital formation (ie in investing in companies, for example a bond issue or an IPO used to expand operations or create a new company), but the problem is often the tax cuts aimed at the upper income people don’t do that, either it goes to stimulating demand for luxury goods (that in the scheme of things, often do little to grow GDP or jobs, for a number of reasons, impacts too few people) or they invest in things like hedge funds or esteric trading in derivatives, which stimulates very little.
It has a mirror with government spending, doing a ton of government spending may not do much, depending on where it is aimed, and there can be too much. I always laugh when I hear someone tell me that FDR’s New Deal didn’t end the depression (which is correct) and then they tell me “WWII ended the depression”…WWII was the new deal on steroids, it was the largest government stimulus program in history (around 800 billion in 1940’s dollars)…in that case it worked, because it was aimed literally at the heart of the problem.
The reality of the laffer curve and other such ideas is that they are economic models and projections that are extremely difficult to prove out in the real world. If the laffer curve worked, then the reagan era tax cuts should have left us with budget surpluses, but it didn’t, and the defense is “we should have cut spending”., even though the cuts alone were promoted as being government tax revenue positive. Someone who likewise shows models of government spending and advocating large swaths of that, is doing much the same thing, the answer lies somewhere in the middle.
One of the reasons that people’s perceptions, especially in the working and middle class, about the bit of taxes is that wages over the past 40 years in real world terms have declined, but taxes have done up. If your salary was going up, tax increases might cause grumbles but could be absorbed, but taxes, especially sales taxes and excise taxes, basically further decline living standards for people whose wages are not increasing. The total tax bill for people of more modest means has gone up a lot in the past 30 years as a percentage of income, the 86 tax redo got rid of a lot of deductions more modest income earners had, and then to make up for revenue governments have turned to regressive taxes, like sales taxes, that hit those at the more modest levels harder, to make up for it.
