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The Laffer Curve Theory -Reagan to Trump era

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The Laffer Curve Theory -Reagan to Trump era

Unread postby efarmer » Sat 06 May 2017, 23:04:34

Mr. Laffer did a napkin sketch to sell people on his theory of improving tax revenue for the US Federal Government via tax reduction. It found purchase in the Reagan era and he is an advisor to the Trump era as well, it does have some merit, it has some issues with globalization providing ways outside the closed box of US economic operations as well.

The Laffer Curve:
The Laffer Curve earned its name from a 1978 article by the late Jude Wanniski (then-associate editor of the Wall Street Journal) appearing in The Public Interest entitled, “Taxes, Revenues, and the ‘Laffer Curve.’” Wanniski recounted a 1974 dinner he attended with Arthur Laffer (the professor at The University of Chicago), Donald Rumsfeld (chief of staff to President Gerald Ford), and Dick Cheney (Rumsfeld’s deputy and a former classmate of Laffer’s). When the foursome’s dinner discussion turned to President Ford’s “WIN” (Whip Inflation Now) proposal for tax increases, Dr. Laffer is said to have grabbed his napkin to sketch the curve as an illustration of the tradeoff between tax rates and tax revenues. Wanniski dubbed the tradeoff described as the “Laffer Curve.”

Hubbert's Peak is based on bell curve distribution, the Laffer curve is based on maximal governmental tax revenue based on tax rate. The real world tempers such approximations but does not negate the inherent truths expressed as tempered by the actual results and dynamics of the actual real world.

Is trickle down and supply side Laffer's Curve and Hubbert's Peak a similar effort in proving a trend without the legs required to be a functional tool for navigating the real word?

Your opinion?

http://www.investopedia.com/terms/l/laffercurve.asp
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby efarmer » Sat 06 May 2017, 23:44:59

Pstarr,
We are of a similar age and opinion, concurrent with our idealistic era the financial power and the inertia of the system we lived under then and since then has persisted. Hippies often morphed to Yuppies and generations have been born who live under what challenges and conditions exist right now. And so we segway to observe as old guys what is going on today. The fact is that many people have a mortal carcass that will carry on beyond our timeline and era. My point here is if the theories of the era before they were born are sufficient to the task of their lives. My point is that congress is a reflection due to age and embedded power that operate on old and treasured principles, much as I do and you may.

Is a 2017 government wise to employ the theories of 45 years ago or more that resonate with a 70 year old mindset? This is why I ask for input from the group intelligence here to see what emerges.

Said more succintly, millenials have to rise up and take the power in the nation and do the things that make sense to them going forward, the notion of old people having the experience and knowledge to guide the young has been disproven by realites of overpopulaton, resource limts, and greed, and they have to do whatever it is to cope going forward. A wise hippie, a conservative yuppie, and a wealthy real estate developer, hedge fund billionaire, or market maven, are about as useless to them as a raincoat in a gun battle. I find myself realizing that cooking a good meal, loving my young offspring well, and anchoring love connections in my circle of loved ones, is more bang for the effort than preaching about how smart I am or "we we're". The big challenge of offering up power to the next generation , (that many of us saw as our big challenge) should be our halmark of behaviour as understanding the principle and being capable of doing better than those who came before us in a world where it made more sense.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Plantagenet » Sun 07 May 2017, 01:21:19

The US has about the highest corporate taxes in the world.

As a result some US corporations are doing "inversions" ie. changing from a US to a foreign corporation in order to avoid the high US corporate tax rate. Other US corporations are keeping their foreign earnings overseas, again to avoid paying the high US corporate tax rate.

This results in a net loss of US tax revenue, i.e. high US corporate tax rates are, in some cases, clearly bringing in less tax revenue then a lower tax would do.

obamas-inversion-failure-

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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby EdwinSm » Sun 07 May 2017, 04:22:09

May be like the Hubbert's curve, where many people seem to disregard the conditions he stipulated to discredit Peak Oil, the Laffer's curve seems to have attracted one-sided responses. The page you linked to seems to be one such one-sided response.

It started out well explaining that a tax rate that is too low will reduce tax income as well as a tax rate that is too high, but then it took the political decision to to only talk about "lowering taxes to increase tax revenue" rather than the need to find the optimum tax rate. Lowering taxes is easy to sell, finding the optimum rate (which might include raising taxes) is far more complicated and difficult to sell to the general public.

Given the reported fact that the first curve was presented on a napkin, I would suspect that better science went into Hubbert's estimates.
Last edited by EdwinSm on Sun 07 May 2017, 04:57:05, edited 1 time in total.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Cog » Sun 07 May 2017, 04:32:32

Reducing taxes is the right thing to do no matter if it stimulates spending and revenue or not. You are returning the money to whom it rightfully belongs. The person who earned it. The government is no more "entitled" to your money, than a thief is entitled to steal your possessions.

We have an necessary evil called government. Lets not feed the parasite to the point it consumes the host.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Tanada » Sun 07 May 2017, 06:52:13

Two points, EdwinSm is correct in that when you only look at half the picture you get poor response from the knowledge offered. It is also frequently ignored that Laffer's theory about some taxes being too low was considered wonderful by certain members of the Carter years because some people seek to raise taxes at any excuse and Laffer gave a formula for maximizing revenue from sources that were below optimum. First you encourage people to invest heavily in those areas, then you raise taxes in those areas to the maximum that people will withstand before dumping the investment and looking for somewhere else to put their money.

Second point, during the Reagan Administration when the extreme tax rates in most areas were eliminated, along with their loop holes, tax revenue to the Federal Government nearly doubled. The Left often refuses to acknowledge this reality just as they defy science in certain other areas that doesn't appeal to their world view. That does not however change reality.

Receipts went from half a trillion in 1980 to a full trillion in 1990 in great part because the Reagan era Laffer based tax rate reduction lead to a vast increase in tax receipts.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby marmico » Sun 07 May 2017, 15:33:41

The Reagan-era individual income tax changes, as a fedgov revenue raising tool relative to GDP, are unremarkable in the post-war historical record.

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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Plantagenet » Sun 07 May 2017, 16:59:47

marmico wrote:The Reagan-era individual income tax changes, as a fedgov revenue raising tool relative to GDP, are unremarkable in the post-war historical record.

Image


??????

Thats interesting, but misleading in a discussion of the effects of the Laffer curve on tax revenue. The plot you've posted shows the tax revenue number divided by an another variable which is changing for mostly other, independent reasons----that makes this plot useless for illustrating the effects of the Laffer Curve on tax revenue.

A more useful contribution to this discussion of Laffer Curve theory and its effect on tax revenue would be a plot of tax revenue ---- just tax revenue----through time, such as the plot that Tanada posted just above. This plot clearly shows a significant jump in tax revenue corresponding to the Reagan-era tax cuts.

What your plot shows is that BOTH tax revenue and GDP grew rapidly in the Reagan years. And that is remarkable, given the slow growth rates in GDP we've seen recently in the US.

Whatever the magic sauce was that worked so well in the Reagan years, we could use some of it now. If it was the tax cuts then that caused GDP and Tax revenue to grow rapidly----then give us tax cuts now.

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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby marmico » Sun 07 May 2017, 18:21:15

Laffer Curve napkin is individual income taxes (IIT). Tanada's plot shows all tax revenues. Laffer is saying that to maximize fedgov revenues you set the tax rate at point E in the following image.

Image

1970-1979 IIT rose from $90 to $225 billion or 150%.

1980-1989 Laffer Curve IIT rose from $251 to $453 billion or 80%.

1990-1999 IIT rose from $472 to $898 billion or 90%.

On a decadal basis the Reagan era is a bust whereas the Nixon/Ford/Carter era is a boom. That is why nominal ITT should be compared to nominal GDP.

Plug and play.

https://fred.stlouisfed.org/release/tab ... 3&eid=5272
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Plantagenet » Sun 07 May 2017, 22:50:52

marmico wrote:Laffer Curve .... is individual income taxes (IIT).


Thats not true.

The Laffer Curve is a general model applicable to any and all taxes---corporate, capital gains, personal income taxes, sales taxes,etc.

The Reagan tax cuts involved reductions in corporate income taxes AND personal income taxes. Any discussion of the Laffer curve model with respect to Reagan tax cuts must include discussion of BOTH corporate and personal income taxes.

marmico wrote:
1970-1979 IIT .....1980-1989 Laffer Curve IIT .....1990-1999 IIT ....

On a decadal basis .... nominal ITT ....



????

Your conclusion is meaningless because you don't understand the Laffer Curve. Your initial assumption that the Laffer curve only applies to personal income tax (IIT) is incorrect. The Laffer curve also applies to corporate and other taxes, and indeed some of the biggest Reagan tax cuts were CORPORATE tax cuts. You shouldn't ignore this part of the data. -

-------------
Recently Laffer has been telling Trump to cut Corporate taxes because the Laffer curve effect will boost tax income.

donald-trump-tax-cuts-arthur-laffer

Once again, this shows that your claim that the Laffer curve only applies in personal income taxes is completely wrong, at least according to Prof. Laffer---and he should know. :lol: :lol: :lol: :lol:

Cheers!

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1. Note that the Gaffer curve Is a general model thought to be applicable to all kinds of taxes.
2. Who's in their right mind would be against dynamic scoring of the effect of tax rate changes?
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby efarmer » Mon 08 May 2017, 00:21:03

I know there is endless debate between advocates of supply side economics (who embrace Laffer Curve Theory for taxation) and demand side advocates. But in both theories the prinicple is to deficit spend to stimulate growth and then replenish the system via that growth to set it back to balanced. We have grown our national debt to over 100% of our annual GDP, have we destroyed the confidence in the system that the stimulus tools count on to work? When the big banks received bail outs and sat on them, it did not exactly inspire a little fish like me to bust a move.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Plantagenet » Mon 08 May 2017, 01:52:42

efarmer wrote:When the big banks received bail outs and sat on them, it did not exactly inspire a little fish like me to bust a move.


It wasn't intended to inspire little fish or help little fish or have much of anything to do with little fish.

The sole purpose of the bail outs was to bail out GM and Goldman Sachs and Bank America, i.e. Obama's friends on Wall Street and in the big banks. And its done splendidly at that----the stock market is way up, housing way up, and there is lots of money available for high tech start-ups.

Unfortunately, if you're working class or middle class then your wages aren't mostly stagnant while things like obamacare costs are going up 30-70% each year

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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Revi » Mon 08 May 2017, 08:09:06

The Fed Gov is running on empty. Non collecting taxes isn't going to help this out. We are borrowing a trillion a year for the foreseeable future. We went past dealing with this in the 80's. The only way forward ( for a while) is the keep borrowing and spending. It's the only game left in town. When it goes down, which it may do in September when our new leader has a "good shutdown", it's not coming back up. The rich think that they can game the system to stay just as rich as they are forever. Ain't gonna happen. When it goes down they go down too. Therefore it makes the most sense to hold up the present system until it goes down. They shouldn't try to tip the tax code in their favor now. It will sink the ship, in my opinion.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Plantagenet » Mon 08 May 2017, 13:12:44

Revi wrote:it makes the most sense to hold up the present system until it goes down. They shouldn't try to tip the tax code...... It will sink the ship, in my opinion.


What happened to your old American "can-do" spirit? Where is your belief in Hope and Change?

Whats wrong with changing the tax system to make it fairer? Why not attempt to goose the economy to create more jobs? I understand you are afraid that any change will bring about collapse, but just leaving things the way they are now will also bring about collapse.

Everything changes. Your hope that everything stays the same in the US is impossible. The physical universe doesn't operate that way, and neither does the political and economic and social universe.

Sure Obama drowned the US in debt. But that doesn't mean we can't change course now and try to reverse that dangerous trend.

You sound like your former Hope and Change has given way to Fear, Despair, Resignation and Surrender. Buck up man---stiff upper lip. This is no time to go all damp. Lets roll up our sleeves and get to work!

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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby efarmer » Mon 08 May 2017, 14:07:16

Plant, Hank Paulson and Ben Bernanke started their unprecedented action to attempt to save the US Economy in the Summer of 2007, the events progresssed to terrible in the election year of 2008 and Obama came in in January of 2009. The big Federal Reserve extraordinary measures were well over a year into what Benanke privately called "their finger in the dike" operation. Letting Lehman Brothers sink seemed to make sense at the time, but is very dubious looking back, such were the times. Bernanke and Tim Geithner then took over for the Obama era startup to keep the rescue effort rolling.
Most people think that the big bank bailout was the $700 billion that the treasury department used to save the banks during the crash in late 2008. But this is a long way from the truth because the bailout is still ongoing. The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out as of 2015 tallies. This is the issue I had in mind questioning if the supply side or demand side tricks work as they have historically when they did, due to this amount of guaranteed, loaned, and spent money associated with the government rescue. A favorite old movie of mine is the original flight of the Phoenix where an aircraft is cut and pasted back together and must be started by explosive starter rounds that are limited in number. It would be good to be sure the engine is clear rather than just blowing off stimulus or tax reduction starter rounds to see what happens. Bush had no choice but to let his experts take their best shot, and Obama had little choice except to keep with the program that while not rising, was not sinking like a stone either. Political kneejerks to hang the mess on either Bush or Obama do not strike me as a real digestion of the issue or it's long and still continuing timeline. The pluck and penchant for bold action will allow Mr. Trump to take a big shot at the problem, I would also hope that our best and brightest are aiming and holding the safety engaged so when he pulls the trigger, he has the best chance possible for hitting the growth target area.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Plantagenet » Mon 08 May 2017, 14:17:12

efarmer wrote:Most people think that the big bank bailout was the $700 billion that the treasury department used to save the banks during the crash in late 2008. But this is a long way from the truth because the bailout is still ongoing. The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out as of 2015 tallies. This is the issue I had in mind questioning if the supply side or demand side tricks work as they have historically when they did, due to this amount of guaranteed, loaned, and spent money associated with the government rescue.


You are 100% right, except that the "supply side tricks" Obama used for the "great recession" were not the ones that were historically used.

Traditional supply side tricks include increased government spending and reductions in taxes to "goose" the private sector. Obama actually INCREASED taxes with his Obamacare law----the stupidity of increasing taxes in the middle of a recession is part of the reason the middle class has suffered so much for the last 8 years and never actually came out of the recession.

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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby efarmer » Mon 08 May 2017, 15:08:41

I agree Obamacare played it's part in hurting growth, the Obama admin deployed the thing in stages and deferred implementation of some parts in what seemed to be active managing it's economic hits to be covered by the growth that was forecast but did not manifest. Likewise a huge tax cut, similar to the bungled Reagan cut in 1981 could be just as damaging or more than Obamacare if the growth doesn't match the financial bet involved and it just drives more national debt for a short sugar high. Always expect and get a good post from you Plant, it beats head butts and mud fights hands down.
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Re: The Laffer Curve Theory -Reagan to Trump era

Unread postby Plantagenet » Mon 08 May 2017, 15:41:23

efarmer wrote:I agree Obamacare played it's part in hurting growth, the Obama admin deployed the thing in stages and deferred implementation of some parts in what seemed to be active managing it's economic hits to be covered by the growth that was forecast but did not manifest. Likewise a huge tax cut, similar to the bungled Reagan cut in 1981 could be just as damaging or more than Obamacare if the growth doesn't match the financial bet involved and it just drives more national debt for a short sugar high. Always expect and get a good post from you Plant, it beats head butts and mud fights hands down.


Great post, efarmer. I always read your interesting comments.

Have a great day!
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