ObamaCare and That Silly Constitution

RR

Ref your #3

The amount of money a tax raises is determined by the rate times how often the taxable event occurs.

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Revenue received = tax rate x taxable events
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It makes no difference what the tax rate zero taxable events produces zero revenue.

If a one thousand Whatits are sold a year at 1 one dollar each , and people will only spend one thousand dollars on whatits, and we decide to impose a tax of 10 cents per whatist we do not receive $100 dollars in taxes we receive about $91.00 in revenue. A second hike of 10 cents will produce an addition 83.30 in additional revenue. Eventually additional increments of increase will result in a actual decrease in income as the number of whatsits being taxed are so few.

Of course in the there are complications like tax evasion, changing behavior to avoid the tax. etc which speed up the process. The citizens may buy untaxed black market whatits or they buy a substitute or just stop using whatits.

Don’s point, and I think he is correct, that we are past the equlibrium point – most of our tax rates are at the point where an i8ncrease will produce declining revenue – they suppress to much taxable economic activity. Lowering the tax rates will produce more taxable economic activity thus raising revenues.

Of course lowering enough would pass the equilibrium point in the other direction and revenues would start to go down, which brings up whole different set of issues.

Basically Obamacare will make the government bigger with no hope of producing the revenues to pay for it.

Hank’s Eclectic Meanderings

About 30 years Presidnt Reagan lowered the Income tax rates. For the next several years income tax revenues increase far larger than anybody expected.

This is what one would expect if the tax rate was set above equilibrium. (SInce Congress increased the budget even more the deficit went up, but that is a different number.)

Listen to the news, the ways governemntal bodies are trying to figure out new ways to get revenue is symptomatic of a situation where they no a simple increase of existing taxes will not produce the increased funds necessary.

I could be wrong, but when the politicians with good budget experts working for them act like the existing structure is past equilibrium, it probably is.

Hank’s Eclectic Meanderings

Long before Dr Laffer became famous and popularized the concept, of which the oldest surviving descriptions date from the 1400′s, I took the courses on government budgeting and finance. One fo the prof’s wore his left leaning ideas on his sleeve the other the his righ leaning ideas. But on this they both taught the same thing.

Dr. Laffer applied the the theory to income tastes and produced results that gored a lot of sacred cows.

Of course the equilibrium point varies with tax and over time but our political leaders, not wanting to cut spending, are acting like they know, public statements aside, that they know they cannot produce significant revenue from the existing tax structure and are looking for new sources.

Hank’s Eclectic Meanderings

“Hank, literally every economist disagrees with you.”

The more important point is there are no credible economists who disagree with him.

“That isn’t to say that they should support higher taxes but they cannot simultaneous preach that we’re on the wrong side of the Laffer Curve and that lowering taxes will shrink government.”

While there is a correlation between the size of the fed gov and its gross revenues they are not one in the same. Equivocating on this issue will cause all kinds of errors in logic as conveniently demonstrated by the post.

Laffer was right that the Laffer Curve exists. I’m not aware of any economist, on the left or the right, who thinks we’re currently on the wrong side of the curve.

“Revenue collections as a share of personal income declined”

Naturally.

Of what significance is this ratio when total federal revenues increased?

1. The Federal Reserve was successful during the period running from 1979 to 1982 in re-stabilizing prices. However, we still had considerable inflation. The GDP deflator increased at a rate of 5.2% per annum during the period running from 1980 to 1985. It increased at a rate of 2.1% per annum in the last five years. In times of high inflation (or, indeed, any inflation) you expect nominal values to increase on a year-to-year basis, so nominal tax revenues are not instructive.

2. You could make use of real tax revenues as an indicator. However, tax rates are not the only factors which affect the value of real revenues. The economy fell into two recessions over the period running from March of 1980 to November of 1982. You ordinarily expect expect real revenues to decline in times of declining production. Income taxes tend to be procyclical, with peaks and valleys in revenue collection exceeding those in production or personal income, so you would actually expect smaller shares of personal income to be captured in taxes during recessions. The decline is more marked during the 1981-82 recession than during previous and subsequent recessions and the recovery in revenue capture also more muted.

3. Here is the index of real federal revenues collected from personal income taxes. The base year is 1973:

1973 100.00
1974 101.83
1975 90.44
1976 99.77
1977 106.42
1978 115.29
1979 121.03
1980 120.96
1981 126.77
1982 113.22
1983 110.87
1984 115.55
1985 121.38
1986 123.65
1987 136.45
1988 137.40
1989 121.03
1990 144.57
1991 256.56
1992 263.32
1993 273.88
1994 290.18
1995 302.41
1996 321.19
1997 342.23
1998 363.28
1999 381.43

Some portion of the decline in real revenue observed in 1980 and 1983 can be attributed to the reduction in income tax rates and some portion to the recession. It is your contention that all of it and then some is attributable to the recession, because tax rates were so high that we were beyond that for maximal revenue collection. I think the descriptive statistics on revenue capture are inconsistent with that thesis.

I cannot help but notice that there is no observed decline in real revenues during the period running from 1990 to 1994 (quite the contrary), in spite of two tax increases. I think that suggests we were not on ‘the wrong side of the Laffer curve’ then. (And we are not now).

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Your implicit thesis is that a legislated tax increase (say, through excision of special deductions, exemptions, and credits) will place the federal revenue stream on a lower trajectory due to its effects on economic activity and thus exacerbate the deficit. The foregoing strongly suggests it will not (in part because federal income taxes are not the only factor influencing the level of economic activity).

I should note that year-to-year improvements in real personal income and real domestic product during the period running from 1980 to 1990 were about the same as those from 1990 to 2000 (and metrics during both periods somewhat higher than they were during the period running from 1973 to 1980). Permanent tax reductions may be helpful, but that is not the only factor which influences economic dynamism.