The Laffer curve: David Stockman ate it up
Arthur Laffer in 1974 had a new theory on why tax rates were inefficient and high, or one might say "inefficiently high". Meeting with Dick Cheney, and eager to please then President Gerald Ford, Laffer proceeded to sketch his infamous diagram for his "Laffer curve" on a napkin in a DC restaurant on why the rich could be said to be "over taxed".
As drawn, it was totally convincing, especially for a guy like Cheney with minimal math skills. Note the line defining the highest marginal tax rate of 70% for Gerald Ford's presidency. What Laffer's curve sought to show is that by cutting that rate down, say to 50%, one could increase the revenues by nearly 35%! Of course, the 50% turned out to be wholly arbitrary and in fact after Reagan became President in 1980 the rates were cut down to 50% by 1981, then to 28% (by 1988). After all, if one could increase revenues by cutting taxes 20%, imagine what one could do by cutting them more than 40%!
Thus did Laffer's curve become the basis of Reagan's tax cuts 1981 and the whole tax cut meme ever since. This despite the fact that in reality no community or even human body has managed to GROW by virtue of starving! But try to tell the bulk of Americans, who continue to buy into this codswallop at a mind-boggling rate! Despite the fact there's never been evidence it's actually worked!
As drawn, it was totally convincing, especially for a guy like Cheney with minimal math skills. Note the line defining the highest marginal tax rate of 70% for Gerald Ford's presidency. What Laffer's curve sought to show is that by cutting that rate down, say to 50%, one could increase the revenues by nearly 35%! Of course, the 50% turned out to be wholly arbitrary and in fact after Reagan became President in 1980 the rates were cut down to 50% by 1981, then to 28% (by 1988). After all, if one could increase revenues by cutting taxes 20%, imagine what one could do by cutting them more than 40%!
Thus did Laffer's curve become the basis of Reagan's tax cuts 1981 and the whole tax cut meme ever since. This despite the fact that in reality no community or even human body has managed to GROW by virtue of starving! But try to tell the bulk of Americans, who continue to buy into this codswallop at a mind-boggling rate! Despite the fact there's never been evidence it's actually worked!
Enter now Phil Gramm and Michael Solon ('The Surprising Truth About Reagan's Tax Cut, WSJ, June 20-21, p. A11) who continue to spread Reagan tax cut fantasies. They insist that a
"bracket creep" (because of inflation at the time) was actually responsible for expanding deficits, not the Reagan tax cuts. But is this true, or are these two conservo experts (one at American Enterprise Inst. the other at Hudson Inst.) just playing word games?
Note that when Laffer's crappola was first presented to Reagan's budget maven David Stockman there was no mention of tax bracket influence. So how did Laffer manage to convince Stockman that HIGHER tax rates cause revenues to decrease? Well, he argued that higher tax rates on the rich would only cause them to work fewer hours, or if REALLY rich, invest in fewer projects, enterprises, hence create fewer jobs. Thus, revenues over all would decline, first from the working rich because Uncle Sam would get less taxes by virtue of their reduced work, and also from the investing rich because they'd create fewer jobs and thus no workers would be around to pay the taxes Uncle Sam wants. Thus, Laffer argued, the higher tax rates were inefficient! No mention at all of how abandoning them would explode deficits.
Fortunately, enough economic real indicators existed - even then - to test Laffer's curve on an empirical basis. Thus, given the progressive Reagan cut - from 70% to 50% by 1981, then down to 28% by 1988, it should be possible to match the claims against economic reality. Especially, given one would expect to find lower debt % of GDP if Laffer's claims were true.
A first full examination of the empirical effects arrived in a text (The Indebted Society, 1995) by James Medofff and Andrew Harless, wherein they found, p. 23:
"For the health of the economy, Reagan's policies turned out to be just about the worst thing that could have happened: investment did not increase, growth continued to stagnate, and the federal deficit ballooned to new dimensions....
In 1981, the year Reagan took office, the public debt was 26.5 % of the gross domestic product (GDP)....In 1993, the year that Bush left office, the public debt was a staggering 51.9 percent of the GDP."
(Gramm and Solon cite a recorded deficit of 2.6% in 1980 - but NOT the deficit for the year 1981- after Reagan took office)
Thus, we have the first evidence that Laffer was plying smoke and mirrors, not sound economic policy! If the debt as percentage of GDP nearly doubled by the end of the Bush Sr. presidency (and recall he kept Reagan's rates for most of his tenure) then we see what a disaster they were.
More impressive yet was Medoff and Harless' analysis in their chapter 'Let The Eat Cake' (p. 84) which looked at actual data(p. 87)and found that:
Thus, we have the first evidence that Laffer was plying smoke and mirrors, not sound economic policy! If the debt as percentage of GDP nearly doubled by the end of the Bush Sr. presidency (and recall he kept Reagan's rates for most of his tenure) then we see what a disaster they were.
More impressive yet was Medoff and Harless' analysis in their chapter 'Let The Eat Cake' (p. 84) which looked at actual data(p. 87)and found that:
"high tax rates are associated with higher productivity growth. There is a consistent and strong relationship.".
This was written barely a year into Bill Clinton's imposition of a marginally higher tax rate on the wealthiest, and we saw after the fact more than 20 million jobs created, even as the deficits decreased. Plus a healthy ($600m) surplus was left for Bush Jr. - which was then promptly pissed away in his tax cuts!
Less well known, but which I can document since I lived there, is that supply side economics was tried in Barbados, in FY 1987. The usually democratic socialist state had just elected a new government (in 1986) that was determined to experiment for the first time with the 'trickle down' supply side bunkum adopted by Reagan. They totally eliminated all taxes totally for those earning under $15,000/ year and also cut marginal rates in most income categories from 20-30%.
Less well known, but which I can document since I lived there, is that supply side economics was tried in Barbados, in FY 1987. The usually democratic socialist state had just elected a new government (in 1986) that was determined to experiment for the first time with the 'trickle down' supply side bunkum adopted by Reagan. They totally eliminated all taxes totally for those earning under $15,000/ year and also cut marginal rates in most income categories from 20-30%.
They were warned by the country's top economists it would lead to economic disaster, but they took no heed. Finding it more to their liking to pander to a naive (then!) populace to garner votes, they couldn't renege once in power, especially if they wanted re-election.
The supply side idiocy was implemented for tax year 1987 and beyond when the chickens came to roost. Five years later (and with cost of the losing of 35,000 out of 105,000 jobs, with reserves barely at $11 million, the island had to go to the IMF for loans as its cash flow had evaporated.
The supply side idiocy was implemented for tax year 1987 and beyond when the chickens came to roost. Five years later (and with cost of the losing of 35,000 out of 105,000 jobs, with reserves barely at $11 million, the island had to go to the IMF for loans as its cash flow had evaporated.
The IMF injected nasty medicine - in the form of across the board pay cuts of 8 percent for all civil servants and higher taxes- though devaluation of the currency was avoided. To escape the deficit pit created succeeding governments had to also impose VAT or value added taxes, including on foodstuffs. This also serves as an object lesson to all who still believe supply side baloney can work in any venue, or that tax cuts are an answer.
What was the biggest irony of all? That one of Reagan's top professional economists, Martin Feldstein, actually pooh-poohed Laffer's curve. In a 1986 econ article Feldstein admitted he "never believed Laffer" and referred to his "curve proposition" as the "height of supply side hyperbole". The tragedy is that Fedlstein's article was snuffed by the Reaganites, and Feldstein himself never broached it, especially after being given an office in the administration. A pity, because decades of foolishness and pain might have been avoided.
Because of that, the belief that tax cuts for the rich are the best way to apply them remains dogma, especially among Republicans. But let's never forget the underside of their credo: that tax cuts are pushed not merely to benefit the rich, but to "starve the beast". In other words, dissolve and destroy social welfare protections if at all possible. True to form, Gramm and Solon in their WSJ piece write:
What was the biggest irony of all? That one of Reagan's top professional economists, Martin Feldstein, actually pooh-poohed Laffer's curve. In a 1986 econ article Feldstein admitted he "never believed Laffer" and referred to his "curve proposition" as the "height of supply side hyperbole". The tragedy is that Fedlstein's article was snuffed by the Reaganites, and Feldstein himself never broached it, especially after being given an office in the administration. A pity, because decades of foolishness and pain might have been avoided.
Because of that, the belief that tax cuts for the rich are the best way to apply them remains dogma, especially among Republicans. But let's never forget the underside of their credo: that tax cuts are pushed not merely to benefit the rich, but to "starve the beast". In other words, dissolve and destroy social welfare protections if at all possible. True to form, Gramm and Solon in their WSJ piece write:
"It was the explosion of social welfare spending that became the driving force in icreasing the federal budget deficit and has been ever since."
Adding:
"The legacy of the Reagan program is that by reversing the growth of the welfare state and cutting tax rates Reagan gave the nation 25 years of prosperity."
No
mention that during his two terms in office, the national debt nearly tripled,
rising from under $1 trillion to $2.6 trillion, owing to out of control defense
spending.
Nor that the Reagan indirect Social Security cuts in 1983 (that raised the retirement age, delayed COLAs and increased taxes on S.S. to 50%) had any effect on slowing the deficits.
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