Subject: Re: Taxes, Revenues and the "Laffer Curve" Date: Thu, 18 Feb 1999 15:29:15 -0600 From: Jim Blair To: "Shawn A. Wilson" Newsgroups: alt.politics.economics References: 1 , 2 Shawn A. Wilson wrote: > That's funny, I've had two entire public finance courses, and we only spent > about 30 minutes total on the Laffer curve. I mean, get real. The Laffer > curve is a fairly trivial observation that only becomes relevant when > marginal tax rates top about 70%. In the real world, taxes that high are so > rare as to be all but unknown. (there's Sweden and...?) Hi, Just where did your 70% figure come from?? How well is that number documented? For which socities, and under what conditions? Did Moses bring it down from Mt. Sinai? Is it not it obvious that the "Laffer curve maximum" is not a universal constant like the speed of light, but is rather a function of the particular society at a particular time? In the US for example, the tax rate was high during both world wars. During the war people would work hard and pay most of their income in taxes to aid in the war effort. But after the wars (and especially after WW I) the economy did not recover and economic growth did not take off until AFTER Andrew Mellon and President Cooledge cut the tax rates. People who worked hard for the privlege of paying taxes DURING the "Great War" would not continue doing this AFTER the war. The "Laffer curve maximum" had shifted. How do you know what it is in the USA in 1999? -- ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834 Subject: Re: Taxes, Revenues and the "Laffer Curve" Date: Thu, 18 Feb 1999 23:34:50 +0000 From: "P. Marks" Organization: The University of York, UK Newsgroups: alt.politics.economics References: 1 , 2 On 18 Feb 1999, Chasna1 wrote: > >Shawn A. Wilson wrote: > > > >> That's funny, I've had two entire public finance courses, and we only spent > >> about 30 minutes total on the Laffer curve. I mean, get real. The Laffer > >> curve is a fairly trivial observation that only becomes relevant when > >> marginal tax rates top about 70%. > > I think you've revealed a serious defect in the teaching of those courses. The > Laffer curve is nothing but a restatement of a primary principle of both > Classical and Neo-Classical economics, that is , that lowering > taxes increases productive effort on the supply-side. That this should be > ignored by an instructor of public finance is a pity. > > If I were a student in those classes, I would have something to say to the > instructor and divisional dean of instruction about the quality of their > program. > > Chas The British reduction in the top rate of income tax from 83% to 60% did indeed greatly increase revenue, but the further reduction from 60% to 40% also greatly increased revenue. Therefore it would seem the figure of "70%" being the point when the curve become very important is mistaken. However, there is a general point to be considered here. Why is maximising government revenue a good thing? If one believes that people are better at spending their own money than government is at spending it for them, well then maximising government revenue is not a sensible objective. Historically in the United States federal government spending was about two to three per cent of national income. These days it is about 30% of national income (less as a percentage of G.D.P.). Certainly technological progress and capital investment has allowed an advance in living standards. But if government had stayed at its past level the standard of economic development would be VASTLY greater than it is now. There are also people (of whom I confess I am one) who hold that even with the level of technology we have today (and the capital investments of the decades) the modern level of government in the United States and overseas is not sustainable in the long term. Oh well, we will have to see. Perhaps when this present credit-money malinvestment bubble bursts things (one way or the other) will be clearer. Paul Marks. AND Edward Flaherty: As requested, here are data on both the share of taxes paid by the top 0.5% of households and their share of aggregate Adjusted Gross Income.* Share of Share of taxes AGI 1962 15.4% 7.07% 1970 13.8% 6.36% 1980 13.9% 7.00% 1990 18.8% 10.75% 1995 23.0% 11.25% *AGI includes all capital gains. From Feenberg & Poterba, "The income and tax share of very high income households, 1960-1995," AER, May 2000. -- Edward Flaherty School of Business & Economics College of Charleston flahertye@cofc.edu Office phone: (843) 953-7166 Fax: (843) 953-5697 Web site: http://www.cofc.edu/~flaherty/index.html AND: royls@telus.net wrote: > >Japan's steeply progressive income tax rate structure hasn't changed >appreciably for decades. Hi, Maybe that is the problem? >...But because few Japanese have the extremely >high incomes that attract the highest rates, the high top marginal >rates have never had much effect on the economy. Maybe Japanese don't have high incomes BECAUSE of the high tax rate on high incomes? Think if the top US rate was still 70% on income over $200,000 as it was in the 1970's , or 50% on income over $106,000 as it was in the early 1980's, the US would still have lots of people reporting high taxable incomes? Date: Tue, 18 Dec 2001 18:44:08 -0500 From: "David Lloyd-Jones" Organization: Bell Sympatico Newsgroups: sci.econ, alt.politics.economics References: 1 , 2 , 3 , 4 , 5 , 6 "Jim Blair" wrote > Maybe Japanese don't have high incomes BECAUSE of the high tax rate on > high incomes? Think if the top US rate was still 70% on income over > $200,000 as it was in the 1970's , or 50% on income over $106,000 as it > was in the early 1980's, the US would still have lots of people reporting > high taxable incomes? Jim, I think you have this quite right. When England had a top rate of 95%, everybody had a company car, a company tailor, and every damn perq you could imagine or couldn't, all written off as expenses. There are an awful lot of guys in Japan with lunch bills of $10~20,000 a year at the local sushi shop. And we won't even go near the question of evening expenses -- except for me to say that at one point I read an internal Finance Ministry memo in which they had taken a survey of tax-deducted business entertainment in the evening, and 84% of all instances, if I remember the number correctly, involved only one male. Cheers, -dlj. Hi, I have seen, since the top rate increase above 28%, the return of some of the tax dodges that were common before the 1980's. Not just "office in the house", but use of company cars, etc. A friend of mine who is a lawyer in a big Boston firm has an interesting perk. When he works late at the office he can call any of about a dozen nearby restaurants and order take out to be delivered to his office and charge it to the firm. They also provide him with limo service home if he took the bus or T-line in and stays after the express bus stops running (at about 6 pm). So he often goes in late, works late, and then brings home dinner in a limo for him and his wife. When you are in the 39% bracket, perks like that look pretty good.