Prof. Gitlin Likely Also Believes that Higher Tariffs Will Never Significantly Reduce Imports

by Don Boudreaux on August 2, 2011

in Myths and Fallacies, Other People's Money, Seen and Unseen, Taxes

Here’s a letter to the Chronicle of Higher Education:

Todd Gitlin classifies the “Laffer curve” as a “crackpot idea,” thereby implying that only crackpots deny that raising tax rates always increases – or at least never decreases – government’s tax receipts (“Expertise, Dogma, and the Journalism of Crackpot Ideas,” July 31).

Contrary to Mr. Gitlin’s apparent misconception, the Laffer curve does not demonstrate that all cuts in tax rates increase tax receipts.  It demonstrates, rather, that tax rates can be so high that the resulting tax receipts are lower than they’d be if tax rates were lower.  The Laffer curve, to be a bit technical, is simply an application of what economists call “elasticity” – a concept denied only by genuine crackpots.

Just as the revenue McDonald’s would earn on Big Macs would fall if it hikes the price of each Big Mac to $100 (How many people would buy Big Macs at that high price?), so, too, would tax receipts fall if government hikes income-tax rates to very high levels.  If it’s not crackpot to see that, in response to higher Big Mac prices, fast-food diners change their activities in ways that can cause Big Mac revenues to fall, it’s not crackpot to see that, in response to higher tax rates, income earners change their activities in ways that can cause tax receipts to fall.

Sincerely,
Donald J. Boudreaux

(HT to Nathaniel Clarkson for alerting me to Gitlin’s essay)

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tw August 2, 2011 at 10:31 am

Equally irritating are the myriad people who cannot seem to grasp the concept that the government can realize more revenue by taking a smaller slice of a larger pie than by taking a larger slice of a smaller pie.

Rayray August 2, 2011 at 11:46 am

Even worse are people who think the idea is to maximize government profit.

Woodand6 August 2, 2011 at 12:05 pm

Your comment is so true. Not sure how the maximization of tax revenue became the goal.

Anotherphil August 2, 2011 at 12:37 pm

If you look at his background, two things stand out about Gitlin: One, he has no background in Economics, Finance or anything that would appropriately inform him on matters pecuniary. (Sociology is largely nondiscplinary method of inculcating leftism, devoid of redeeming social value)

Two: He’s an aging radical, who needs to be ignored or ridiculed, not addressed seriously, since dialogue is clearly impossible.

I am so sick of the hippies and am glad they will soon find rules they cannot evade or defy-those found in actuarial tables. We can only assume they will navigate mortality tables with extra haste as result of their “youthful idealism”.

kyle8 August 2, 2011 at 3:36 pm

The worse ones are the old gray haired guys who still sport a ponytail, Grow up gramps!

Michael August 2, 2011 at 10:41 am

It’s as if he doesn’t know how to read the graph…

It’s meaning is obvious if you just look at the thing.

If taxes didn’t modify people’s behavior, what is the point of the excise taxes on gasoline, alcohol, and cigarettes?

Jeremy August 2, 2011 at 12:11 pm

Raise revenue to give to politically connected entities?

Kirby August 2, 2011 at 10:42 am

It’s just an artificial way of increasing price, which reduces demand. Even crackpots can understand the price/demand curve.

Slappy McFee August 2, 2011 at 10:57 am

Overheard at a ‘meeting’ with Minnesota Gov Dayton while on his two day bus tour to get citizens to help end the ‘shutdown’

And this is a direct quote:

“I’m a small business owner and if you raise my taxes, it will just mean that I will have to work harder.”

This was followed by the usual round of applause from those that choose to ignore reality. I just giggled.

Simeon Pilgrim August 2, 2011 at 1:35 pm

Yes, because for that single individual has no other choice.

The mistake the left makes is to assume all “rich” people will make the same choice. Or in relativity, the left leaders rely on the left voting block to not thinking the non-left has options (unlike the demo person) and thus higher tax is a “good” choice.

Chucklehead August 2, 2011 at 5:10 pm

Why doesn’t he work harder before his taxes are raised? He could give the money away to the government or those he feels needy. Or is it about raising taxes on others by force?

PrometheeFeu August 2, 2011 at 11:00 am

To be fair, it seems like we are pretty clearly on the left side of the Laffer curve where a broad decrease in taxes reduces revenue. Now, a decrease in the rate of some particularly harmful taxes could generate a total raise in revenue.

Don Boudreaux August 2, 2011 at 11:03 am

That might well be true. But it remains vital to avoid mistaking that empirical fact as being evidence that the (very old) idea that we now call ‘the Laffer curve’ is invalid.

Surely if all that Gitlin meant was that, empirically, we’re now on the left side of the Laffer curve, he’d not have described the Laffer curve as a “crackpot” idea.

PrometheeFeu August 2, 2011 at 11:22 am

Oh, this was not meant as a defense of Gitlin. But while those on the left often seem to be guilty of the intellectual dishonesty of attacking the Laffer curve itself, those on the right appear to be frequently guilty of simply assuming that we are on the right side of the Laffer curve. The evidence that liberals often advance as “proof” that the Laffer curve does not exist seems to me to be pretty compelling evidence that we on the left side of the Laffer curve.

John Dewey August 2, 2011 at 11:31 am

Would you mind providing some of that “evidence”? I’ve never seen any which I considered compelling.

kyle8 August 2, 2011 at 3:42 pm

I don’t have any evidence, but I have some observation. To my view anytime that total taxation begins to exceed around one quarter of total income there is a negative effect on growth.

If that is the case then we may still be on the right side of the curve. Of course there is the effect of the curve on total taxes, and a separate effect due to higher marginal rates. But a good thumbnail is around 25%.

I think if you look at any historical tax/growth records of any nation you will see the trend that I see.(admittedly I am basing this on a small sample of economic growth rates in four nations that I had to do a term paper on.)

John Dewey August 2, 2011 at 11:29 am

PrometheeFeu: “it seems like we are pretty clearly on the left side of the Laffer curve where a broad decrease in taxes reduces revenue”

How do you know this? Are you referring to the immediate change in tax revenue or to the change in tax revenue over four or five years?

PrometheeFeu August 2, 2011 at 10:49 pm

I am referring to the immediate/short-term change in revenue as can be seen from the way revenue dropped for instance when the Bush tax cuts were passed. I think establishing causation with a 4-5 years time-lag is quite iffy due to the fact that policy and endogenous conditions shift so much during that time. Not impossible, but hard to trust with any measure of certainty.

But yes, the “evidence” I have is far from publication quality. So it is possible that we are on the right of the Laffer curve. However, I come from a country with a much higher tax rate (France) where tax cuts in recent years resulted in a decrease in revenue. So it leads me to believe that the comparatively low tax rate in the US is firmly on the left of the Laffer curve.

John Dewey August 3, 2011 at 8:57 am

The whole premise of supply side tax cuts is that high marginal tax rates discourage the income production. Some workers may drop out of the work force (such as spouses of high income earners). Some earners, especially those who create opportunities for others through entrepreneurship, will reduce their efforts. Some entrepreneurs wll forego promising but risky opportunities.

The reason changes to marginal tax rates do not immediately change output is that new careers and new business opportunities take time to start and become productive.

The Regan marginal tax rate cuts of 1986, the Clinton capital gains tax rate cuts of 1997, and the Bush marginal tax rate cuts of 1983 were all followed by impressive growth periods. We can debate the extent to which growth in subsequent years were the result of other factors. But none of those periods produced evidence that tax rate changes result in less government revenue. (Very important: more government revenue was never the objective of marginal tax rate cuts.)

FYI, France is not the U.S. What works or does not work there has little bearing on what works in the U.S., IMO.

John Dewey August 3, 2011 at 8:58 am

One more point: There was a significant lag between passage of the Reagan and Bush tax laws and the lowering of marginal tax rates.

Seth August 2, 2011 at 11:33 am

Just curious. Why does it seem we are clearly on the left side?

Anotherphil August 2, 2011 at 12:42 pm

Moreover, there’s no “we”, because everybody is differently situated with respect to the tax consequences of their decisions. (That is no accident, if everbody faced the same tax situation, that would foment unified rebellion).

PrometheeFeu August 2, 2011 at 10:52 pm

The Laffer curve is generally interpreted as being at the country level IIRC. If we are talking about individual Laffer curves, I must say that myself and most people I know are firmly on the left side.

Invisible Backhand August 2, 2011 at 11:06 am

But higher tariffs would raise tax revenues.

Don Boudreaux August 2, 2011 at 11:09 am

Not necessarily. And almost certainly not if the tariffs are meant to be protective (rather than a source of revenue) and are implemented properly to achieve their protective goal of significantly reducing imports.

Dan H August 2, 2011 at 11:09 am

Not if it significantly decreased the amount of imports. That’s kind of the point.

vikingvista August 2, 2011 at 2:22 pm

Yep. And that is the reason the government doesn’t like tariffs for the purpose of raising revenues (as opposed to protecting domestic cronies). The tariff taxpayers can fairly easily escape them.

That is also the reason why this country would be better off if the government had always depended upon tariffs rather than income taxes.

rhhardin August 2, 2011 at 11:36 am

The usual Laffer argument, and the one Jude Wanniski gave in a 70s WSJ op-ed, is that at a zero rate you get zero dollars revenue, and at a 100% rate you get zero dollars revenue, so somewhere between is a rate that gives you the most revenue.

If your rate is above that, lowering the rate increases revenue, and raising the rate decreases revenue.

It’s one of the few economic theories that’s non-linear. It explicitly says that there’s an interior best, and more is not always better.

rhhardin August 2, 2011 at 11:41 am

Wiki confirms my memory of author and date. Memories don’t often work that well. It was a memorable editorial.

wiki laffer curve

Krishnan August 2, 2011 at 11:45 am

I have a far sinister interpretation – Gitlin (and people like that) are not really interested in raising revenue for Government (go back and read Obama’s interview with Charlie Gibson about the relationship between lower tax rates and increasing revenue – Obama said “it is about fairness”) …

What Gitlin (and others like that) really want is to punish those that have more by forcing them to hand over more … It does not matter what actually happens to the total revenue – so, in a sense it is less about taking and redistributing revenues/money – but more about making sure that those that do not have enough misery, get misery and grief …

They would be happy if they can force WalMart to unionize and pay a “living wage” even if it means that the hundreds of millions who depend on WalMart to survive now cannot do so as well … The “seen” effect (i.e. increasing wages on a few that work at WalMart) is far more important than the “unseen” (and widely distributed) effect of the spread of misery to the many who are impacted …

You cannot reason with people who think that way.

Greg Webb August 2, 2011 at 12:44 pm

You really cannot reason with people who think that way. It is all about their need to control others.

John Dewey August 2, 2011 at 12:46 pm

I think you are certainly correct about Obama and many other liberals.

John Dewey August 2, 2011 at 12:49 pm

I never really understood how someone can argue that taking possessions from one person and giving to another has anything to do with “fairness”. For that matter, I can never understand how one can argue that progressive taxation has anything to do with “fairness”.

Greg Webb August 2, 2011 at 12:52 pm

John, it is not about “fairness.” Rather, it is about control. Fairness is a terms that is used by controlling people and their cronies to argue that they deserve something that they did not earn.

John Dewey August 2, 2011 at 2:13 pm

Thanks for the reply, Greg. I believe you are correct about the aims of Obama and other liberal politicians. What I’m not understanding is how the electorate accepts the fairness argument. I know that some do. Some of my relatives talk that way all the time.

Perhaps it is the losers of the world who can believe the fairness argument, and desire that government correct for their lack of achievement. Of course, not taking responsibility for their own failures is exactly what prevents them from being anything other than losers. Maybe that’s what they really want: to be lifelong underachievers while having producers to feed them and to bear the blame for their character flaws.

Yeah, now that I write it, that does sound like a few of my relatives.

Greg Webb August 2, 2011 at 3:49 pm

John, everybody has relatives and friends like that. But, I don’t view them as losers. Rather, they are people who value their free time more than others who chose to get an education or work longer hours to make more money. The only problem is that they want to have their cake (free time) and be able to eat it to (goods and services that they cannot afford). And, wouldn’t we all like that? But, life does not work that way.

Don Boudreaux August 2, 2011 at 2:19 pm

I suspect – although it’s no more than a suspicion – that people who believe that wealth is a fixed sum and that humans can only appropriate it rather than create it are prone to see the world, and to judge its fairness, in the very way that you and I and most readers of this blog do in fact find foreign.

kyle8 August 2, 2011 at 3:55 pm

What Krishnan is saying, and I agree, is that there are some who even if they do understand that wealth can be created and that economics is not a zero sum game. Will, still be in favor of anti-growth policies because of their envy and hatred of either, “the rich”, or capitalism, or freedom, or the middle class, or society in general, or all of the above.

I have met these people and they are really motivated by the most horrible of emotions, and any lip service they give to “the poor” or environmentalism or anything else is just window dressing.

Krishnan August 2, 2011 at 8:34 pm

What most of the rich people in Hollywood practice (e.g. James Cameron) is orthogonal to what they preach (e.g. James Cameron).

“Use less energy” (Why? So, “we will have whatever we need for our mansions, our cars, our SUV’s, our planes”)
“Tax the rich” (but not them – they get tax breaks for making movies and cities/politicians court them for donations to run inelections)
“People are greedy” (except them, they “give back” – just do not ask how much or why they “give back” – unless ofcourse they “took without permission”)
“Capitalism is evil” (except when it works for them to make money … sell all over the US, the world, fight for copyrights, fight to protect their private property)
“Use private property for public use” (except in their neighborhood and do not dare take their properties)
.

Leonardo T. B. August 2, 2011 at 11:49 am

Mr. Gitlin apparently didn’t have a boring economics teacher during high school (or never watched Ferris Bueller’s Day Off):

http://www.youtube.com/watch?v=dxPVyieptwA

Peter August 2, 2011 at 12:37 pm

There was a time when such crimes against common sense (such as Mr. Gitlin’s assertion that artificially high, non-market prices on earnings, aka wealth generation, could and eventually will lead to less revenue from such a thing) that led to people’s suffering (as less wealth generation is certain to do) were dubbed witchcraft and those people who supported them were burned at the stake. Now we give them cushy jobs and taxpayer subsidized payrolls.

Even freedom has a price, and putting up with the inane banter of Gitlin and those of his ilk is part of it.

Peter August 2, 2011 at 12:38 pm

correction: will *never* lead to less revenue

nailheadtom August 2, 2011 at 12:48 pm

“As Reuters’ superb economics writer Felix Salmon points out, the Japanese example is grotesque, for earthquake protection has to be built. It creates jobs: ”It’s hard to see how the production of goods and services means that the economy is not engaged in the production of goods and services.”———- If that’s the case, why not make every building asteroid proof? That would create lots of jobs. Or we could simply dig holes and fill them. Evidently Salmon hasn’t heard of risk assessment.

“…the incompetent, negligent, sometimes greed-crazed bank lending policies that brought down the world economy….”————–Fortunately (for them) journalism professors at Columbia, regardless of their incompetence and negligence, have a limited role in bringing down the world economy.

” But when news media go looking for experts, they don’t examine their records.” ————– That’s why Paul Ehrlich and Al Gore are ignored by the media today.

vikingvista August 2, 2011 at 2:08 pm

It isn’t immediately clear at what tax rate/structure the maximum of government revenues is generated, but it is the peak of stupidity to suggest that there isn’t a maximum, or that the maximum isn’t at some tax rate less than 100% or greater than 0%. These are a priori certainties. And such logic is all that is required to prove the necessary truth of some form of Laffer curve.

John Dewey August 2, 2011 at 3:41 pm

I guess what’s really sad about any discussion of the Laffer curve is the implied assumption that maximizing government revenue should be an objective. What would be much more useful is a curve which shows tax rates on one axis and economic growth on the other.

Anarchists may disagree, but it seems that some very minimal level of government revenues/spending is necessary for enforcement of property rights and for protecting the populace from the insane. But the tax rates to achieve such minimal protections would be very low.

kyle8 August 2, 2011 at 3:59 pm

On the other hand, I would be much happier if all taxes would be set constitutionally right at the exact point of equilibrium on the Lafer curve (provided that could be determined).

Although it would not be great, It would be much much better than what we have now, It would also decrease economic uncertainty.

Dave P August 2, 2011 at 5:16 pm

I don’t know that it’s an implication of profit maximization so much as it is a statement of limits to ability to spend.

Dave P August 2, 2011 at 5:15 pm

To be fair there are a lot of people who throw the concept of the Laffer curve around do so in an unscientific manner. In fact, since I graduated college I haven’t seen anyone cite where the optimum tax rate is based on any kind of rigorous study along with the principal of the curve.

vikingvista August 2, 2011 at 11:11 pm

Politicians who favored tax cuts used to bring up the Laffer curve all the time to show how it is possible that cutting taxes could increase government revenues. This had led a number of looters to ridicule the Laffer curve itself, rather than arguing where on the Laffer curve current tax rates fall. For us, this makes for a good litmus test. Since the Laffer curve is a logical necessity, we know those denying it are morons, and we can safely ignore or ridicule their puny minds.

Gil August 3, 2011 at 7:54 am

As implied by some comment the Laffer notion can also be used to see which types of taxes are harder to avoid. Of course, Libertarians use the Laffer Curve to suppose we’re always on the right side as if to say that a 1% would reap in more revenue than a 10% tax which it probably wouldn’t. However I would agree a real Libertarian wouldn’t be trying to find the “optimal” tax rate rather no taxes at all.

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