The Laffer Curve Versus BO's Idea Of Fairness

click on graph to enlarge

 

Above is the famous Laffer Curve first drawn on a cocktail napkin by Arthur Laffer in 1974 to explain to Jude Wanniski, Dick Cheney, & Don Rumsfeld that there is a sweet spot on the tax rates axis that will yield the maximum tax revenue for the government.  This sweet spot is paradoxically @ a lower rate than what many politicians instinctively think it should be.

 

Now I have always had a problem with the Laffer Curve because of its proponents, including Art Laffer, who emphasize the part about "the maximum tax revenue for the government" – the curve shows the government how to get the most money possible from an income tax system but by so doing provides politicians an open invitation to spend even more money than they normally would – give them more money & they will spend it.  Many of us remember that in the 1980s Reagonomics lowered the income tax rates & the tax revenues increased only to find that spending increased even more & the deficits & interest on the national debt widened.

 

Of course it is true that every time supply side principles like those derived from the Laffer Curve have been tried under the Harding, Coolidge, Kennedy, Reagan, & GW Bush presidencies the country experienced economic growth.  JFK, the lone Democrat in this supply side group, realized that high income tax rates were an anchor around the country's neck.  JFK was willing to see more people get rich while he watched the increased revenues flow to the government treasury from his reduction in the top marginal rate from 91% to 70%.¹

 

Not so BO, who has repeatedly put his idea of fairness over maximum revenue collections meaning that his plan is designed to punish success as measured by income while increasing destructive class warfare & envy.  BO parts company with JFK in that BO turns down maximum tax revenue if it means people will prosper in living the American dream to its fullest – BO would rather spread the wealth around & have less wealth than have people succeed & generate more tax revenue.  After all, BO knows that he can borrow any shortfall in tax receipts from the Fed to fund his many programs as he has been doing since his first day in office.  

 

Don't think for a minute that BO does not understand that high income tax rates bring in less revenue than lower income tax rates found around the sweet spot on the Laffer Curve or that lowering the top federal income tax rate brings in higher revenue from other taxes like the payroll tax when more people go back to work due to increased economic growth.  Payroll taxes can find their way into the General Fund of the Treasury when they are borrowed from Social Security – the payroll tax receipts can be exchanged for "special issue" securities held in the accounting Trust Fund from where the cash can go into the General Fund of the Treasury where it is indistinguishable from other cash in the General Fund.

 

Even those who don't pay the least bit of attention, but still are breathing, must ask themselves from time to time "just how does any of BO's policies help anyone?"  Adding record numbers to the food stamp rolls, the disability ranks, & the national debt while hoisting a nationwide healthcare insurance program on over 300-million people to theoretically obtain healthcare insurance for the fraction of the uninsured American population plus his near trillion dollar Stimulus & job destroying cap-and-trade plan are just a few topics that touch on BO's anti-American policies that have been documented on RTE for well over five years. 

 

Are people really so oblivious that they don't know, even if they are one of them, that 12.3 million people are unemployed + 8.0 million are working part time but want full time employment + 2.4 million are marginally attached to the labor force of which 800,000 have become so discouraged that they have stopped looking for any work @ all?  Aren't enough people feeling the pain of the deterioration of over $4,000 in real inflation adjusted median annual household income during BO's first term or the artificially manipulated low CD interest rates that deprive many seniors of some additional money they could use in their golden years? 

 

Now I know BO has a way of addressing one mess after another as though he was just an innocent bystander who had nothing to do with anything that has gone wrong even though he is the head of our government & all of the problems described immediately above are intentionally imposed by his design.  It takes a real master of disguise to deliberately inflict this punishment on people & continually get away with it.  Or is it that government programs have replaced the immediate need for jobs & CD interest income for enough people that BO was able to win reelection & still has a 52% approval rating?

 

To confirm the last question with an obvious yes & to answer who is helped (in the very short run) by BO's policies I return to a posting of over two & a half years ago that many of you may remember where I described the ultimate telecommuter - "we have a portion of the electorate who is growing in size all too fast - who could not care less about what happens to America as long as they receive their government relief checks. This portion of the electorate would not hesitate to vote for someone in jail who has raped their grandmother, been convicted of pornographic crimes, is an admitted crack cocaine dealer who dodged paying income taxes on millions of dollars of money derived from illegal activities, & was captured by our military as an enemy combatant fighting for al Qaeda against America - if that person could telecommute from his jail cell with phone, fax, & computer to approve the issuance of the relief checks needed by his hapless constituents who very soon will comprise the majority."

 

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^1.  Supply side economics works best in an income tax system when both the capital gains tax rate & the top marginal income tax rate are on the sweet spots on their respective Laffer Curves.  This is because people who have significant unrealized capital gains & high incomes that can be deferred have discretion as to when to take income & don't pay these elective taxes unless it makes economic sense to them.  These risk takers of their own capital & job creators work best to grow the economy when the tax rates are low.

     

The most successful president who practiced supply side economics was Calvin Coolidge in the 1920s.  The income tax, ratified by the 16th Amendment in 1913, was supposed to be a flat tax with a single rate of 4% but it quickly changed to a graduated tax of 1% to 7% with the income brackets determined by the ability to pay.  By 1921 Congress had raised the top marginal rate from 7% to 73%.   President Coolidge was the only president to follow all of the supply-side economic principles:  1) the reduction of the size of government and its claims on earned income, 2) a lower marginal tax rate for the highest income earners, & 3) sound-money policies.   Silent Cal reduced the top 73% income tax rate to 25% by 1925, reduced the national debt, & balanced the budget – a budget that actually was smaller when he left office than when he took office.  Federal spending was 3% of GDP in 1928 – it is 24% today. 

 

One of the problems with the current Flat Tax plan is illustrated above.  The income tax was conceived as a flat tax but rapidly grew into a progressive & graduated tax with huge increases in the rates.  This was made possible because of the complexity of the income tax bureaucracy – today there are over 70,000 pages that comprise Treasury Department Rulings, IRS Regs, CCH's own tax explanations, & the Internal Revenue Code itself.  With this entire body of quite often contradictory knowledge that a taxpayer is held accountable for when preparing a tax return it is easy for politicians to tell one group of voters that another group will pay for any income tax hikes – & of course this rarely if ever works out for the average tax payer.  This cannot happen with the FairTax because there is only one rate & it is uniformly paid by everyone so if the FairTax rate is raised the electorate will be able to quickly determine if they are getting their money's worth & if not take appropriate action @ the ballot box.