Taxes Haven't Been Cut Enough

Martin Brock: "Let me get this straight. If I bring home a million bucks a year, my spouse will work, but if I bring home a hundred grand a year, she won't. I don't know how you figure that."

Well, Martin, now I remember why I stopped responding to your comments. When you attribute statements to me that I did not make, I have no choice but to either correct you or to stop commenting on your posts.

I did not write anything close to what you claimed was my argument. My argument was very simple:

"At very high marginal tax rates, there is little incentive to earn more income. Spouses of high income earners do not bother to work."

If the marginal tax rate for a family is 50% or 60%, there is less incentive to add income streams and to take risks than if the marginal tax rate is 25%. There's nothing magic about that, Martin. It's pretty basic economics.

Martin Brock: "The individual income tax does not apply to your business earnings. It applies to your personal income."

Are you sure you know much at all about the tax laws, Martin? I'm not going to bother explaining my personal tax situation to you, but I'll provide a link that explains small business taxation and a passage that should show the error in your statements:

"An under-appreciated feature of the U.S. tax system is that most small businesses are not required to pay the corporate income tax. Instead, small business income "flows through" to the owners who report it on their individual income tax returns. About 35 percent of business taxes are paid in this manner by the owners of sole proprietorships, partnerships and S corporations."

Basically, the Federal government paid people in a position to realize more personal income to collect more taxes for them. Tax collection has always worked this way.

Just wanted to reiterate this point.

Many of us believe that much more occurred than just "rearranging of income".

I know you do. Many people believed that Iraq had mobile biological weapons factories on transfer trucks too, but they were mistaken.

At very high marginal tax rates, there is little incentive to earn more income. Spouses of high income earners do not bother to work.

Let me get this straight. If I bring home a million bucks a year, my spouse will work, but if I bring home a hundred grand a year, she won't. I don't know how you figure that.

If you're talking about the "marriage tax", that's a separate issue. Let's get rid of it by taxing all individual income alike and making no distinctions based on marital status. I have no idea why anyone expects a tax break for supporting an able, non-working spouse.

If a family has dependent children, that's a separate issue too, but I prefer arrangements other than dependent exemptions and credits for children. Let parents account for their children's support as "investment" and expect a yield on the investment. Then let's scrap the Social Security system. This more realistic accounting better serves children as well as parents.

Potential entrepreneurs do not bother leaving secure corporate jobs. Other entrepreneurs do not devote time and energy to expand successful businesses.

When marginal income tax rates were higher, entrepreneurs put more money into their businesses and less into their houses. That's why income tax revenue was lower.

Please do not tell me that entrepreneurs are indifferent about marginal tax rates. I was a successful entrepreneur who would not have worked 100 hour weeks if the various governments had confiscated more than 50% of my earnings. I wasn't in it for the fame.

The individual income tax does not apply to your business earnings. It applies to your personal income. I don't know anything about you personally, but the world is full of people who are in it for the fame and for countless other reasons other than entitlement to build private castles. That you wouldn't play the game is irrelevant. Many people don't play the game now. Others do. The only thing that matters is that a sufficient number of people would continue organizing resources seeking profit. High marginal income tax rates need not prevent many people from benefiting personally in this way. The idea is to prevent a few people from building private castles.

Perhaps the largest benefit from lowering capital gains rates was the rearranging of capital rather than the rearranging of income. Extracting earnings from slow growth enterprises and investing it in higher potential enterprises generally does lead to economic growth.

If it were up to me, capital gains would be taxed like other income, and no reinvested income would be taxed. Bill Gates could pay the same income tax that I pay if he chose to reinvest the rest of his income, regardless of its source.

When marginal tax rates and economic growth were both higher, the tax must have worked this way. Rather than pay a high income tax, people in a position to realize much "personal income" simply didn't. They called the business revenue something else instead.

One consequence of lowering various capital gains rates in the last decade was a huge shift of income toward purchasing costly, residential real estate and thus bidding up the price of these assets, according to recent discussions in this forum. Apparently, we've built too many costly residences as a consequence, thus "castle building". I don't see the utility in that.

We had very robust growth with higher marginal income tax rates than we had later under lower rates as a matter of fact. "Personal income" rose, along with the revenue of central authorities, when tax rates fell, because people effectively started calling various revenue "personal income" that had been called something else before. This renaming of revenue raised Federal revenue, expanded the Federal government and impeded useful economic growth.

Lower marginal rates didn't impede economic growth by transferring less money from potentially wealthy people to the Federal government. Lower rates impeded economic growth by transferring more money from these people to the Federal government, just as the Lafferians say it did. Basically, the Federal government paid people in a position to realize more personal income to collect more taxes for them. Tax collection has always worked this way.

You can claim all you like that entrepreneurs aren't productive under high marginal income tax rates, but the empirical facts don't support your claim. When marginal income tax rates are high, people don't pay the tax. That's not a bad thing. It's a good thing. If statesmen simultaneously impede reinvestment as well as personal consumption, that's a bad thing.

martin brock: "Did this rearranging of income result in any more economic growth? Did we actually produce more real output than we would have produced anyway, or did we only redirect monetary income?"

Many of us believe that much more occurred than just "rearranging of income". At very high marginal tax rates, there is little incentive to earn more income. Spouses of high income earners do not bother to work. Potential entrepreneurs do not bother leaving secure corporate jobs. Other entrepreneurs do not devote time and energy to expand successful businesses.

Please do not tell me that entrepreneurs are indifferent about marginal tax rates. I was a successful entrepreneur who would not have worked 100 hour weeks if the various governments had confiscated more than 50% of my earnings. I wasn't in it for the fame.

Perhaps the largest benefit from lowering capital gains rates was the rearranging of capital rather than the rearranging of income. Extracting earnings from slow growth enterprises and investing it in higher potential enterprises generally does lead to economic growth.

If a 100% marginal tax rate on personal income over a million bucks a year decimates Federal tax revenue, I suppose that would a good thing for the economy. I wouldn't produce any less and neither would 99.9% of other people. That top professional basketball players receive less personal income wouldn't much affect their performance either. They'd go right on playing.

When marginal income tax rates were high, many people in a position to realize high marginal income didn't, because they didn't want to hand so much of it to central authorities.

When Kennedy and later Reagan cut marginal income tax rates, they made a bargain with these people. They said, "If you'll realize a lot more personal income and send a substantial portion of it to us, we'll let you keep the rest."

So these people realized a lot more personal income and sent a substantial portion of it to Kennedy, Reagan and their successors and kept the rest.

Did this rearranging of income result in any more economic growth? Did we actually produce more real output than we would have produced anyway, or did we only redirect monetary income?

We'll never know, because we can't rerun history without the marginal income tax cuts; however, I doubt it. We do know that the cuts entitled both Federal authorities and a few wealthy individuals (who are central authorities themselves) to govern the expenditure of a lot more money. That's what we know.

Do I want central authorities entitled to spend a lot more money? Certainly not.

However, if the tax rate(s) would change, and the output (revenue raised) could be observed for every change in the tax rate(s), we could graph it and make a function to fit the data.

This "function" would change from one day to the next. You could raise rates one year, and the increase would have effects so that lowering the rates back to the previously level a year later wouldn't raise the same revenue.

Don't tell me that there's not math involved, because that is bull.

There's no math involved in what you've described. I can also plot the S&P 500 vs. the length of my finger nails, and there's no math in that either.

No. That tax revenue is zero at zero percent and 100% tax rates is a simple truism. You know nothing about any smooth curve relating tax revenue to a rate between these extremes.

Okay. So, revenue (the Y-axis) is zero at the tax rate (X-axis) being 0 and also zero when the tax rate is 100. You do wisely not dispute this. And we know that when the aggregate tax rate [accounting for federal income tax, payroll taxes, state taxes, corporate income tax passed through to consumers] is somewhere near 50%, over two trillion is raised in revenue.

No one here claimed that the curve, if graphed, would be smooth or that it would be a second-order function without local minimums and maximums. What we do not know, and can never know, is what the quantity of taxable stuff would be given the aggregate tax rate. However, if the tax rate(s) would change, and the output (revenue raised) could be observed for every change in the tax rate(s), we could graph it and make a function to fit the data. Don't tell me that there's not math involved, because that is bull. On macro and micro levels, society, and the individual who partipate in its economy, are making calculated decisions.

Obviously the whole mess of taxation has too many moving parts and too many taxes to see instantaneously. The ripple effects are much too complex and so is is tax-skirting behavior of many who would report the true quantity of taxable things involved. But to claim that there's no math involved and no curve [even if not smooth] involved seems rather ignorant.

But don't sacrifice your family's interests to do it. Wait until you're old, or your family is truly threatened. I don't much expect another draft to man a major war anytime soon, but it could happen. If my sons are drafted and killed, I'll certainly murder a lawful authority then. I'll drill a hole in his head like those guys in Iraq, and I'll suck his brains out and spit them in his face.

You can call me a "murderer" rather than glorify me with "soldier" and similarly vain rhetoric. That's perfectly O.K. with me. I'd much rather murder a statesman for my sons than valiantly kill another man's son on the statesman's command. I prefer the murder to the valiant killing. That's my choice.

Allāhu Akbar

Martin is advocating assassination extermination of political leaders parasites on this blog?

Only when it becomes necessary to save the host.

If it comes to that, assassinating political leaders is the most moral war I can imagine.

Let me get this straight. Martin is advocating assassination of political leaders on this blog?

I think it's dishonest when the polemicist does not praise Somalia, a place where there is no state, or disparages the emergent order there as "warlordism."

We have to account for what people believe and for what has preceded.

Free markets can occur in tribal states, but when the state becomes the belief system, then free markets must be chosen. At such a point, it becomes increasingly difficult to free the market from the past.

Drug addicts typically must undergo very uncomfortable withdrawal symptoms when they stop taking their drugs. This is because their bodies have adapted to the presence of drugs.

I don't know what the dominant belief system is in Somalia, but in the world at large, the dominant belief system is statist.

What Somalia does illustrate is that states fail. This is also illustrated by Zimbabwe, and soon, Venezuela.

No. That tax revenue is zero at zero percent and 100% tax rates is a simple truism. You know nothing about any smooth curve relating tax revenue to a rate between these extremes.

Search Henderson's Encyclopedia of Economics for "Laffer curve". You'll find one reference, in an article titled "Supply Side Economics". It says, "Indeed, economist Arthur Laffer (of “Laffer curve” fame) popularized the notion that higher tax rates may actually cause the tax base to shrink so much that tax revenues will decline, and that a cut in tax rates may increase the tax base so much that tax revenues increase." That's another truism. There is no "curve", no mathematics, nothing. It's just a truism popularized by politicians.

Martin Gardner dispensed with the "mathematics" of the "Laffer curve" decades ago.

The "Laffer curve" has no significant economic content. It's political science, not economic science.

You fail! It does have significant content in Economic Theory and uses Mathematics while making some very solid micro & macroeconomic assumptions. And yes it does make a curve just as any revenue equation would. But instead of using [price] x [quantity], it uses [tax rate(s)] x [taxable items].

My answer: "Because when I turn around, I would find myself to be the only one charging up the hill with a pitchfork."

Don't confuse the metaphor with the plan of action.

So now that we've created our army Martin, when do we start?

Lone wolves don't join armies. When I decide the time is ripe, I'll pick my target and take him out. You do the same. Do it when you're old enough and tired enough of this life to move on. You won't live forever. Trust me. Transfer your estate to your loved ones before you do it.

I'm makin' a list and checkin' it twice. I only need to take out one statesman, and I've done my part. It won't be Vito Titone, 'cause he's already dead.

I understand that acknowledging that there are reasonable government expenditures would weaken the polemic. I think it's dishonest when the polemicist does not praise Somalia, a place where there is no state, or disparages the emergent order there as "warlordism."

The Laffer curve is false. Every employee of a conventional firm pays 100% taxes to the firm, because 100% of whatever he produces is deemed to belong to the firm. Yet, he labors for the firm because the firm pays him benefits. Ergo, there is a form of organization which can confiscate 100% of its members' contributions, and yet, through redistribution of those contributions, continue. QED, Laffer's curve fails. Laffer's curve fails to predict correctly the existence of the firm. Why does Laffer's curve fail? It is because Laffer's curve does not take account of "the unseen," namely what the organization is doing with the revenues, and the benefits to the confiscatee. Bastiat's ghost points and howls with laughter: "Laffer would claim that if a customer gives a shopkeeper a franc, and the shopkeeper gives the man a roll and 20 centimes, that the customer has been taxed eighty percent! Laffer must imagine that the roll is a happy accident. He sees only the currency transaction."

Discretionary spending has only increased by 42%

Charlie, my man, they have got you bamboozled. The entire budget is discretionary in that they can hold a vote at any moment to change the level of spending. That they are not courageous enough to do so is immaterial.

it seems misleading to count entitlement spending that was promised long before the 1980s against those that simply had to honor those promises as they got on budget.

It's funny, what they choose to "honor", and what they don't.

If we don't see these details pronto, we should carry our pitchforks to D.C. and New York, the twin Capitols, and start spilling some blood.

And here I thought I was the only one advocating such action. I have students as ask me all the time: "Why don't you start the revolution?"

My answer: "Because when I turn around, I would find myself to be the only one charging up the hill with a pitchfork."

So now that we've created our army Martin, when do we start?

Mr. Boudreaux,

It appears that you and Mr. Friedman desire for revenues to go down. If so, how do you pay for the ever increasing entitlement obligations? Given that politicians are elected via a corrupt system based on bribery, how do you propose to reduce these entitlements, and then subsequently, taxes?

Just because the Laffer curve has evidently not been working, this does not mean it will not work, if we just keep working enough at it… Is that the spirit Professor Boudreaux?

Americans do not revolt; period end of statement.

I'm not Americans. I'm one American. I can stick my pitchfork in Paulson or Bernanke or Bush or Cheney or Barney Frank, and you can pick your own pitchfork target. If you don't want to call that "revolution", I couldn't care less. Just call me a "terrorist" or an "assassin" or a "murderer". Who cares? I'm not interested in your politics either.

At both zero and 100 percent tax revenues are zero and somewhere in between revenues will reach a maximum. ... Isn't that the how it works?

No. Because the "Laffer curve" is not a parabola. It's not even a "curve". It's hardly a meaningful concept at all. The "curve" is just a simple figure that Laffer sketched on a napkin for Dick Cheney while peddling political promises to his rent seeking constituents. The "Laffer curve" has no significant economic content. It's political science, not economic science.

Wouldn't it be better to always be a bit below that level and keep government on a shorter leash?

How about a bit above zero? That's the minarchist position.

Martin says: "If we don't see these details pronto, we should carry our pitchforks to D.C. and New York, the twin Capitols, and start spilling some blood."

Americans do not revolt; period end of statement.

That point was recently made in the book The Forgotten Man: A New History of the Great Depression by Amity Shlaes

That was the 1930s. With all the excess we have available now the idea of revolt or revolution is out of the question.

Both Don and Russ are correct. Russ wants confidence here are steps to ensure that confidence:

* Tax cuts are key

* Term Limits are key


* The Line Item Veto is key


* Spending Cuts are key

Of course there is more to be done but tackling these large issues fire the shot over the bow.

Spending by central authorities hasn't been cut enough, and as long as we're creating money to spend it, less central monetary authorities might as well do that too.

I don't favor fixing the price of a single commodity, and I certainly don't favor 100% reserve gold banking, but I do favor decentralized monetary authorities creating currency to meet local credit demands and suffering bankruptcy when they overextend. When credit dries up as a consequence, the solution is new banks, not bailouts for the failed banks. A failed bank's assets should be sold off only after a thorough examination by an impartial, public (transparent) bankruptcy court.

Our banking system is supposed to work this way already, but it instead encourages marginal banks to merge into bigger marginal banks in the name of "stability" and "security" to guarantee the riches of already rich depositors, shareholders, executive officers and other established banking interests.

Now we can add marginal borrowers to the list of established interests. And we wonder why we have inflation, increasing wealth concentration and the rest. If the problem is "socialism", then it's primarily "socialism" for the rich. A better label is "corporatism", or let's just be honest and call it "fascism", but let's certainly stop pretending that it's about "the poor" or "the working class". I've had my fill of this politics. Bankers and the guys at GM are not "the working class". They're all a lot of rent seeking, political capitalists, regardless of the color of their collars.

I'm absolutely amazed that Bloomberg must sue the Federal Reserve to release details of trillions of dollars worth of "market securities" essentially swapped for taxpayer obligations. If we don't see these details pronto, we should carry our pitchforks to D.C. and New York, the twin Capitols, and start spilling some blood.

Government is a way of making people pay more than they should have to for things they don't really want to buy, but will accept if they entertain the illusion that someone else is paying for them.

Isn't the point of the Laffer curve that there is an optimum tax rate at which tax revenues will maximize? At both zero and 100 percent tax revenues are zero and somewhere in between revenues will reach a maximum. And this is because as tax rates get lower more people work harder and invest more and produce more income to be taxed. Isn't that the how it works?

I thought so. And Milton Friedman has a good point. Why would you want to be at the optimum rate that produces the most tax revenue to the government? Wouldn't it be better to always be a bit below that level and keep government on a shorter leash?

Yes. Milton Friedman, RIP, smart man. A national treasure.

Only over time have I seen the follie of Government. Don your point is similar to others that I have heard. It is not how much money the goverment collects in cold hard taxes, but how much the government spends in redirect limited resources.

I am sure we can have many economist studying the multiplier on things such as economic stimulus, but few willing to stand up and use Mr Bastiate's insight to bring forward the "divider" effect of all the good that resources that were removed from the economy by Taxes.

I would however take the perspective that taxes as a percent of GDP would be the measure that I would use to judge if taxes are going up or down. In the end after 28 years of battle and stident reducing tax cheap talk, we have only stayed level.

Methinks had the back half of the Laffer Curve: disincentives.

The answer is the curve, and hopefully slope, keeps expanding, and as long as you’re rising on the front half (conditional to economic expansion), you’ll collect positive revenue.

The Laffer Curve has nothing to do with the underlying disaster of Democrats spending too much money in congress. And Republicans emulating them.

And the Socialist Security time bomb we’re currently sedentarily placed upon…..

Methinks,

I think Milton Friedman was making a joke, because if he was serious, he would have flunked second semester accounting. "My revenues are up," says the business owner, "so I must be doing better!" For thirty points, list all the flaws in the business owner's thinking.

I do not think it likely that a Nobel Prize winning economist would be unable to lead a discussion about the difference between cash accounting ("candy store") and accrual accounting. I do not believe that Milton Friedman would be so confused. If the tax rate changes, or the tax object changes, or indeed if anything substantive about the tax protocol changes, then things aren't equal after that change ab ipso necessitatem. It is nonsense or jocularity to suggest that they are.

It is marginally more defensible to argue that if deficits increase after a tax cut, taxes were cut too much. At least the notion of deficit requires comparing revenues and expenses.

Even more defensible is to argue that any substantive change in the tax protocol is presumptively harmful because it increases uncertainty and encourages lobbying behavior at the expense of innovation behavior. Set the object (consumption please), set the slope, set the rates, then leave it alone -- but that's off topic.

Sorry Prof Boudreaux, gotta call you on this one.

Tax revenues are a flow, not a stock, and I don’t believe even Art Laffer would follow you here.

I do absolutely agree that taxes should be lower (and zero in several areas such as estate/death tax), but citing positive revenue gains during periods of economic expansion is muirgeo-level (i.e. idiot) economics.

There is a major counterargument to this.

Let’s see if somebody posts it….

Discretionary spending has only increased by 42%, while GDP has risen 122%.

How much of that 122% rise was faux wealth?

TL,

1.) How many of the goods government obtains are obtained for any less than N*1.5 or some other much larger factor?

2.) I think you misunderstand what Milton Friedman was referring too. All else held constant, if revenue rises when tax rates are reduced, the tax rates were too high. If tax rates don't change with a decrease in tax rates, then tax rates are not high enough to significantly impact investment and work incentives. Thus, the tax policy is bringing in as much revenue as it can without creating significant disincentives to work and invest. Think Laffer Curve.

-Don

Discretionary spending has only increased by 42%, while GDP has risen 122%. So it seems the growth in government that you cite is really just a manifestation of old promises being put on-budget. That is, the push in the last 28 years is dramatically towards less government. As a percentage of national income, discretionary spending has fallen 25% since 1980, even though total outlays have only fallen by 8% of national income.

Since the article is talking a shift in governance philosophy, it seems misleading to count entitlement spending that was promised long before the 1980s against those that simply had to honor those promises as they got on budget.

Charlie

Don,

If a collective good that would require private actors an expenditure of N can be obtained by a government expenditure of (N * 0.01), then it is beneficial to the economy for government revenue to rise by (N * 0.01) in order to free up (N * 0.99) of funds by the private actors.

Thus, Milton Friedman's quip, although thought provoking, is not strictly true.