I take it all back

A conservative publication, which I will not name, just spiked a book review because I said that the Laffer Curve didn't apply at American levels of taxation, even while otherwise expressing my vast displeasure with the (liberal) economic notions of the book I was reviewing. This isn't me looking for an alternative explanation for the spiking of a bad review: the literary editor accepted it, edited it, and then three hours later told me it couldn't be published because it violated their editorial line on taxation.

I suppose I ought to have known, but I didn't. Go ahead liberals, pile on: you told me so. The Laffer Curve and the supply siders pushing it seem to be the teacher's unions of the right.

Comments

are you going to publish your review here, or shop it someplace else?

Posted by David | October 16, 2007 8:03 PM

And you are suprised? Was it NRO?

Posted by Joe Klein's conscience | October 16, 2007 8:07 PM

What did they do with your review of Origin of the Species?

Posted by Ben | October 16, 2007 8:51 PM

It would be interesting if it were NRO, considering that Ramesh Ponnuru matter of factly stated today that US marginal tax rates are below the revenue-maximizing level. Indeed, he brought up a New York Sun editorial claiming otherwise precisely for the purpose of disagreeing with it:

"Presumably what they mean is that the top income tax rate is higher than the revenue-maximizing rate, but I'm not sure why they think that it is. Bush's tax cuts appear to have caused revenue to be lower than it would otherwise have been, which suggests that we're already below the revenue-maximizing tax rate."

Posted by John Thacker | October 16, 2007 10:07 PM

What are the journalistic ethics surrounding publicising spiked pieces?

Because I'd really like to know what organization did something so intellectually dishonest. (Hah, a situation where that is the only proper phrase) If they are capable of such baldfaced flim-flammery, I doubt they can be shamed, but I think we ought to do what we can. Simply grotesque.

(And then I wonder why I'm always a little embarrassed to think of myself as a conservative. With friends like these...)

Posted by heedless | October 16, 2007 10:15 PM

forget about the Publisher, name the Book.

Also, the Laffer Curve is all well and good--When you accept the premise that Progressive Taxation is fine and dandy.

Maybe we'd do well to remember:
the 10 measures the proletariat will use to bring about the full realization of the communist utopian dream, once they have the political power:

1.Abolition of property in land and application of all rents of land to public purposes.
2.A heavy progressive or graduated income tax.
3.Abolition of all rights of inheritance.
4.Confiscation of the property of all emigrants and rebels.
5.Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.
6.Centralization of the means of communication and transport in the hands of the state.
7.Extension of factories and instruments of production owned by the state; the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan.
8.Equal obligation of all to work. Establishment of industrial armies, especially for agriculture.
9.Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country.
10.Free education for all children in public schools. Abolition of children's factory labor in its present form. Combination of education with industrial production, etc.

http://www.lewrockwell.com/orig/keller5.html

Posted by Mark E Hoffer | October 16, 2007 10:20 PM

Perhaps the literary editor is bound in a way that the publisher is not. I think this deserves more exploration. Push them. Post details. Maybe you can convince them they are wrong - or perhaps they'll convince you.

Posted by Michael Couvillion | October 16, 2007 11:42 PM

Nice way to take an equivocating cheap shot at unions. Classy.

Posted by Justin | October 16, 2007 11:59 PM

Mark,
Marx also advocated a scientific study of economics... hmm that must be why conservatives support the Laffer Curve on faith. We can't investigate it empirically... that's just what the commies would want.

Posted by B | October 17, 2007 12:02 AM

One way to check if an allegedly-conservative organization is doing lots of spiking on behalf of its "corporate masters" is if its publications don't mention regulatory capture. That's too obvious a problem for libertarians to overlook but it's also not something big business would want to publicize.

Posted by Joseph Hertzlinger | October 17, 2007 12:52 AM

Is it standard practice at political mags to spike invited articles if the authors (who are, after all, named and taking responsibility for their opinions) make a (non-inflammatory) statement that is not in concordance with the magazine's views?

Posted by Warren Terra | October 17, 2007 1:03 AM

Posts like these are really important, both so we know this sort of thing goes on and for shaming the perps (even if they aren't named).

Posted by Justin B | October 17, 2007 1:10 AM

We told you so.

Posted by The Reality-Based World | October 17, 2007 1:47 AM

"What did they do with your review of Origin of the Species?"

Can we stop the charade that liberals accept Darwin's teachings? They ignore everything he had to say about how different races of man evolved to have different capabilities.

Posted by Juan | October 17, 2007 2:06 AM

I certainly don't "accept Darwin's teachings." He was a 19th century naturalist who had nowhere near the resources or scientific backing of current evolutionary biology. The current state of physical science lends creedence to many of his insights, but has proven as unlikely an equal number.

Posted by Tim P. | October 17, 2007 2:29 AM

Hmm, Laffer Curve not apply at current levels of US taxation?
(I'm leaving aside entirely the major issue. They should either pay you a kill fee or you should try to place it elsewhere. Pretty scummy behaviour though.)
There's not, I think, any "one" Laffer Curve. Depends upon the tax as to where the peak is. Taxes on capital, for example, would have a very different peak from those on labour, given the relative mobility of each.
Very difficult to make the overarching statement about gross levels of taxation in hte economy I would have thought.

Posted by Tim Worstall | October 17, 2007 6:38 AM

OT: Notice how Juan cleverly and deceitfully refers to "Darwin's teachings" to implicitly advance the grossly erroneous creationist claim that the theory of evolution is just another religion. No one refers to "Newton's teachings" or "Mendel's teachings"; the phrase is used almost exclusively to refer to the writings or sermons of religious leaders. Those of us who have actually read (and understood) Darwin know what an absurd claim Juan's second sentence is.

Posted by Terry Walsh | October 17, 2007 7:17 AM

I'm not going to say I told you so, because it takes a big person to admit you were wrong. Sorry that happened to you and even more sorry that certain conservative publications won't tap into the vast smart conservative economic commentary--preferring hacks like Larry Kudlow.

Posted by d | October 17, 2007 7:32 AM

Color me unimpressed with your candor. You won't name the conservative publication? Give me a break. By refusing to name them, you are facilitating their frankly destructive policies. Grow a metaphorical pair and take the jerks on directly, won't you?

Seriously, are you on the side of ideology and dogma or the side of empiricism? Stand up for something! Punish these people!

Posted by glasnost | October 17, 2007 7:40 AM

The lesson here is simple: Whenever you start using your brain you start sounding like a liberal. Conservative publications are not going to welcome you as long as you keep thinking rational thoughts.

Posted by ken | October 17, 2007 7:57 AM

Mark E Hoffer,

Are you twelve years old?

Posted by An Outhouse | October 17, 2007 8:22 AM

Name names. Any bridges you burn were not bridges you would want to be seen on anyway.

Posted by jimbo | October 17, 2007 8:27 AM

The book is obviously Jon Chait's "The Big Con."

Posted by Dave | October 17, 2007 8:35 AM

Dave is probably right, although the other candidate I thought of was Krugman's book.

Posted by Amber | October 17, 2007 9:09 AM

Dave: I think so too. Anyone notice if the WSJ has published a review of the Big Con yet?

Posted by d | October 17, 2007 9:09 AM

A search for "Chait" on wsj.com reveals, that, no, they haven't reviewed it yet. My guess is they will have to wait until someone who isn't Megan writes a new review.

Posted by d | October 17, 2007 9:13 AM

Surely the Laffer Curve still applies -- regardless of where we may be on it. And, in the case of corporate taxation, at least, there's pretty good evidence that we might be on the wrong side of the hump.

Posted by Chris | October 17, 2007 9:31 AM

B,

Not all Economists are positivists. You would do well to aquaint yourself with the "Austrian School". This brief intro by Robert Murphy:
http://www.mises.org/story/1304

should help you fill in the gaps.

Also, Why is it that Chait's book is garnering so much attention?

Posted by Mark E Hoffer | October 17, 2007 9:33 AM

Pile on this.

Comparing a right wing publication with a party line with an organization consisting of goons that have virtually single-handedly disabled the children of America is hyperbole at best and moronitude at worst.

Posted by Paul A' Barge | October 17, 2007 9:42 AM

I read that quote by Ramesh of NRO yesterday, and was struck by the line that another commented quoted above:

"Presumably what they mean is that the top income tax rate is higher than the revenue-maximizing rate, but I'm not sure why they think that it is. Bush's tax cuts appear to have caused revenue to be lower than it would otherwise have been, which suggests that we're already below the revenue-maximizing tax rate."

Uh, what exactly is the basis for the claim that "Bush's tax cuts appear to have caused revenue to be lower than it would otherwise have been"? Everything I've seen - which is that revenues are -vastly- up as a direct result of increasing economic output due to lower taxation - implies the exact opposite, and if anything the last several years and round of tax cuts actively support the Laffer Curve.

That revenues are up sharply after tax cuts is indisputable. Where the heck is this claim that the opposite has been proven coming from?

Qwinn

Posted by Qwinn | October 17, 2007 10:03 AM

>>I said that the Laffer Curve didn't apply at American levels of taxation.

Perhaps this indicates the problem.

Either the Laffer curve is a useful model, or it is not. We may be on the short side or the long side of the hump, but to say "it doesn't apply" is to say "it is not a valid model" -- ostensibly at ANY level of taxation. If you meant to say what Ponnuru said, that we are currently at a level of taxation lower than the [short-term] revenue-maximizing rate, then you should have said that. But you didn't. You said, "it didn't apply".

If I were an editor and I couldn't get a reviewer to understand this very basic point, I would be motivated to deep-six the review also, not out of concern for political correctness, but out of concern for the intellectual quality of the publication.

Equally obvious is that some of your commenters cannot tell the difference between "being at a level of taxation lower than the revenue-maximizing rate" and "the Laffer curve is garbage". That this confusion exists makes it all the more important to make the distinction.

Aside: And for the record, NRO does not have a discernable editorial stance in favor or opposed to the theory of evolution. Look at the columns of John Derbyshire, for example. If anything, NR is influenced heavily by Catholic teachings, and the Church has long come down on Darwin's side of the debate. To say otherwise is to betray a telling lack of knowledge.

BBB

Posted by bbbeard | October 17, 2007 10:05 AM

What taxes are we talking about here? Corporate rates still appear to be too high.

Posted by 8 | October 17, 2007 10:07 AM

What makes you think that we should maximize goverment reveue? I'd much rather maximize my DNI and keep the tax man's hands off my wallet.

Posted by Laserlight | October 17, 2007 10:11 AM

it violated their editorial line on taxation

1) They could simply have lied to you about the spike's rationale. I was a freelance writer for a while, and I learned editors are (cough) not always honest.

2) A "line on taxation" covers a lot of intellectual real estate....so much that it can be hard to see exactly where one went wrong.

Posted by buckydent | October 17, 2007 10:23 AM

You are seriously arguing that the laffer curve analysis is irrelevant to high income individuals who pay federal, state and local taxes, which combined exceed 50%? And may go higher if Obama's plan to take the caps off Social Security and Medicare goes through?

It's a shame to see a normally enlightened voice go so awry.

Posted by apetra | October 17, 2007 10:29 AM

I look at this the same as the question is the death penalty a deterrent? Frankly, since it is a question of justice, I don't really care what side of Laffer we are on. At some level, we can all agree that it is immoral for govn't. to take one's possessions, under the threat of force, and give them so someone else. Personally, I believe we are well passed that level.

Posted by Richard Palmer | October 17, 2007 10:35 AM

Sheesh. I thought the point of Mr. Laffer's curve on the napkin was where we were on the curve, not the shape. The shape looks like a garden variety of bell curve to me. I think that drawing curvy sorts of graphs is about 90% of economics.

So, what would have happened if Laffer had said "Yeah, this is the shape, but we are way over here where there is plenty of room to raise revenue by raising rates."? My guess is that most of us would never have heard of Mr. Laffer.

Posted by Nat | October 17, 2007 10:39 AM

The phrase "the Laffler curve does not apply" is too loosely worded to be true or false. If you actually said it in that way, it is certainly not your best writing.

If you said that tax reciepts will fall somewhat if personal income tax rates are reduced you are perfectly right and an editor who blocks your review because you said it is a dunderhead or is blinded by ideology (the two are sometimes so hard to tell apart).

The valuable insight from the Laffler curve is that receipts will fall by a lower percent than the rate cut due to various dynamic effects including greater work incentive and less incentive for tax avoidance. Thats still true so I can't support a blanket dis of Laffler.

Posted by dave | October 17, 2007 10:42 AM

Apetra - High-income wage-earners pay a total tax rate almost precisely equal to low-average income wage earners. It's simply not true that their total tax rate is higher. However, since we're talking about the laffer curve, obviously their marginal tax rates are higher, though nowhere near 50 percent.

And of course you're not talking about people who make their living through investments, where they generally pay a flat 15% rate, far below what I pay, for example, in income taxes.

Qwinn - Revenues are not up, not even slightly, never mind "vastly." What's your source? There is a rightwing meme out there suggesting that when post-cut revenues fall less than some people expect it's an "increase," but it's not. It's a less-dire decrease (dire, assuming spending is not also cut). The Bush administration is trumpeting that the deficit - which every sane economist agrees is larger now than it would be had Bush not cut taxes for the rich - is not as huge as many had predicted. True. But it's still a decrease, and a big one. Ramesh is correct.

Posted by Slippery Pete | October 17, 2007 10:54 AM

The Lafer Curve is something like the price of products in supermarket. You can cut the price of groceries in a supermarket and still raise your profit IF the raise on consumption is enough to cover your costs.

Posted by André Kenji | October 17, 2007 11:02 AM

I don't see any evidence to why supply side doesn't work. Where is the enlightened discussion of the substance.

Also, why is it left wingers always charactorize their point of view as smarter and reality based. I doubt I'm open to your point of view if you insist that I'm too stupid to understand your nuance.

We shouldn't let our young men play soccer. That's how we get men like "ken".

Posted by PaulB | October 17, 2007 11:07 AM

I think there may be some factual basis to belive that tax cuts beyond a certain level do restrain the growth of government revenue. Fine. Given the level of waste and fraud, exactly why is that a bad thing? The absolute finest thing about tax cuts )after the proven historical fact that they stimulate the economy in a productive way), is that knucklehead politicians and bureaucrats have less of our money to piddle away than they otherwise would have.

Posted by DennisH | October 17, 2007 11:24 AM

Wouldn't it be a bit more fair to say 'one of the few Conservative outlets said I didn't tow their ideological line... upon which their identity depends'

Would you expect 'The Nation' or 'The New Republic' to publish a book supportive of the arguments regarding the Laffer Curve?

And... allow me to toss in the red-meat... Of course the Laffer curve applies to "American levels of taxation" because it is "American levels of taxation" it attempts to model.

Posted by DANEgerus | October 17, 2007 11:31 AM

I think they misspoke. They should have said they couldn't accept your review because it's just nonsense.

The Laffer curve is a curve. From 0% to 100%. It applies at all levels and predicts a different result at each one.

If you meant to say that we are at a point on the curve where a tax cut wouldn't lead to increased tax revenue, then that might be right or wrong but it wouldn't be nonsense.

Posted by Ben | October 17, 2007 11:32 AM

Sigh. I blogged in haste -- and anger -- but the review simply said, as is true, that at American levels of taxation, cutting taxes does not raise revenue.

Posted by Megan McArdle | October 17, 2007 11:35 AM

PaulB -

If your position is that cutting taxes increases revenue, the burden is upon you to come up with some evidence for that, if you can. Megan is correct and has the facts on her side (along with Ramesh). Since you seem to be, perhaps, a bit unfamiliar with the mechanics, the idea is this:

Take an economy. Set the marginal tax rate to zero percent. What's the government's revenue? Nothing.

Then raise taxes to 100%. What's the government's revenue? Well, it's more than zero (see: Soviet Union), but it's still low.

Then, lower taxes to, say, 25%. What's the government's revenue (after markets adjust)? We know from experience (ya know, facts) that it will be higher than under both a zero percent rate and a 100% rate. Now, plot those 3 points on a graph and connect the dots, and it's a curve, with tax rates going from 0-100 percent along the horizontal axis, and tax revenues increasing along the vertical axis.

I wish I could say nobody disputes the self-evident nature of this, but in fact a lot of liberals do dispute it, but they're wrong. The Laffer Curve matches the evidence and makes intuitive sense.

The kicker is in the details. As with any utility curve, the effect of a change in tax rates depends on what your starting point on the curve is. If you're the Soviet Union and you lower taxes, you will certainly increase government revenue (all things being equal). But in practice, in this country, at these rates, tax cuts absolutely, positively, without any doubt at all, do not increase revenues. When the Bush administration says otherwise, it is lying to you.

Look at the Clinton years: Bill Clinton raised marginal income tax rates, and wingers predicted calamity and disaster, and we had a nice little boom throughout he 90s. If anything, there was too much growth, helping feed the tech bubble. To go back to the curve, it's an inverted u-shaped curve, and we're somewhere in the left half, so that as you move left to right along the horizontal axis (increasing taxes), tax revenue increases (vertical axis).

I hope this helped, and I tried not to sound too condescending, although it's hard, because frankly it amazes me that people like you can somehow forget what happened during the entire Clinton adminisration. It's like it didn't happen. An entire decade - poof! - gone. BTW, if you're going to let my bad attitude determine your openness to facts, rather than your need to know facts, that's pretty sad.

Posted by Slippery Pete | October 17, 2007 11:35 AM

Surely the Atlantic Monthly will publish it.

I keed. I keed.

Posted by Triumph, the Literary Standards Dog | October 17, 2007 11:40 AM

As an international tax planner for a large multinational corporation, it is my strong impression that the Laffer Curve has a lot of curve left on it. Multinationals pay a lot of attention to tax rates in determining what country to invest jobs and capital in. It certainly is not the only factor in a full financial analysis, but it often is the largest variable that one has control over.

But don't most overtly political magazines, such as National Review, typically only publish in line with certain key editorial viewpoints?

Posted by M of U | October 17, 2007 11:51 AM

M -

I think they probably do. But in this case it's not a matter of opinion, but fact. Megan's article was spiked for containing inconvenient / unwelcome facts, not alien editorial "positions."

DP Moynahan said you're entitled to your own opinion, but not your own facts.

Posted by slippery pete | October 17, 2007 11:58 AM

Slippery Pete does a creditable job of explaining the Laffer Curve. That it exists should be obvious; where we happen to be on it now is not.

But Laserlight brings up what for me is a bigger concern: that too much focus on the Curve will plant an unstated assumption that tax policy should be aimed at maximizing government revenue. Nooooo!

Posted by Casper | October 17, 2007 12:02 PM

Casper - Thank you, but I actually disagree that the Laffer Curve doesn't really imply anything, it just describes what is. However, I'd even go a step further and say that its advocates don't advocate maximizing government revenue as such, but increasing the overall efficiency of the tax system - called pareto efficiency. If you can increase the amount of money people keep after tax and increase government revenue, through a change in tax rates, then the overall system is more efficient - that is, there's less deadweight loss. This is almost always a good thing, even if you think that government is bad (which I do not).

Posted by slippery pete | October 17, 2007 12:13 PM

I won't judge the decision to not publish without reading the article, but considering that many people are paying 30% and more in combined taxes, I'd say the statement "at American levels of taxation, cutting taxes does not raise revenue" is at best too simplistic.

And for Slippery Pete who cliamed: Revenues are not up, not even slightly, never mind "vastly."

Please be so kind to review this page and this page and let us know if you've learned anything new today.

Oh and if anyone's wondering, according to the IRS wiki 2006 revenues were over 2.2 trillion. We'll have to wait for refunds to judge 2007 but I haven't seen any reason to think they won't be higher still.

Personally, I learned tax theory in 94 or 95 when I read how Bush Sr.'s 1990 luxury tax helped sink the yacht industry, luxury taxes which Clinton repealed in 93. Seemed rather obvious in retrospect.

Posted by abw | October 17, 2007 12:33 PM

The Laffer Curve is ALWAYS 100% correct in theory.

The problem is one can never know where the heck we are on it with the exception of 0% tax and 100% tax.

Posted by mr lawson | October 17, 2007 12:35 PM

Pete: Well stated, though I'm not at all sure we can assume we're on the left side of the curve because of one data point (Clinton's tax increases coinciding with that whole "explosive growth of internet commerce and cheap and super-accessible computing" thing.).

(We may well be on the left side of the curve, of course - I'm just saying that since we can't control external factors like the aforementioned, that would almost certainly lead to a massive increase in wealth creation regardless of a tax increase at that time, we can't easily know where we are on the curve from that data point.)

The difficulty here compared to the hard sciences is that we can't run control studies in any sort of sane way; not only because the people in general wouldn't likely stand for it, but because if they know tax rates are temporary and being used to determine that, that raises the spectre of gaming the system, thus distorting the data compared to how people would act knowing that tax rates weren't being used to... determine future tax rates.

Posted by Sigivald | October 17, 2007 12:38 PM

Juan:
I'll second that emotion! 98% of what Darwin wrote in The Origen of Species, and 99.9% of The Descent of Man is now (1) known to be false; or (2) so politically incorrect that even Ann Coulter wouldn't dare utter it in public. Liberals who cite their acceptance of Darwinian theory as an indication of their sophistication have never read him.

As for the spiking of the review: well, it's their magazine. They can decide what it says, can't they? Quit griping and publish the review somewhere else. It's not as if America has only one outlet for the expression of thought and opinion.

Posted by Jim O'Sullivan | October 17, 2007 12:47 PM

Anyone interested in arguing which side of the Laffer Curve federal taxes are on would do well to look at the tables in the "Economic Report of the President" http://www.gpoaccess.gov/eop/tables07.html

In particular, the table on Federal receipts by major category ( http://www.gpoaccess.gov/eop/2007/B80.xls ) is interesting, as is the table on Federal receipts and outlays ( http://www.gpoaccess.gov/eop/2007/B78.xls ), since it provides GDP figures for the corresponding period.

Looking at those tables, it took six years for personal income tax receipts and five years for corporate tax receipts to return to their 2000 levels of gross revenue. That would seem to make it tenuous to argue that the tax cuts increased revenue. If you want to take 2001 as the baseline, the it took four and three respectively for receipts in return to pre-tax cut levels. Still not a strong case for the tax cuts causing tax revenue increases in my mind, but others will, I am certain, disagree.

That does not mean that the tax cuts were not worth it. The real annual growth in GDP went from 0.8% in 2001, and increased every year through 2004 (3.9%) ( http://www.gpoaccess.gov/eop/2007/B4.xls ) And anything that let's me keep a greater portion of the money I earn is definitely worth it.

Posted by dirc | October 17, 2007 12:53 PM

Yes, ABW, I've learned you have difficulty understanding economics. In case I wasn't kindergarten-clear, what I meant is that revenues aren't now higher than they would have been, had a tax cut not passed.

Posted by slippery pete | October 17, 2007 1:01 PM

ABW - I'm curious - why do you link to a graph depicting revenue from corporate income taxes?

Also, are you not aware that post-recession rebounding economies always throw off greater income and tax revenue?

Posted by slippery pete | October 17, 2007 1:12 PM

If tax rates could be increased without, over time, negatively affecting the behavior of producers, socialism should work. And as tax cuts are believed to be leading to a coming recession, it appears politicians will be testing if 1990s type tax increases will rescue the economy - though it seems doubtful that 1990s type cuts in military expenditures can be made simultaneously - with the savings being spent on other more economically stimulative projects.

Posted by Art - SF Bay Area | October 17, 2007 1:22 PM

Whenever you start using your brain you start sounding like a liberal

What a great way of keeping your self-esteem up!

Posted by Ivan Lenin | October 17, 2007 1:27 PM

Megan,
I read through the comments to try to figure out what "I take it all back" is supposed to refer to.
A proposition that there are only partisans on one side of an argument?

Posted by anomdebus | October 17, 2007 2:15 PM

-Slippery Pete:
"Qwinn - Revenues are not up, not even slightly, never mind "vastly." What's your source? There is a rightwing meme out there suggesting that when post-cut revenues fall less than some people expect it's an "increase," but it's not. It's a less-dire decrease..."

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=economic_indicators&docid=33ja07.txt

Total Federal receipts in billions of dollars
2003: 1,782.5
2006: 2,407.3

35% increase.

Federal receipts from individual income taxes
2003: 793.7
2006: 1,043.9

31.5% increase

http://www.cbo.gov/ftpdocs/77xx/doc7731/01-24-BudgetOutlook.pdf

Capital gains tax receipts in billions of dollars
2003: 50
2006: 103

106% increase

A key passage from the cited CBO report:
"Although 2007 would be the third consecutive year in which revenues rose faster than gross domestic product, revenue growth would be less than half the rate observed in each of the past two years, when revenues grew at their fastest pace in 25 years. The last time revenues rose that fast was in the early 1980s, when inflation was higher and certain elements of the tax system were not yet indexed for inflation."

The income tax cuts did provide a relatively small boost to economic growth, growing the tax base, but the 2003 tax cuts to investment (capital gains and dividends) has had massive payoffs, both in terms of economic growth and in broadening the tax base to increase revenues.

Keep in mind that the capital gains rate was lowered from 20% to 15%, a *25% reduction* in the rate, and yet capital gains revenues increased 106% in 3 years.

Posted by Mike Mangum | October 17, 2007 2:17 PM

Yes, ABW, I've learned you have difficulty understanding economics. In case I wasn't kindergarten-clear, what I meant is that revenues aren't now higher than they would have been, had a tax cut not passed.

Doesn't this point sort of make the liberal whining about conservatives "lying" about supply-side effects rather weak beer? Conservatives (some of whom might be lying, but most of whom are just misinformed) claim that cutting taxes will spur economic activity & investment, which will lead to increased revenues than lower levels of economic activity. They then claim that the net increase in tax revenue is larger than that lost by the tax cut itself. Liberals throw hissy fits, whining that the revenues aren't higher than they would be without the tax cut - which is true. But the end result is that we get economic growth, and we can still see increasing tax revenue and deficit reduction even after the tax cut. Is it really so important that we could have had even more tax revenue without the tax cut, and had a lower rate of economic growth? Do liberals really think that their economic message will sell that much better if conservatives consistently claimed that tax cuts won't pay for themselves?

Posted by Mike S. | October 17, 2007 2:21 PM

slippery pete,

Thanks for the geometry lesson. I have no problem with your facts. I take issue with your conclusion.

I was inquiring why Megan, in her post, had not developed her argument about the curve. Maybe I wasnt so clear on that.

I posit if I paid less in taxes there is a good chance that I would engage that money in the economy in some other way. So explain how that amounts to a zero sum game at any level of taxation.

When I buy a doughnut it benefits the whole production chain for that doughnut. Even Homer knows you can't buy doughnuts if you don't have the money.

Pete, I hope that whole doughnut analogy didn't lose you. It would be a better world if we could have a laffer curve without the math...oh and kill all the lawyers.

Posted by PaulB | October 17, 2007 2:24 PM

Sorry, that quote above was of Qwinn, not Slippery Pete.

Expanding the tax base is a much better way of increasing revenues than increasing the tax rate.

Posted by Mike Mangum | October 17, 2007 2:31 PM

"In case I wasn't kindergarten-clear, what I meant is that revenues aren't now higher than they would have been, had a tax cut not passed."

Nonetheless, it has been proven true that the government does not have to raise taxes in order to increase tax receipts and in time the budget deficit will fall. So why should any politician consider raising taxes?

Posted by Brian | October 17, 2007 2:34 PM

Every dollar or drachma a government spends has to come from _somewhere_:
taxes (forcibly extracted from taxpayers)
debt (creditors enticed to pay cash for bonds)
printing press (inflation reduces the value of all cash holdings)

The previous possessors of this wealth would have done _something_ with it had the government not drawn it into/through/out of the treasury. Any analysis that applies a virtuous Keynesian multiplier to the effects of the government spending ought logically to be applying a similar, not-so-virtous multiplier to the loss of that "other" use of the wealth.

Somewhere in all that mess there are bound to be benefits from at least some government spending. (See, I'm not _completely_ doctrinaire.) We might not really believe that Government is evil, but given the acquisitive and protective instincts of the humans granted government power, and given the tendency of large government organizations toward deadweight loss, treating the government as if it _were_ evil may still be a useful model.

And keeping taxes down makes it politically a little more difficult to increase government spending, at least in the US. I hope, anyway.

Posted by Casper | October 17, 2007 2:35 PM

In reviewing revenue figures you have to adjust for inflation. Most of the numbers cited above are in current as opposed to constant dollars. In constant dollars the revenue situation isn't nearly as positive as it is in current dollars. The fact of the matter is that on all levels, job growth, GDP growth, revenue growth, etc., the average annual growth during Bush's term has been worse than during the Clinton years.

Posted by Jim | October 17, 2007 2:38 PM

"They then claim that the net increase in tax revenue is larger than that lost by the tax cut itself.

Can anyone cite where the Laffer Curve actually makes the case above? While I know some conservatives may make that case; I understood that the Laffer Curve does not.

Posted by Brian | October 17, 2007 2:41 PM

Brian - Yes, on the right half of the curve (the downward-sloping part), as you increase the marginal tax rate (horizontal axis moving left to right), tax revenues drop. The dishonest thing that supply-side conservatives do is to assume that we're on the downward-sloping side of the curve, when all evidence suggests we're on the upward-sloping side. That's why nothing bad happened when Clinton raised taxes, except perhaps that we had too much growth.

Mike Magnum - Again, your numbers show that revenues increased after the Bush tax breaks, but that's simply beside the point. Nobody said that revenues can't go up; the point is that they don't increase as much as they would have had the tax rate remained higher.

Plus, ya know, 2003 was when we pulled out of the post-tech-boom post-9/11 recession, and these things tend to go up after recessions.

Brian - Politicians raise taxes to pay for stuff. Tax revenue certainly tends to increase over time regardless of whether the rate is 10% or 40% - the point is that revenues are higher at 40% than at 10%.

Posted by slippery pete | October 17, 2007 3:12 PM

Thank you, Mike Magnum, for providing the data that shows that I was quite correct about revenues being sharply up.

For the record, here's some more evidence of it, as detailed in the NY Times as far back as 2005.

http://www.nytimes.com/2005/07/13/business/13deficit.html?pagewanted=print

The title of the article: "Sharp rise in tax revenue to Pare US Deficit".

So, Slippery Pete, since you wanted to know where my "meme" came from that revenues were up, I'd like to know where -your- meme came up that they weren't even up "slightly". That works both ways, right?

And I see a huge stepping back on the argument now. From Jim:

"The fact of the matter is that on all levels, job growth, GDP growth, revenue growth, etc., the average annual growth during Bush's term has been worse than during the Clinton years."

Come -on-. Here's a wild theory. Couldn't have been a result of minor things like, oh, a huge tech stock bubble that Clinton happened to receive the benefit of but did nothing to create (unless Gore really did create the Internet) while Bush got the bubble's explosion, or, say, 9/11. I think that if on 9/12 someone predicted how the economy actually did perform over the next 6 years, that person would've been laughed out of the house.

Job growth was better under Clinton? Uh, yeah, well, I guess when the unemployment rate under Bush has been under 5% for several years, there's not much room for additional growth.

Mike Magnum - again, thanks for providing the raw data. Still looking for an answer to my question about where this "revenues not even slightly up" myth came from. As if I couldn't guess.

Qwinn

Posted by Qwinn | October 17, 2007 3:26 PM

Wow, Pete, so after telling us that revenues weren't even slightly up, and now being shown that they are indeed sharply up, this makes no difference at all to you? You dismiss it as "beside the point"? If revenues being actually up or down is "beside the point", why'd you respond to my question by chafing at my claim that revenues are in fact up?

You are aptly named, I see.

And I propose that claiming that they aren't up as high as they would've been is 100% speculation. There's no way you could know that. If they'd gone down, okay, fine, it'd be hard to argue that the Laffer curve worked, but since they have in fact gone -sharply- up, you've got to show -why- you think revenue would be higher if taxes hadn't been cut and all the economic stimulus that the tax cuts provided hadn't happened.

It's like you're simply presuming that the economy would've done exactly as well without the tax cuts, and then applying differing tax rates and saying "See? We would've gotten more". This is completely silly. You can't do that. You have no credible way of estimating what the economy would look like if the tax cuts hadn't happened. If you could, you should be the Fed Chairman.

As it stands, with revenues up sharply, all you're proving is that no amount of evidence could possibly confirm the Laffer curve to you. No matter how much tax revenues increase after a tax break, you'll just effectively say "Well, I say they woulda been higher without the tax cuts, so nyah". Please.

Qwinn

Posted by Qwinn | October 17, 2007 3:33 PM

Wow, this is getting really funny, Qwinn.

Let's dig right in, shall we?

I read the NY Times link you provided. I mean, did you read that article before you posted the link, or just the headline? I'm seriously asking, because it's inconceivable to me that you actually read the article, which would be in line with expectations, if you know what I mean.

Do you want me to start producing quotes from it, or are you willing to concede you didn't read what it actually said?

Posted by slippery pete | October 17, 2007 3:51 PM

-Brian
"Can anyone cite where the Laffer Curve actually makes the case above? While I know some conservatives may make that case; I understood that the Laffer Curve does not."

That depends on 1) the tax rate, and 2) the period of time you are measuring. If the tax rate is high enough, lowering the tax rate will result in an immediate increase in revenues, but that is only true for very high rates (or for moderately high rates on investment). What is more frequently the case is that a reduction of tax rates will stimulate a sustained increase in economic growth that in the long term will increase revenues over what they would have been with no change in the tax rate.

If you reduce the marginal tax rate by 10% (and the average tax rate by about half that) and the economy changes from 3% to 4% long term economic growth as a result, tax revenues can grow to be higher than they would have been without the tax changes, given enough time. It all depends on how much of a growth stimulus the tax changes provide.

Extremely simplified model below:
assuming revenues grow at a 1:1 ratio with GDP growth - they don't...it's a simple model
assuming the reduction in average tax rate is half of the reduction in marginal rate
assuming an initial average tax rate of 15% without the change, and 14.25% with the change
assuming 3% average GDP growth without the change and 4% GDP growth with the change

first year after tax change
GDP: 103% 104%
Revenue: 15.5 14.82

after 5 years
GDP: 116% 122%
Revenue: 17.4 17.4

after 10 years
GDP: 134% 148%
Revenue: 20.1 21.1

That is the theory at least, displayed in a very simplified model. The key question is how much of a stimulus the tax rate cut provides. Income tax cuts seem to provide a modest stimulus and cuts to capital gains and dividends seem to provide a larger stimulus. Of course, that is dependent on the original rate. A capital gains cut from 2% to 1% would probably only result in halving revenues from capital gains taxes and not provide any measurable stimulus, whereas a capital gains cut from 75% to 37.5% would obviously provide a significant stimulus to economic growth. The massive increases in capital gains revenues (and excellent economic growth) over the past few years isn't proof, but it is definitely suggestive.

At least, that is my understanding. I'm sure an actual economist would gnash their teeth at my attempted explanation.

Posted by Mike Mangum | October 17, 2007 3:53 PM

-Slippery Pete
"Mike Magnum - Again, your numbers show that revenues increased after the Bush tax breaks, but that's simply beside the point. Nobody said that revenues can't go up; the point is that they don't increase as much as they would have had the tax rate remained higher."

You seem to think that the economic recovery happened in a vacuum. It did not. The 2003 tax cuts on investment provided a massive economic stimulus that prompted the strong recovery. The recovery would not have been nearly as strong without those tax cuts, and the tax base would not have grown as quickly.

If you assume that tax cuts have no effect on economic growth, then your optimum tax rate is simple: 100%. I think you would quickly find that economic growth is not divorced from the rate of taxation.

Posted by Mike Mangum | October 17, 2007 3:58 PM

While I await your reply, for one last time I'll briefly address this perplexing quandry - increasing revenue following a marginal tax cut rate.

I never argued that tax revenue would go down year on year following a tax cut. What I said was that tax cuts don't pay for themselves - meaning, increases in revenue attributable to economic growth spurred on by tax cuts are not greater than the direct cost of the tax cuts themselves. In other words, the revenue foregone by tax cuts is greater than the extra (tax) revenue generated by increased economic growth.

See, the whole argument offered up by supply-siders is not (merely) that tax revenue can increase in years following marginal tax rate cuts. It is a much more radical argument, that the tax cuts pay for themselves.

If you're imagining that I'm sitting here chagrinned that some hard facts have shown I'm wrong, I'm sorry to disappoint you, but you're mistaken (again). You don't understand what my counterargument is because you don't even understand the supply-side case itself to begin with. You think you've nailed me on an argument I never made, because you're confused and over your head and perhaps because you spend too much time waging partisan battle and too little time learning things.

Posted by slippery pete | October 17, 2007 3:59 PM

Yes, I did read it, slippery pete. And I stand by it. There's nothing there that downplays the data other than the NY Times' incapability of doing everything it can to downplay any positive news about Bush, but it's obviously contrived.

I mean, come on, we're dealing with a media that today actually had the balls to bemoan the economic plight of gravediggers in Iraq because they don't have as many bodies to bury now. Do you expect anything different in economic coverage? What's amazing is that revenues were up so much that they actually conceded it at all.

About the only negative point worth making in there was about increased federal spending, but that really has nothing to do with the Laffer Curve.

Other points made in there were analysts saying "it won't last"... except, oops, it did. So feel free to quote them too.

Oh wait, let me guess, you're going to quote this one...

"In addition, while a lot of the increase in tax revenue flows from the improving economy and higher incomes, part of the jump stemmed from a special factor: the expiration of a temporary tax break that allowed companies to write off their investment in new equipment much more rapidly than normal."

Right. So "a lot" of the boost in revenue is precisely because of the Laffer Curve. But "part" of it was for some other reason. Are we told how big a part? No. Could it be inconsequential? Sure. But hey... it's some damn nice downspin that lets you point and say "That article isn't as positive as you claimed", right?

Qwinn

Posted by Qwinn | October 17, 2007 4:02 PM

"You think you've nailed me on an argument I never made"

*cough*

Slippery Pete: "Revenues are not up, not even slightly, never mind "vastly."

You did, in fact, make the argument that the tax cuts did not increase revenue at all.

Someone less slippery would indeed feel some chagrin at that.

Qwinn

Posted by Qwinn | October 17, 2007 4:06 PM

Oh, and having been so vastly wrong on the facts about the actual revenues we've had since the tax cuts, I think it would befit you to be a little less condescending and arrogant. I mean, to be so utterly wrong on the data and then to actually act -more- arrogant and as if you so -obviously- know more than the rest of us takes some balls, ya know?

Qwinn

Posted by Qwinn | October 17, 2007 4:08 PM

Mike -

Well, since the Early 2000s recession ended in November 2001, it'd be quite the trick for Bush's 2003 tax cut to have had much to do with it, eh?

http://www.nber.org/cycles.html

And, really, this has to be the final time I say this. Some people are uneducable.

The argument is NOT whether tax cuts stimulate the economy - they do - but whether they pay for themselves. Please, seriously, try to stop forgetting this.

Posted by slippery pete | October 17, 2007 4:08 PM

"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute.
...
An analysis of Treasury data prepared last month by the Congressional Research Service estimates that economic growth fueled by the cuts is likely to generate revenue worth about 7 percent of the total cost of the cuts, a broad package of rate reductions and tax credits that has returned an estimated $1.1 trillion to taxpayers since 2001.

Posted by Facts | October 17, 2007 4:16 PM

There are two arguments that confuse Qwinn and Mike. They are:

1) Tax cuts stimulate the economy, which then throws of additional tax revenue

2) Tax cuts stimulate the economy so much that the additional tax revenue pays for the cost of the tax cuts

See, guys, these are not the same argument. They are different. The guys on your team understand the difference, but you do not because you actually know less about this subject than the discredited loonies who advance it.

I am doubting whether there's any point in argument this anymore. I can't be any clearer.

Qwinn, you became excited over this part of the Times article:

...a lot of the increase in tax revenue flows from the improving economy and higher incomes....

Now, does this sentence refer to argument 1 or 2 above? The answer is 1. The article states that the revenue in excess of predicted post-tax revenue resulted from increased economic activity. This is almost certainly true. And another way of saying it is that the decline in tax revenue was less than forecast due to higher-than-anticipated economic activity. This supports Argument 1, which nobody disagrees with. Argument 2 - that post-cut revenue increases exceeded the direct cost to tax revenue of the tax cuts - has nothing to do with it.

Now I will concede that my wording about revenue not being slightly up would be confusing to somebody with no training, education, experience, or working knowledge of this subject. I had assumed you realized that the debate was whether tax cuts pay for themselves, and not merely whether post-cut revenue can increase. I was mistaken and I apologize for assuming too much of you.

Posted by slippery pete | October 17, 2007 4:23 PM

"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former Bush White House economist now at the nonpartisan American Enterprise Institute."

Ah, yes. Just like global warming. "There's really no dispute among" scientists about that, either. Well, except for the 17,000 or so who dispute it.

Sorry, but I've really lost faith in people telling me that there's "no dispute" among supposed authority figures. We got tax cuts. People told us this would lower revenue. In fact, we had pete here telling us it -did- lower revenue. But look at the data, and find out that revenues are in fact sharply up.

And the same person who told us that they weren't up at all is now telling us he feels no chagrin whatsoever for misrepresenting the facts, and in fact simply ramps up his calling us stupid and "uneducable". This same guy is passing himself off as having profound economic knowledge. I should believe in his good faith why? I should believe that other unnamed "economists" who are "not in dispute" are any different?

I believe what I see with my eyes. And what I see is - tax cuts triggered huge increase in tax revenue. You expect you can roll in and basically say, "Well, yes, but if it weren't for the tax cuts the rise in revenue wouldn't have just been huge, it would've been absolutely freaking fantabulously massive".

Seriously. For you guys to be right, it seems to me that the revenue increase over the last few years, after the tech bubble burst and after 9/11, would have to be record setting. Absolutely staggering. And with no prompting at all from tax cuts. It would've just happened all by itself, you're trying to tell me.

Bollocks, I say. And appeals to authority that claim "no dispute" among economists (except, I'm sure, from supply side economists who dispute it but they're considered not credible and so written off out of hand, just like in the global warming debate) don't help your case whatsoever. I believe the numbers.

Qwinn

Posted by Qwinn | October 17, 2007 4:27 PM

Qwinn, thanks to your shocking refusal to acknowledge you didn't read the article you linked to until I speculated about it, please don't hold it against me if I quote a few parts of it:

On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February. Note: The point is that revenue is higher than predicted, not higher than it would have been had the tax cut not been passed.

Most of the increase in individual tax receipts appears to have come from higher stock market gains and the business income of relatively wealthy taxpayers. The biggest jump was not from taxes withheld from salaries but from quarterly payments on investment gains and business earnings, which were up 20 percent this year.

That was similar, though much smaller than a sharp rise in tax revenue during the stock market boom of the late 1990's, which was followed by plunges in revenue when the market bubble burst. And, gosh, I think that stock market boom of the late 1990s followed a substantial tax rate increase.

But many independent analysts cautioned that the improvement, though notable, could prove ephemeral and that it did little to eliminate much bigger fiscal problems just over the horizon. "Lawmakers who allow themselves to be lulled into thinking that the economy is growing its way out of the deficit," wrote Edward McKelvey, an economist at Goldman Sachs in New York, "are unlikely to support the painful measures needed to reach a more lasting solution."

A senior White House official cautioned that it was too early to make definitive judgments about whether the tax cuts had fulfilled the promises of "supply side" economics, a Reagan era concept that posits a direct relationship between lower tax rates and faster economic growth. Here the Times gets it wrong, as any self-respecting supply-sider would be happy to explain. Supply-side doesn't merely predict that tax cuts stimulate growth, but that the growth is so strong as to pay for the cost of the tax cuts.

Critics of Mr. Bush's fiscal policies said the budget outlook seemed good only in comparison with the dire state of affairs a year ago. Given that the recession formally ended nearly four years ago and that overall growth has been quite strong for the last two years, they said, the budget ought to be in much better shape.

Posted by slippery pete | October 17, 2007 4:33 PM

1) That an excessive marginal rate will reduce net tax collections is nearly indisputable (the 100% taxation example.)

2) No one (including Art Laffer and Megan McCardle) knows exactly where we are on the Laffer curve.

3) No one can accurately attribute a certain level of GDP growth over a certain time span to a particular tax rate or change thereof. There are too many non-controlled variables.

4) It is quite obvious that some tax rate reductions can result in higher net revenues (see 100% example above). It is not possible to know in advance (or even after the fact) whether a tax cut has 'paid for itself.'

5) Combined federal/state marginal rates are very close to 50% in some states. It is quite reasonable that we could be on the revenue losing side of the Laffer curve.

6) Lower income taxpayers pay a lower average and marginal tax rate than high income taxpayers. By a lot.

7) Current US tax rates are immoral and confiscatory regardless of where we are on the Laffer curve.

Posted by Dark Helmet | October 17, 2007 4