Tuesday, August 01, 2006

Wheels coming off the wagon

So, you're familiar with the Laffer curve. This is the thesis that states:
  1. If no one was taxed, no revenues would be raised
  2. If taxes took everything, no one would bother to generate wealth, and no revenues would be raised
  3. We're between 0 and 100 % taxation
  4. Some tax revenues are raised
  5. Since we have two zeros with an non-zero number in between, the dependence of tax revenues on taxation is a parabola
  6. Since more than half of all economic wealth is absorbed into taxes, reducing taxes would increase revenues
Now, assertion (5) may seem blind-faithy to you. And assertion (6) might not sound true. But, JFK's reducing the top levels of income tax taxation below 91 % did precede an increase in tax revenue, which proves the point. Or, supports the point, which is the same as proving if you're lying and powerful.

But! Two kind of crazy otherwordly things happened, as reported in Slate.
  • Dick Cheney ordered a study to see how true this was
  • A report was released debunking the Laffer Curve nonsense
Now, these people had clearly learned their lesson with the global warming report and the State Department Patterns of Global Terrorism report. You can't just let these eggheads run away with the questions, as they'll come back and tell you you're wrong. Which they've done again!

Here you are. The introduction seems very line-toeing, but turns around into brutal irony the deeper you read.
Extending the remainder of the tax relief – the 10 percent rate, the expansion of the child tax credit, and the reduction in marriage penalties – stimulated economic activity during and immediately after the recession and served other purposes, such as making the tax code more progressive. However, these elements of the tax relief do not have positive growth effects in the longer term in ways that this type of model can measure.

Which is to say, tax cuts are only good for the rich.
Second, the initial steady state assumes that current law polices are fiscally sustainable.
If the revenue cost of that tax relief is offset by reducing future government spending, the increase in output is likely be about 0.7 percent under plausible assumptions. If, instead, the tax relief is extended only through the 14 end of the budget window (i.e., it is temporary), the tax relief would increase national output in the short run, but long-run output would decline as future tax rates increase.
Well, OK. But, if Mr.-Tax-Cut president can't get spending down with a friendly Congress, I think we'd best keep an eye on our revenues.

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