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Monday message board

August 30th, 2005

I haven’t got time to post anything substantive right now, but I’ll put up the Monday Message Board as usual Civilised discussion and no coarse language. Also, again, nothing about football this week, please.

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  1. Terje
    September 2nd, 2005 at 17:59 | #1

    Homer,

    Laffer outlines the revenue data for the Reagans “Economic Recovery Tax Act” (ERTA) in the following article.

    EXTRACT:-

    The ERTA slashed marginal earned income tax rates by 25 percent across the board over a three-year period. The highest marginal tax rate on unearned income dropped to 50 percent from 70 percent (as a result of the Broadhead Amendment), and the tax rate on capital gains also fell immediately from 28 percent to 20 percent. Five percentage points of the 25 percent cut went into effect on October 1, 1981. An additional 10 percentage points of the cut then went into effect on July 1, 1982. The final 10 percentage points of the cut began on July 1, 1983.

    Looking at the cumulative effects of the ERTA in terms of tax (calendar) years, the tax cut reduced tax rates by 1.25 percent through the entirety of 1981, 10 percent through 1982, 20 percent through 1983, and the full 25 percent through 1984.

    A provision of ERTA also ensured that tax brackets were indexed for inflation beginning in 1985.

    Prior to the tax cut, the economy was choking on high inflation, high interest rates, and high unemployment. All three of these economic bellwethers dropped sharply after the tax cuts. The unemployment rate, which peaked at 9.7 percent in 1982, began a steady decline, reaching 7.0 percent by 1986 and 5.3 percent when Reagan left office in January 1989.

    Inflation-adjusted revenue growth dramatically improved. Over the four years prior to 1983, federal income tax revenue declined at an average rate of 2.8 percent per year, and total government income tax revenue declined at an annual rate of 2.6 percent. Between 1983 and 1986, federal income tax revenue increased by 2.7 percent annually, and total government income tax revenue increased by 3.5 percent annually.

    The most controversial portion of Reagan’s tax revolution was reducing the highest marginal income tax rate from 70 percent (when he took office in 1981) to 28 percent in 1988. However, Internal Revenue Service data reveal that tax collections from the wealthy, as measured by personal income taxes paid by top percentile earners, increased between 1980 and 1988–despite significantly lower tax rates.

    ~~~ end extract ~~~

    The full article shows the tables of revenue data.

    Even if revenues had fallen by a few percent (the data suggests it rose) the fact that the top rate was reduced from 70% to 28% would have meant the accumulation of a massive private sector benefit with only marginal decline in the well being of the public sector finances.

  2. Ian Gould
    September 2nd, 2005 at 18:55 | #2

    Terje,

    Feel free to answer my question regarding the Bush/Clinton tax increases any time.

    although judging by your final paragraph the answer is “Claims that tax cuts increase revenue are false but who cares?”

    The answer, of course, is that everyone agrees that taxes should be as low as possible. however most responsible people care if the government cuts taxes while maintaining or increasing spending resulting in an increase in the national debt.

    Had Reagan or Bush Jr. cut spending first then cut taxes by an amount equivalent too or lower than the tax cuts, their actions would not be anywhere near as irresponsible.

  3. Terje Petersen
    September 4th, 2005 at 22:31 | #3

    Ian,

    Regarging your question about the Bush/Clinton tax increases. I will happily go and review the data however I don’t have any answer at my finger tips.

    In the following article (and others) Wanniski claims that the 1993 Clinton tax increases were not big enough to have any severe impact on economic expansion. They also cut in at a fairly high income level so they effected a relatively small number of suppliers.

    In 1997 Clinton cut capital gains taxes from 28% to 20%. Capital gains taxes are seen as double taxation by supply-siders and they routinely argue that the fairest and most efficient rates for CGT is 0% (#). As such Clintons cut in CGT was more significant (although later) than his increase in income taxes.

    http://www.polyconomics.com/searchbase/08-18-00.html

    You presume that I would say: “Claims that tax cuts increase revenue are false but who cares?�. This is not accureate at all. So let me spell it out a little more.

    If we were to draw a laffer curve we might agree broadly that revenue at 0% tax and 100% tax is close to nil. The question then turns to what shape is it in the middle. My own view is that in most circumstances the curve looks a lot like Ayres Rock (Uluru) with the top being slighly higher at the left.

    The laffer curve looks only to the optimisation of public revenue. It does not look at total output which would include private sector production. As such the societal optima would be to the left of any laffer curve optima. As such I would be of the view that tax cuts should still be in order even after they finished being revenue positive.

    My view would be more acurately summariesed as “Claims that tax cuts increase revenue are generally true however thats only half the point of tax cuts”.

    Even Keynes could see the point of the Laffer curve although it did not go by that name in his day (*).

    Regards,
    Terje.

    (#) The reason capital gains tax is double taxation is because any gain in the price of capital generally stems from the capitals increased ability to generate future income. This future income is already subject to income tax. Under CGT this future income is taxed a second time if the ownership of future income flows is transfered to a different owner. However if there is no change of ownership then no CGT applies.

    (*) QUOTE KEYNES
    “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”

  4. abb1
    September 5th, 2005 at 01:20 | #4

    I disagree that revenue at 100% tax is close to nil. Israeli kibbutz is a clear empirical example.

    In addition, many social democracies have (or used to have) a top tax bracket that’s reasonably close to 100% (the US in 1940s and 50s, for example) while experiencing rapid economic growth and growing tax revenues.

  5. Terje Petersen
    September 5th, 2005 at 09:57 | #5

    Abb1,

    I thought that Kibbutz was a voluntary affair. Can you expand on the notion or provide links.

    If one part of the population suffers 100% taxation but most do not then I have little doubt that official production and trade will still happen.

    Wanniski offers this example to support your position:-


    When the nation is at war, point E can approach 100 percent. At the siege of Leningrad in World War II, for example, the people of the city produced for 900 days at tax rates approaching 100 percent. Russian soldiers and civilians worked to their physical limits, receiving as “pay” only the barest of rations. Had the citizens of Leningrad not wished to be taxed at that high rate, which was required to hold off the Nazi army, the city would have fallen.

    http://www.wanniski.com/PrintPage.asp?TextID=2980

    Regards,
    Terje.

  6. abb1
    September 5th, 2005 at 16:56 | #6

    Yes, a voluntary affair, but that’s the whole point. To postulate 0 revenue at 100% tax you have to assume a sort of un-enlightened self-interest as the solo motivation for any and all economic activity. This is a simplistic presumption that may or may not be justified when applied to any particular scenario.

    In addition, even if we accept your assumption, your laffer curve is not really a flat curve, but due to a progressive tax system it’s more of a 3-dimentional surface. In this model raising high tax brackets to 100% (or close to it) may cause more income to flow to low-income segments of the population and create a better equilibrium. Well, I am not an economist, but I think it’s a possibility.

  7. Terje Petersen
    September 5th, 2005 at 22:12 | #7

    Abb1,

    You may not be an economist but perhaps you are also a contortionist.

    Regards,
    Terje.

  8. abb1
    September 5th, 2005 at 22:50 | #8

    Fair enough. I was just trying to point out that your ‘optimum between 0 and 100′ illustration might be a bit simplistic, that’s all.

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