Laffer, Reagan, et. al.

Revenue Growth Expend. Growth Deficit Real GDP Inflation

1990 1,031,308 4.10% 1,251,703 9.41% -220,395 1.67% 5.39

1989 990,691 8.99% 1,144,069 7.52% -153,378 3.62% 4.81

1988 908,954 6.42% 1,064,051 6.00% -155,097 4.09% 4.12

1987 854,143 11.06% 1,003,830 1.37% -149,687 3.38% 3.66

1986 769,091 4.77% 990,258 4.64% -221,167 3.50% 1.86

1985 734,057 10.14% 946,316 11.10% -212,259 3.82% 3.54

1984 666,457 10.97% 851,781 5.38% -185,324 7.21% 4.37

1983 600,562 -2.78% 808,327 8.40% -207,765 4.48% 3.21

1982 617,766 3.09% 745,706 9.95% -127,940 -2.19% 6.16

1981 599,272 15.89% 678,209 14.77% -78,937 2.45% 10.36

1980 517,112 11.61% 590,920 17.37% -73,808 -0.20% 13.48

1979 463,302 15.95% 503,464 9.75% -40,162 3.15% 11.28

1978 399,561 12.38% 458,729 12.10% -59,168 5.54% 7.59

1977 355,559 19.29% 409,203 10.07% -53,644 4.64% 6.62

1976 298,060 6.80% 371,779 11.87% -73,719 5.64% 5.75

1975 279,090 6.03% 332,332 23.38% -53,242 -0.24% 8.98

1974 263,224 14.05% 269,359 9.63% -6,135 -0.73% 11.11

1973 230,799 11.33% 245,707 6.51% -14,908 5.91% 6.2

1972 207,309 10.78% 230,681 9.76% -23,372 5.42% 3.31

1971 187,139 -2.94% 210,172 7.42% -23,033 3.36% 4.31


(cont.)

Sorry for the crappy format, but I haven't figured out how to make nice columns here. I've clipped this data from several sources, if you'd like an excel version to play around with let me know.


Re: Laffer Curve. The idea of the Laffer Curve is intuitively correct, even if the details are hard to discern. Obviously, if tax rates are 0%, tax revenues will be zero. If tax rates are 100%, all on-the-books economic activity will stop and tax revenues would be zero (or at least close enough for our purposes.) We also know empirically that tax rates somewhere between 0% and 100% generate some level of tax revenue. So, the curve starts at the origin, increases for awhile, reaches a maximum, begins to decline and then reaches zero again when tax rates equal 100%.


Here's what we don't know. What is the shape of the curve? Is it smooth (does it look like a bell curve with no tails?) Is it skewed to the left or right? What is the point of maximum revenue? Unfortunately, empirical testing of any hypothesis is extremely problematic. Many things impact tax revenues. Things like GDP growth and inflation rates (at least prior to indexing)and there is some probable circular causation at work. Tax rates (probably marginal rates as opposed to average rates) impact economic activity at some level and then economic activity impacts revenue, which impacts deficits, which impacts interest rates, which impacts economic activity, and so on.


While it is a truism in economics that you tax what you want less of and subsidize what you want more of, there is a school of thought that posits that government regulation has a larger impact on economic activity than tax rates do. We all have opinions on this, some are more firm than others. What I do know is this: the true believers on either side of the arguement will never be convinced of the merit of the other side.


To the numbers. I haven't done an analysis, but here's a couple of observations. The Reagan tax cuts were enacted in 1981. Given that there is a delay between enactment and implementation, I don't think the 1981 tax revenue is impacted. There were also small tax increases passed in 1982 and 1984, along with "reform" passed in 1986 that substantially flattened tax rates and did away with many tax deductions (personal interest expense being the most famous one.)


The mid 70's through 1982 were a period of historically high inflation. Prior to the tax cut of '81, tax revenue seems to be more correlated with inflation than with GDP growth. One of the little-commented-upon provisions of the '81 tax act was to index tax brackets to inflation. The federal government, prior to that time, had the benefit of increasing tax rates through bracket creep without having to pass any tax increases. After several years of this, most people caught on.


What caused the "Reagan" deficits? I can't say definitively, but I offer a couple of more observations. 1980 through 1982 (even a little bit of 1979) was the period in which the Paul Volker-led Federal Reserve was increasing interest rates in order to tame inflation. This resulted in a recession finally hitting in 1982 with a bounce-back in 1983. With indexing, tax revenues more-closely tracked GDP growth than they had in the past. At the same time, expenses were increasing - not a surprise in a recessionary economy. The deficit topped out at slightly above $200MM in 1983. Even though tax revenue increased 65% from 1983 to 1989 while expenses increased "only" 41.5%, the deficit decreased to only $155MM due to the much higher base figure for expenditures.


What does all this mean? Beats me. Did the 1981 tax cuts cause the deficits? Maybe you could say that indexing did, but only if you're willing to say that double digit increases in overall federal revenues are proper, or even sustainable over the long haul. I have my doubts on this one. Do the deficits even matter? They're pretty small compared to the overall level of GDP. I'm sure there is a level of deficits (and overall nat'l debt) at which it begins to drag down the economy, but it doesn't seem to be at that level yet. {shrug}


Ron

"What I do know is this: the true believers on either side of the arguement will never be convinced of the merit of the other side."


Proving that at least one side is wrong. As it is, one side also happens to be right, my side. The simplest evidence that my side is the correct one, is that the vast majority of ideological migration goes from the wrong side, to my side, and extremely rarely in the other direction.


This is consistent with people, having reached a higher plane of realizing what reality is, not tending to forget it. Put differently, there is ample evidence of normal people realizing more and more of the tenets of the left are incorrect, every day of their lives. Almost nobody, at age 60, suddenly realizes the left was correct.


Because people on the right understand the mechanics of why people on the left are wrong. People on the left, just assume people on the right are mean and stupid. People on the left don't even realize there are any mechanics. For them, there are no facts, only different people's opinions.


eLROY

"Beats me."


Well if it beats you, it surely beats me, though thanks for a lucid and informative post. Beats most economists too, I think. The "experts" didn't quite know what to do when we went through stagflation during the Carter years. Their advice to the incoming Reagan team was contradictory.


So the amateurs took over. The editorial writers at the Wall Street Journal--especially Jude Waninski (sp?)--started pushing Mr. Laffer's curve and supply side economics. They won the day, especially with Jack Kemp who eventually won over Reagan.

A post in which every sentence is either factually or logically incorrect or both. Worthy of a Reagan disciple.


1) "What I do know is this: the true believers on either side of the arguement will never be convinced of the merit of the other side."


Proving that at least one side is wrong.


-The fact that people on both sides of an argument believe that the other side is wrong does not prove at least one side is wrong. Maybe both sides are wrong. Maybe parts of both arguments are right and parts are wrong. What people believe about an argument has nothing to do with whether it is wrong or not.


2) As it is, one side also happens to be right, my side.


-Only correct if you mean the word "right" in the sense of right-wing, not in the sense of being correct.


3) The simplest evidence that my side is the correct one, is that the vast majority of ideological migration goes from the wrong side, to my side, and extremely rarely in the other direction.


-This is not evidence that your side is correct, even if the migration you discern is indeed factual. At one time, most people believed Lee Harvey Oswald acted alone. Now most people believed he did not act alone. Whichever view is correct has nothing whatsoever to do with the fact that people's opinions have migrated in one direction. Maybe people were correct before and are incorrect now, perhaps swayed by such things as Oliver Stone's fantasy version of events.


4) This is consistent with people, having reached a higher plane of realizing what reality is, not tending to forget it.


-It is consistent with people getting older, having more money, and becoming more conservative. People's memories, in any event, get worse when they get older, not better.


5) Put differently, there is ample evidence of normal people realizing more and more of the tenets of the left are incorrect, every day of their lives.


-"Normal" people? Those who remain on the left are "abnormal"? What evidence do you have that "normal" people realize that more and more of the tenets of the left are incorrect every day of their lives? And even if they "realize" it, they can still be incorrect in their realization.


6) Almost nobody, at age 60, suddenly realizes the left was correct.


-While I have no statistics at hand, I would venture to agree that people rarely become more liberal at age 60. But this has nothing at all to do with whether the left is correct or incorrect on any issue. There can be a difference betgween what people "realize" and what is true.


7) Because people on the right understand the mechanics of why people on the left are wrong.


-There is plenty of evidence to the contrary. Most of the people on the right I hear on the radio, and most on the right who post hear, resort to name-calling and unprovable accusations, as, for example, in your next sentence.


/images/glasses.gif People on the left, just assume people on the right are mean and stupid.


-On what evidence do you base this conclusion? People on the left generally have more of a bleeding heart, so one would think they'd be more inclined to take people at their word.


As for this lefty, I do not think people on the right, as a group, are mean and stupid. There are mean and stupid people all over the political map. (One should also remember the wise words of Mr.Reagan who said that when we think we're talking to someone who is stupid we should realize that the other person may be thinking the same thing.) One can disagree with another person without thinking ill of them, without thinking they're mean or stupid. It seems to me that those on the right are much more vituperative in their derogatory remarks about those on the left, you being a prime example.


9) People on the left don't even realize there are any mechanics.


-I saw my mechanic just yesterday. If by mechanics, you mean the way things work, people on the right, usually having more money and power than those on the left, would have much more incentive to hide the mechanics that keep them in money and power.


10) For them, there are no facts, only different people's opinions.


-Simply ridiculous. Facts are twisted and turned by all politicians of every persuasion to suit their own purposes. I have presented several instances of Mr.Reagan lying when things got tough for him. I could cite many additional examples. I could also do so for Mr. Clinton and Mr. Truman and Mr. Nixon and John Foster Dulles and Robert McNamara and Ted Kennedy. Playing fast and loose with the facts is not the sole province of those on the left.

"Because people on the right understand the mechanics of why people on the left are wrong. People on the left, just assume people on the right are mean and stupid. People on the left don't even realize there are any mechanics. For them, there are no facts, only different people's opinions."


You have just proven your own close-mindedness.


--Cyrus


(not-of-the-Left)

if taxes were eliminated it would probably trigger a much higher inflation rate. when the fed went into their most recent tightening mode the unemployment rate was at a record low of 3.9%. the fed viewed this as being below the natural rate of unemployment. in other words the demand for labor had become too high which would eventually lead to high inflation. the reason for the increase in labor demand was due mostly to a surge in corporate profits. i think that a disproportionate amount of the labor demand was in technology. massive tech company profit increases were fueled by y2k spending and the dot com explosion although they were both one time events. i think this gives us a look at what would happen if corporate taxes were reduced enough to have the same effect on corporate profits. if personal income taxes were reduced enough it would seem to me that a corresponding surge in consumption would occur. such a surge in consumption would also have the effect of being over stimulative to economic growth. of course whom the tax burden falls on is also something to be thought about. labor is a finite resource in our economy and unfortunately there is probably such a thing as too rapid a pace of economic growth which taxes mitigate.