More Mitchell on Tax Policy

by Don Boudreaux on April 23, 2008

in Taxes

Here’s the third and final installment of the Cato Institute’s Dan Mitchell’s superb YouTube videos on the Laffer Curve.  (The first two installments can be found here and here.)

These are all superb.  I recommend them highly.

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{ 10 comments }

Matt April 23, 2008 at 8:29 am

The government has the same portfolio management problem as investors. Government is least cyclic when each of their target customers is a proportionally equal consumer of government. This should be a direct result of Hayek cycle theory.

This is the kernel of theory, not "flat taxes cause growth".

Cato did a study, in fact, and found that when taxes are cut under Republicans, the ratio of government to private sector increases. So, the Republicans, according to dynamic scoring, believe government is too small. In fact, that was the original purpose of the Republican party, to grow government.

save_the_rustbelt April 23, 2008 at 9:23 am

Give Mitchell some credit, he is immensely more honest and straightforward than the dittoheads who run my Republican Party.

One problem with Lafferites is the focus on rates to the general exclusion of deductions (before and after AGI), exemptions, credits, etc.

Also, the behavioral-work impacts are over stated, and the behavoral impacts of capital gains cuts are overstated as well. Most people can't do 80% of their jobs because they want to avoid taxes, the world doesn't work that way.

But overall, a better than average discussion.

Flash Gordon April 23, 2008 at 11:04 am

Watched all three videos and they are excellent. Sent them to about 25 people. Phooey to Matt and save the rustbelt.

Randy April 23, 2008 at 11:07 am

It occurs to me that the political process is just a big machine designed to discover the peak of the Laffer curve. My guess is that they've probably got it pegged – plus or minus a percentage point or two of GDP.

Mac e April 23, 2008 at 1:03 pm

save_the_rustbelt says:

"One problem with Lafferites is the focus on rates to the general exclusion of deductions (before and after AGI), exemptions, credits, etc."

The Laffer curve is all about **marginal tax rates**, i.e. people make their decision to work extra hours based on the incremental amount of income/taxation. You are only correct in regards to the average tax rate, but that is not what Laffer is talking about.

Gary April 23, 2008 at 2:03 pm

Mac e – "Marginal Tax Rates" is a fine cincept, except my marginal tax rate is directly influenced by the type of income I earn. If I work an extra hour at my day job, I'll earn an extra X number of dollars, taxed at (say) 25% (we neglect the fact that I'm a salaried employee, so I, in fact, make 0 additional dollars). If I work an extra hour in my side gig, I have to pay self employment taxes too, so my tax rate is more like 33%. Of course, I can reduce that rate by making a contribution to my SEP-IRA.

Now if the extra income I earn is dividend or capital gains income, it could be 5% or 15%, or it could be taxed at ordinary income rates.

While I'm sure there is an optimal point on the laffer curve, our tax code in this country is so complex, and changes so often, its difficult to say exactly what one's marginal rate is. That's a pretty important component in the assumptions underlying the laffer curve.

LowcountryJoe April 23, 2008 at 7:46 pm

If Dan believes, as do I, that by cutting taxes to some optimal point will increase revenues to the government, then why push for an optimum? In other words, if maximum revenue to the government is an idea that Dan uses to push for lower taxes [a presumable selling point for low taxes] then it is quite disingenuious to mention anything regarding big government…because that's what he'd be advocating indirectly.

Paris April 24, 2008 at 7:33 am

As I've said before, the Laffer curve is impossible to dispute at the extremes of 0% and 100% taxation, and the interesting debate has to do with the shape of the curve and where we are on it. But I feel that it puts the cart before the horse. We citizens do not exist to maximize government revenue. Government exists to maximize our freedom to pursue happiness. We should NOT be seeking a revenue-maximizing point on the curve, as though we are mere milk-cows maximizing milk flow for government; rather we should seek a freedom/utility/happiness-maximizing point on the laffer curve, the point at which further growth of revenues, and growth of government, reduces rather than enhances our freedom to pursue happiness. Generally that point would occur when government has sufficient revenues to pay for true public goods such as law and order, defense, civil courts, certain information systems, some public health measures, and possibly roads and education. Government revenues would probably just hit the double digits as a percentage of production.

Matt April 24, 2008 at 9:06 am

OK, let me try and channel Mitchell and find out why he is so disingenuous.

The problem with government is that we, the economic agents, are unable to balance our portfolio investment in government. To be the most efficient savers, we ultimately need to buy more, or less, shares in government according the the relative volatility of government products.

But there is an ultimate, long term limit on the amount of shares we can hold in government, namely, one vote per person over the long run. This is the ultimate quantization limit that determines government inefficiency.

Mitchell should adopt a quantum mechanical approach and he will find the better bound.

Randy April 24, 2008 at 2:23 pm

Paris,

I agree, but the reality is that government is primarily self serving. All philosophy aside, what government is is a group of people who advance their careers by their ability to collect revenue and exercise power over other people's lives. Revenue maximization is the defacto objective because there is simply no incentive for the members of this group to leave money on the table.

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