When does the “backward bend” (higher tax rates produce less revenue) on the Laffer Curve begin?

What is the optimal marginal tax rate? 50%?

9/17/2011 8:51:57 AM

Insufficient information to determine. However, I would guess the optimal to be somewhere around 35% (federal top marginal) taking into account all the other taxes present in the wider system.

9/17/2011 10:08:06 AM

Also, correlation =/= causation.

9/17/2011 10:22:44 AM

9/17/2011 11:46:17 AM

so clearly the answer to our budget woes is raising taxes on the rich.

9/17/2011 12:31:34 PM

Quote :

"• And since growth in gross domestic product is the ultimate aim of any economic policy, we’ll include that in the analysis as well. (Note: All data below have been adjusted to account for inflation.) Private investment: After the ‘81 Reagan tax cuts, private nonresidential investment over the next seven years grew at an annual rate of 2.8 percent. After the ‘93 Clinton tax hike, private investment over the next seven years grew annually at 10.2 percent. After the 2001 Bush tax cut, private investment grew annually at 2.7 percent. (Data source: CAP/EPI study, Sept. 2008,, based on Bureau of Economic Analysis data.) Federal revenue: From 1981-1993, federal revenue increased by 20.7 percent over 12 years. From 1993-2001, federal revenue grew by 46.6 percent over 8 years. From 2001-2009, federal revenue decreased by 13.9 percent. (Even if you don’t include the deep recession year of 2009 — you might say we’re invoking the mercy rule — revenue increased just 3.3 percent over the eight years of Bush’s presidency. (Source: OMB Historical Table 1.2) GDP growth From 1981-1993, real GDP grew by an annual average of 2.97 percent. From 1993-2001, real GDP grew by an annual average of 3.56 percent. From 2001-2009, real GDP grew by an annual average of 1.56 percent. (Source: U.S. Bureau of Economic Analysis) In conclusion, in all three categories central to the claim of supply-side proponents, the economy performed significantly better in the wake of tax increases than it did in the wake of major tax cuts. "

http://blogs.ajc.com/jay-bookman-blog/2010/09/15/the-laffer-curve-in-real-life/

9/17/2011 1:14:11 PM

yes, when you cherry pick statistics and ignore other pertinent facts, you can make anything seem like anything you want

[Edited on September 17, 2011 at 1:24 PM. Reason : ]

9/17/2011 1:24:34 PM

^^ As Deficits Are Future Taxes, the Reagan tax cuts which were associated with a growth in spending constituted a net increase in taxes (most of which were in the future). The same situation applies to Bush 2. However, the Clinton tax hikes were associated with a reduction in spending, constituting a net decrease in taxes (again, most of which were in the future).

So the question is which policy engendered economic growth? As we have no theory as to why raising taxes and holding everything else constant would produce economic growth, we are left with the credible theory that Deficits Are Future Taxes and running deficits harms the economy equally as much as taxes do. Given this theory, a tax increase holding spending constant should have no negative impact upon the economy, as the immediate-term higher taxes are offset by the expectation of lower future taxes.

If we accept this theory, then it doesn't matter if we raise taxes. All that matters is that we reduce spending.

9/17/2011 1:39:21 PM

A typical estimate places the revenue-maximizing rate at 70%, based on an estimate of 0.4 for elasticity of taxable income with respect to after-tax share: http://www.dictionaryofeconomics.com/article?id=pde2008_L000015

Of course you probably wouldn't want such a high flat rate, and more generally you might be concerned about the substantial deadweight losses that would occur: https://secure.wikimedia.org/wikipedia/en/wiki/Laffer_curve#Research.2C_quantification_and_empirical_data

I'll try to derive the 70% estimate from the 0.4 estimate...
AFAIK by "after-tax share" a simplified model (with a single flat tax on income) means 1-r where r is the tax rate; then if Y is income, elasticity of income with respect to after-tax share (derivative divided by ratio) is
dY/d(1-r)/(Y/(1-r))=0.4
so simplifying it a bit, dY/Y=-0.4dr/(1-r), so ln(Y)=C+0.4ln(1-r), so Y=A(1-r)^0.4, where A is the level of income that would be reached with no taxation; then the total tax collected would be rY so the derivative with respect to r is Y+rY'=A((1-r)^0.4-0.4r/(1-r)^0.6)=0 when (1-r)^0.4=0.4r/(1-r)^0.6, so 1-r=0.4r, so 1=1.4r, so r=0.714..., so the optimal rate to one significant figure is 70%.

More generally the elasticity of income to after-tax share has been seen in various studies to range from near-zero to greater than 1; if the elasticity is x then the total tax collected would be rY=Ar(1-r)^x, going through the steps again the optimal rate is seen as 1/(1+x), and an optimal rate of 35% would correspond to an outlandishly high elasticity of about 1.857

9/18/2011 1:03:30 AM

9/18/2011 5:39:49 PM

9/18/2011 10:23:24 PM

How about we just look at real-world data




Oh yeah, that's right, the Laffer curve is a completely worthless, bullshit concept unless you're talking about 0% or 100% tax rates.

9/19/2011 9:50:10 AM

^ That trendline does not appear to fit the data at all, beyond Norway and UAE.

9/19/2011 10:06:26 AM

Exactly, no trend line would, that's the point. The trend line there is basically facetious.

9/19/2011 10:20:00 AM

The point is that there's 50 variables beyond tax rate that affect GDP and tax revenue, and any "Laffer Curve" overlaid on the aggregate data will be lucky to hit 2, maybe 3 countries tops.

It's almost as though the Laffer curve is a crude oversimplification unfit for intelligent discussion.

9/19/2011 10:22:18 AM

Quote :

"It's almost as though the Laffer curve is a crude oversimplification unfit for intelligent discussion."

Such might describe every statement ever made pursuant to tax policy.

9/19/2011 11:25:02 AM

I'm fine with raising taxes on the top earners, as long as we also close the loopholes that allowed over half of people who filed to pay $0 in income tax or actually received more back than they paid.

Everyone should have some skin in the game.

9/19/2011 11:35:17 AM

Just a quick comment...

looking at either income tax rates (of any kind) or corporate taxes alone and suggesting that an empirical correlation has any relationship to a predicted economic phenomena is plain wrong. That's because taxes include multiple things:

- Corporate tax
- Capital gains tax
- Income tax
- Sales tax, property tax, fee-based operations
- Direct government intervention in markets

Taxes on investments, like in corporations, need to be taken as the total tax efficiency of an individual investing and collecting his/her return. Corporate tax rates don't do this. Corporate tax rates combined with capital gains tax comes closer, but still does not do this.

Furthermore, graphs showing a falling top marginal income tax rate at the same time as increasing government revenue as % of GDP should have made everyone be like O_o in the first place.

9/19/2011 12:04:33 PM

Quote :

"Everyone should have some skin in the game."

Everybody already does have skin in the game. It just so happens that some people have nothing else after they've lost the shirt off their back. If somebody is so fucking poor they can't make enough money to pay income tax, are you really trying to tell me they don't have skin in the game? They're living in poverty, the system is clearly working against them. Just because they aren't getting shafted another inch by taxes on what little they make doesn't mean they're gaming the system.

I mean really, how many people below the poverty line do you think would rather continue to live like that than make more money and pay some of it back in income taxes? There's this bizarre fantasy on the right that living on welfare is somehow luxurious or comfortable. Go to the welfare lines and ask around and see if you can find 1 person who would prefer where they are to having a decent-paying job that puts them above the poverty threshold.

[Edited on September 19, 2011 at 1:07 PM. Reason : .]

9/19/2011 1:06:22 PM

More than 50% of filers paid nothing. I'm not sure what the current percent of americans living below the poverty line is, but I'm pretty sure it's a lot less than 50%.

I understand what you're saying, and if you have no income you're already paying zero and it'll stay that way. No income to tax should equal zero income tax. However, even if you made 12,000 dollars last year, you should pay something in taxes. I don't care if it's $1. You should have to put something into the pot. $.02 per week in taxes isn't asking too much is it?

9/19/2011 1:57:15 PM

So you're more interested in a token contribution than policy that actually might make a difference in...anything? Sounds like you're more motivated by pettiness than anything else. Does the sales and state taxes (both of which are typically regressive) they pay mean nothing to you?


[Edited on September 19, 2011 at 2:14 PM. Reason : .]

9/19/2011 2:13:41 PM

Unless I'm mistaken, don't those people who pay "nothing" in fact deal with payroll, medicare, and social security taxes? (To say nothing of the sales taxes already mentioned)

In response to the OP, I've had a couple of professors suggest that the curve peaks around 55-60%, though they did not go into any great detail to back up that claim.

9/19/2011 2:20:07 PM

Quote :

"I mean really, how many people below the poverty line"

There is a difference between having an income below the poverty line and declared income below the poverty line. According to Warren Buffet's tax return, he earns something like $60k a year in taxable income yet manages to afford his own jet.

[Edited on September 19, 2011 at 4:36 PM. Reason : .,.]

9/19/2011 4:36:20 PM

Quote :

"More than 50% of filers paid nothing. I'm not sure what the current percent of americans living below the poverty line is, but I'm pretty sure it's a lot less than 50%. I understand what you're saying, and if you have no income you're already paying zero and it'll stay that way. No income to tax should equal zero income tax. However, even if you made 12,000 dollars last year, you should pay something in taxes. I don't care if it's $1. You should have to put something into the pot. $.02 per week in taxes isn't asking too much is it?"

Holy ignorance Batman!

Do you know how much of that 50% is comprised of retirees? Consider how these statements collide into a massive logical fallacy:

- More than 50% of filers paid nothing
- I'm not sure what the current percent of americans living below the poverty line is, but I'm pretty sure it's a lot less than 50%
- even if you made 12,000 dollars last year, you should pay something in taxes

Did you feel the wind from the millions of non-working Americans flying over your head? How 'bout them unemployed? Should they be paying taxes on their unemployment checks coming from the government? Same case for the retirees and those fully living off welfare. The idea of a low-income family working and not paying taxes is a boggy man that is completely divorced from reality.

If someone is living off their savings and income from a government program THEN WHY THE F IS INCOME TAX RELEVANT? They have "skin in the game" - far more skin than those making income from working because decisions by the federal government affect the payouts they get. Asking for "income" tax from someone living off social security is an accounting game. Asking for "income" tax from someone living off investment income is also an accounting game because they already pay capital gains.

Maybe you should shift your outrage to the fact that so many filers don't work in the first place.

[Edited on September 19, 2011 at 4:41 PM. Reason : ]

9/19/2011 4:41:00 PM

Quote :

"Maybe you should shift your outrage to the fact that so many filers don't work in the first place. "

I was always under the assumption that if you didn't make enough (any) income you don't have to file income taxes?

9/19/2011 7:54:36 PM

I would love to see some specific examples of different types of people who don't pay income tax, and an average profile.

I know there are a lot of deductions and credits out there, but it really blows my mind that 50% of filers don't owe anything.

9/19/2011 8:04:25 PM

Well, to be honest, that 50% number that is being cited is because of all the tax holidays and rebates the government has given in response to the recession. Before the bottom fell out it was around 25-30%, the same number it has been going back many decades.

I've posted that stat before but people cling to their talking points like guns and religion.

[Edited on September 19, 2011 at 8:07 PM. Reason : .]

9/19/2011 8:07:44 PM

It's still an insanely high number, whether you talk about the 50% with all the bonus stuff, or the 25% without all of it. Either way, that's a lot, and I'd love to see some specific scenarios under either condition.

9/19/2011 8:12:52 PM

^50% don't pay federal income tax -- As GrumpyGOP said, they pay payroll, medicare, social security taxes, sales, property, etc.

Before you go into full bitch vagina mode, why don't you come up with the real statistic on total taxes paid by people?

9/20/2011 1:07:37 AM

I'm not close to bitching. I'm curious how it works and what it looks like, because that is a really, really high number. That's not an objection, though it may sound like it. It's just a statement of amazement.

It seems like kids make a really big difference. With three kids, that's a direct $3k refundable tax credit, plus $10k-ish in deductions from taxable income. With those kids, you're automatically over the standard deduction, and you capture any other deductions for all they are worth. I don't have any problem with that.

http://www.smartmoney.com/taxes/income/more-people-opt-out-of-federal-taxes/

Here is an example they give:

Quote :

"Say you re married with wage income of $50,250 and two under-age-17 kids. After claiming the standard deduction and four personal exemption deductions, your 2010 tax bill is $2,800. However, it s zeroed out by the child tax credit ($2,000) and the Making Work Pay credit ($800). So you owe nothing to the feds."

Without the Making Work Pay credit, you could still get the total bill nearly to zero with other tax credits or other major deductions.

9/20/2011 1:38:55 AM

I think that pretty much every living adult in the US has to file, although it could be jointly filing.

My mind stretches to imagine what the tax return of someone with no assets and income from only SS would look like. Now, they could still get credits of some types.

I mean, they would have to not have a bank account. I don't even know how they would cash the checks from the government. If you have a bank account, you have something taxable, although it can still be washed out from deductions. And even if you don't have a bank account you still have to file.

9/20/2011 1:47:36 AM

It might be an interesting question to ask how many members of the, "50% of people don't pay taxes!" crowd actually know somebody who doesn't pay taxes, and what the circumstances of those acquaintances are.

9/20/2011 2:19:22 AM

I think the majority of them would know somebody who doesn't pay income tax, but they don't know that those people don't pay income taxes.

As I'm running the numbers in my head, I'm thinking I know quite a few, when just a few hours ago, I would've said I probably didn't know any.

Even the people who pay no net income tax may not know it themselves. A lot of folks have a very hazy understanding of their own finances, and they just know that income tax gets taken out of their checks. Therefore, they think they pay taxes. And they're happy to get a big refund. But how many actually know how much was taken out of their checks vs. how much their refund was? My guess is quite a few don't.

Shoot, if you know someone with an income at $50k with two kids who owns a home, they probably don't have any net income tax liability. And if they do, it's really small. At least that's the way it's appearing to me now. Even above that income, it's easily possible that someone may not pay in.

[Edited on September 20, 2011 at 2:34 AM. Reason : a]

9/20/2011 2:32:48 AM

Exactly. The middle class pays very little of the actual tax burden. And what's even more amazing is that there are plenty of people who receive a refund greater than the amount if taxes paid throughout the year. When you actually start looking into it it's pretty amazing.

9/20/2011 2:57:56 AM

Quote :

"The middle class pays very little of the actual tax burden."

We still pay sales taxes which eventually become revenue for the government. And we've managed to continue doing that because crony capitalists got the government to create fake money
for us to give to them (by purchasing their products) and when got to where we couldn't pay the cronies their money back, they got the government to print more of it to give to them and are sticking us with the bill.

But hey, you keep on with your crusade against the middle class.

9/20/2011 7:11:54 AM

Quote :

"Shoot, if you know someone with an income at $50k with two kids who owns a home, they probably don't have any net income tax liability. And if they do, it's really small. At least that's the way it's appearing to me now. Even above that income, it's easily possible that someone may not pay in."

From what? Mortgage payments? That seems an awful stretch.

9/20/2011 7:58:01 AM

Quote :

"From what? Mortgage payments? That seems an awful stretch."

Something called "The First-Time Home-buyers Tax Credit" which was able to eliminate the tax bill of quite a few Americans that took advantage of it ($7500 off the final tab). Deductions reduce your taxable income. Credits reduce your final tax bill. The stimulus was chock full of ridiculous tax credits that a clever American could take all the way to the bank. Lots of people purchased golf-carts basically for free because the tax-credit for buying an electric vehicle matched the price of the cart.

9/20/2011 10:29:48 AM

Quote :

"But hey, you keep on with your crusade against the middle class."

Sigh. Look, the tax code is full of tax breaks for the average american family ($47k in salary, 2 kids, mortgage) from mortgage interest deductions to child credits and many, many more that allows them to avoid paying a tax that funds the majority of the governments programs and departments. What's outrageous is that it has been allowed to get to the point that the majority has literally voted themselves into a free ride on the dime of the minority. And that, frankly, is morally repugnant and exactly what representative democracy is supposed to prevent.

Mob rule is terrible idea whether you're talking about the tax code or you're talking about an amendment banning same sex marriage. Just because most people want it doesn't make it right.

9/20/2011 1:03:47 PM

Quote :

"From what? Mortgage payments? That seems an awful stretch."

Of course, I'm trusting that the smartmoney article did everything correctly. But just with the child tax credit, a $50k income with two kids would have roughly $800 in income tax to pay.

That's already pretty low, and doesn't consider the deductions for mortgage interest, student loan interest, charitable giving, 401(k) contributions, or refundable tax credits for things like child care expenses or the EITC (which these people would be eligible for).

It's actually pretty easy to see a married household with 2 kids and $50k income having a negative income tax burden, without any funny business going on.

9/20/2011 1:10:16 PM

The math isn't difficult, it's just that most people don't really bother to check. It's much easier to just scream for more taxes on "the rich" and more tax breaks for the "middle class." News flash, most of America, you already aren't paying income tax! How much less than zero would you like to pay? What's even more fucked is that you can actually get back more than you pay!

So, sorry about my "crusade against the middle class."

9/20/2011 1:19:50 PM

Do you understand the difference between taxes paid and income taxes paid?

Just a question

9/20/2011 1:38:31 PM

Yes. Do you understand that this thread is about the income tax and this entire time I've been specifically referencing income tax?

9/20/2011 1:40:53 PM

Really? I thought it was about the Laffer curve, which really applies to all types of taxation.

Silly me, never mind then.

9/20/2011 2:02:27 PM

Doesn't Ron Paul argue for abolishing the income tax, noting that it only makes like 1/3 of government's income?

9/20/2011 2:14:47 PM

9/20/2011 2:36:08 PM

Job growth in the long run (such as 1950 to 2010) is dictated by working age population growth. As such, all this^ shows is that the working age population grew faster in the past when income tax rates were high.

9/20/2011 2:40:33 PM

Every good republican knows that the only thing that creates jobs are tax cuts.

9/20/2011 2:53:17 PM

^^^^He advocated that in '07, but I haven't heard him say it this year. Maybe he has, but I haven't heard it.

Given the recession and declining revenues, we would now have to go back to a mid-1980s budget (in real terms) to have no income tax and no deficit.

In 2007, you could claim only to need to go back to Clinton budgets to have no income tax and no deficit.

[Edited on September 20, 2011 at 2:56 PM. Reason : s]

9/20/2011 2:54:39 PM

I'm interested to see the experiment where the federal government takes in 30% more than it spends (by taxing the rich) and pays down the debt with that.

Really, pigs would fly. We might even start running a net export surplus to China in that case.

9/20/2011 3:57:22 PM

Quote :

"And what's even more amazing is that there are plenty of people who receive a refund greater than the amount if taxes paid throughout the year. When you actually start looking into it it's pretty amazing."

indeed it is: https://secure.wikimedia.org/wikipedia/en/wiki/Earned_Income_Tax_Credit

9/20/2011 5:14:31 PM