The Wall Street Journal writes:
The theory is really one of the simplest concepts in economics. Yet its logic continues to elude the class-warfare lobby, whose disbelief is unburdened by the multiple real-life examples that validate its conclusions. The idea is that lowering the tax rate on production, work, investment and risk-taking will spur more of these activities and thereby will often lead to more tax revenue collections for the government rather than less.
In the 1980s, President Ronald Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion.
Now we have overpowering confirming evidence from the Bush tax cuts of May 2003. The jewel of the Bush economic plan was the reduction in tax rates on dividends from 39.6% to 15% and on capital gains from 20% to 15%. These sharp cuts in the double tax on capital investment were intended to reverse the 2000-01 stock market crash, which had liquidated some $6 trillion in American household wealth, and to inspire a revival in business capital investment, which had also collapsed during the recession. The tax cuts were narrowly enacted despite the usual indignant primal screams from the greed and envy lobby about “tax cuts for the super rich.”
Earlier this month the Congressional Budget Office released its latest report on tax revenue collections. The numbers are an eye-popping vindication of the Laffer Curve and the Bush tax cut’s real economic value. Federal tax revenues surged in the first eight months of this fiscal year by $187 billion. This represents a 15.4% rise in federal tax receipts over 2004. Individual and corporate income tax receipts have exploded like a cap let off a geyser, up 30% in the two years since the tax cut. Once again, tax rate cuts have created a virtuous chain reaction of higher economic growth, more jobs, higher corporate profits, and finally more tax receipts.
This Laffer Curve effect has also created a revenue windfall for states and cities. As the economic expansion has plowed forward, and in some regions of the country accelerated, state tax receipts have climbed 7.5% this year already. Perhaps the most remarkable story from around the nation comes from the perpetually indebted New York City, which suddenly finds itself more than $3 billion in surplus thanks to an unexpected gush in revenues. Many of President Bush’s critics foolishly predicted that states and localities would be victims of the Bush tax cut gamble.
Update: Heritage Policy blog has more.
Update: Economist Bruce Bartlett thinks we need better arguments than the Laffer curve.
Dude,
I haven’t seen too many referrences to the Laffer curve since I graduated with a BA in Economics. My favorite professor was a big proponent of “The Curve”. Great Post!
Hey, your an economics major?!?!? Cool!! You just jumped up a couple points in my cool meter. There are many times I wish I had studied economics instead of electrical engineering.
Yes,
I got my BA in Economics back in the day (WAY back). I had several great profs (monetarists, Laissez Faire libertarians and supply siders) and a few duds (Keynesian wannabes, socialists)but enjoyed the discussions and debates (which stayed very civil in the econ dept).
That was a long time ago, now I’m studying for the allied health field (possible career change). I did save most of my books, though and occasionally still read them.
I always thought economics was the perfect undergrad degree because it gave you a solid base from which to jump into most any field (except of course, allied health). I don’t regret it though.
Keep up the great site.
PS: you could always teach economics when you retire, you certainly know your stuff!
HP-
You actually are arguing the other point. NYC actually raised taxes. Bloomberg drastically increased property taxes. He eliminated the decade long exemption on sales taxes for clothing purchases under $125, raised the sales tax on all goods by .5%. He also increased parking meter rates, increased fines etc.
As far as the reduction on federal income taxes in NY. Counting the ridiculous AMT many New Yorkers including myself now pay we actually increased payments to the IRS because the deduction for payment of State and Local taxes on our federal taxes are now reduced on our AMT. Add to that, the large increase in property taxes that I had to pay to my suburban NY municpality to offset the reduction in funding to my school district and local town, village and county while being forced to pay for unfunded mandates in medicaid and Education and my overall tax bill has gone up drasitcally in the past 4 years.
Yeah, I am no Bloomburg fan. He is a RINO, as far as I am concerned.
I feel your pain though, I live in California. Oh yeah, and I am no fan of the AMT.
Agreed on the AMT. This is a shell game that has to be reformed. It was initially put into place to force the ultra wealthy to avoid paying taxes on some questionable tax shelters. Now it forces middle class folks who live in states with high taxes to pay double taxes.
I’d love to see your analysis on this issue.
Any candidate from either party who addresses this has my vote.
What is a RINO?
Yeah, I need to write something about the AMT one of these days, I think it has bipartisan support for reform, only problem is, it has bipartisan support from politicans to not reform it, they are making too much money from it for any party to want to tackle it.
A RINO is a Republican In Name Only. In other words, a person who calls himself Republican but does not abide by any of the Republican ‘principles’.