I reported earlier, at this link, on the conservative think tank CFP's Laffer Curve video starring Dan Mitchell, Cato Institute guru. Part II is now out, making the claim that tax cuts (sometimes) pay for themselves. Part II reiterates the purported "theory" of the something-for-nothing Laffer Curve claim: that there is a maximum tax rate (regardless of base subject to taxation) beyond which the economy inevitably shrinks rather than increasing. Of course, as I noted in my first posting on this issue, that "theory" is mostly ideologically driven propaganda. There is no scientific formula that produces the wonderfully symmetrical graph displayed as the Laffer Curve, with steeply rising slope (revenue to tax rates) at the low rates and steeply falling slope at the "too high" rates, so we could just click and discover the "right" rate to tax returns.
In fact, only one point on the graph is fixed--if you charge zero tax, you will quite certainly collect zero revenues. All else is a polycentric question with many different factors and circumstances intervening--from tax system specifics like what base is taxed, whether the system is progresive, and whether there is good voluntary compliance or good enforcement, to the socio-politico-economic situation regarding the need for sacrifice for the common good, and the willingness to do it; the political party in power and its will to ensure adequate support for enforcement of the tax laws; the federal deficits in budget and trade; the relative burden of tax on those at the higher ends of the income scale compared to needs; whether the economy is currently in recession or growth, and whether that growth is broadly based or restricted to those at the very top (as it is today).
That's relevant, because the libertarian think tanks pushing the Laffer Curve "theory" also are known for wanting to shrink government and letting billionaires keep "their" billions while letting the poor keep "their" widow's mites--generally maintaining what I call the "free marketarian fallacy" about the way economies work, as though they were independent of the social and political institutions in which they are embedded.
CFP's Part II claims to offer the "evidence" for the Laffer Curve reality. It mentions three specific country examples: the US, Ireland and Russia. For the US, it compares revenues under a poorly enforced and loophole ridden 70% maximum rate with revenues under a 28% maximum rate after the 1986 major overhaul of the tax system involving significant base broadening, even more significant loophole closing, a well-considered and fair (though regrettably short-lived) end to the ridiculous preferential taxation of capital gains of especial benefit to the wealthy, and more focus on enforcement following the wild tax shelters of the last decade. Mitchell admits that the reduction in the top rate wasn't responsible for all the growth in the economy, but suggests that the correlations (higher rates, fewer "rich people" and lower revenues; lower rates, more "rich people" and higher revenues) are close to proof that it was tax cuts that produced "revenue feedback."
The video goes on with a few further anecdotal examples: Ireland (comparing 1985 to 2004); Russia (comparing 2000 to 2006); and the Bush luxury tax on yachts. Of course, each of these is a particular item in a complex of other issues. Ireland's post-war economy was very regional and essentially dependent on the U.K. With the development of the EU's single market, Ireland had an opportunity to grow in very different directions by opening its markets and becoming involved in global trade, which it did most effectively in areas where it had some skill already. Additionally, Ireland had support from the EU's Structural Fund, which was significant to its turnaround from a marginal member of the EU to a successful one. Finally, it paid attend to fiscal stabilization and human capital development--two key factors in economic growth. Dan Mitchell in the Laffer Curve video simplistically correlates a tax change with GDP increase, leaving out all this information about the actual context of the GDP increases, and says he has evidence for the idea that tax cuts result in revenue increases.
Similarly, countries like Russia and many of the former Soviet Union satellites have found adopting a low flat rate makes sense as they move from their former systems to more robust capitalism. They generally had to move from dysfunctional economies (including their tax systems, with money siphoned off at every level by bribes and brigands). See, for example, this description of Russia's economy in 2000, nine years after throwing off the yoke of communism and attempting to stablize inflation, markets, and other dysfunctioning systems, and of course just coming off the major 1998 Asian economic crisis. Russia actually started a "mini-boom" coming off the August 1998 crisis--one that was built especially on oil export revenues. See this link. In that context, establishing a very simple tax system that can be more easily collected (and enforced) is a logical step to reform. In fact, at least some researchers have concluded that the Jan 2001 reform of the Russian tax system was mainly effective because of reduction of tax evasion, and much less because of economic efficiencies. See Gorodnichenko et al, Lessons from Russia's 2001 Flat Tax Reform. Thus, major factors in Russia's expanding GDP are its oil riches, its newfound engagement in the global marketplace, and its creation of a much more stable institutional framework for its citizens, and the increase in GDP and tax revenues between 2000 and 2006 is due in no small part to where Russia was coming from. (Russia has also increased economic inequalities by permitting a few in insider positions to get control of formerly government-owned assets.) Russia thus provides little support either for the Laffer Curve or for the idea that a low flat tax is the panacea that the Cato Institute suggests.
Recent Comments