I'm currently reading Wanniski's magnum opus-it was where he systematized his supply side theory most thoroughly. I'm a little less than a third of the way through, but I must say that up until now I haven't read anything that strikes me as obviously wrong. To be sure this hardly means that I'm endorsing it as being all right-the Truth itself, just that it doesn't seem obviously wrong and much of it seems thought provoking and maybe a good deal of it is right.
Wanniski's title is certainly ambitious as he promises to lay out for us the way the very world works. Some might find it too ambitious but not me. I like ambitious and anyone who can educate me about not just small things but how the world itself works I can only be grateful to.
It's certainly very interesting stuff up to where I am and I at least find it thought provoking. However, I'm now in chapter 6 and the real punchline-supply side economics is coming into better focus. It is here that he finally introduces the Laffer Curve. This was during the 70s and the Laffer Curve at that time was very new.
The basic idea is that to achieve any particular level of tax revenue there are two tax rates that can get you there. The extreme, limiting example is where you would get the same exact revenue-zero in either case-whether the government sets the tax rate at 0% or 100%. In the first case, obviously there would be no revenue. However, you also wouldn't be able to fund any of the government.
While-at least in the short term-this would raise production to its highest possible level, limited only by the desire of workers for leisure. Of course, this would also starve and stifle the government. So there would be anarchy-and in time this would weaken the infrastructure of the money economy-Wanniski has two kinds of economies: the money economy and the barter economy. For more see pg. 98 in Wanniski.
http://www.amazon.com/Way-World-Works-Jude-Wanniski/dp/0895263440/ref=sr_1_1?s=books&ie=UTF8&qid=1374186013&sr=1-1&keywords=jude+wanniski
Lowering taxes increases output and can even raise revenue. This is what makes Laffer's Curve notorious-the idea that you can raise revenue while lowering rates. However, the point is that just because lowering the tax rate can raise revenue according to the LC doesn't mean that lowering tax rates always and necessarily will do so. i
The point is that there is an ideal level of taxation that the electorate 'wants to be taxed at.' It isn't always, necessarily lower. Sometimes it will actually be for a higher rate of taxation. This ideal spot for the tax code is where production and revenue are maximized. Once at this spot, lowering taxes further will not increase production or revenue but the reverse.
Based on what you've heard from most conservative politicians over the last 30 plus years since the 'Reagan Revolution' the idea that the electorate can actually want a higher rate of taxation sounds like the most unbelievable thing in the world. Yet, here is Wanniski-I think it's safe to say that he and Laffer are the two godfathers of the Supply-Side revolution-saying that the electorate can actually desire higher taxes-and that this is preferrable for the economy.
Here he is on page 98 talking about the ideal tax rate the electorate wants to be taxed at-here he refers to it as point E on the Laffer Curve. There are only two points on the Laffer Curve-0% and 100%. E on the other hand is a variable number.
"At points B and D, the electorate desires more government goods and services and wishes to pay the higher rates producing the revenues consistent with E."
He then goes on to say that at points A and C the electorate wants more private goods and services in the money economy and wants the government to lower taxes consistent with revenues at E.
Again, just to emphasize: the E curve-the ideal tax rate for the electorate-varies. During times of war it can actually be very high. During the German invasion of the USSR in WWII, the tax rate in the city of Leningrad during the siege was effectively 100%. Yet this was point E for the citizens of the city as they wanted to hold off the Nazi army.
This understanding of the Laffer Curve suggests in theory at least, it's hardly ideological and clearly can in certain circumstances justify a high-even very high to the point of being truly confiscatory-tax rate.
Yet this is not the view most people have of Supply Siders. Supply Side economics for the most part is associated with the Reagan Revolution and the Republican party since that time and there certainly hasn't been t time since Reagan that you've heard Republicans saying that it's a good time to raise taxes.
In theory, you could make the case that perhaps taxes were too high in 1980 and that the electorate did want the tax burden considerably lowered-after all it's what they voted for. However, in the last few years judging by how people vote-and in this book, Wanniski seems to believe that the electorate isn't fooled or duped but rather votes the right way. His theory more ore less seems to be a variation of Hegel.
For Hegel, History tends to make something that happened right. If it did happen, it was supposed to happen, and it is right that it did happen. Wanniski believes that election outcomes are always right-as long is there isn't gross fraud-which problematizes George W. Bush, but I digress.
Yet, despite this seeming pragmatism and logic of the Laffer Curve, it's Father seems to 'forget' that E sometimes does require higher taxes. He certainly doesn't seem to remember that here.
http://online.wsj.com/article/SB10000872396390444873204577537244225685010.html?mod=WSJ_Opinion_LEADTop
http://watchdogwire.com/blog/2012/10/10/video-renowned-economist-arthur-laffer-teaches-obama-a-math-lesson/
http://www.marketplace.org/topics/wealth-poverty/arthur-laffer-income-inequality-raising-taxes
http://marketmonetarist.files.wordpress.com/2012/08/bad-math-in-the-wsj2.pdf
http://marketmonetarist.com/tag/arthur-laffer/
Yes, in the last link you have Lars Christensen calling out Laffer for an 'embarrassing' argument against fiscal stimulus.
So, at this point in the book-I'm must on pg 105 admittedly-the LC strikes me has having some intuitive logic-of course, intuition can badly lead us astray. However, what gives me pause is the counterintutive way that it's Father is using it. Clearly with the LC, there are times when E calls for higher tax rates. Yet, this never seems to happen for Laffer and certainly never for his Republican followers.
Wanniski's title is certainly ambitious as he promises to lay out for us the way the very world works. Some might find it too ambitious but not me. I like ambitious and anyone who can educate me about not just small things but how the world itself works I can only be grateful to.
It's certainly very interesting stuff up to where I am and I at least find it thought provoking. However, I'm now in chapter 6 and the real punchline-supply side economics is coming into better focus. It is here that he finally introduces the Laffer Curve. This was during the 70s and the Laffer Curve at that time was very new.
The basic idea is that to achieve any particular level of tax revenue there are two tax rates that can get you there. The extreme, limiting example is where you would get the same exact revenue-zero in either case-whether the government sets the tax rate at 0% or 100%. In the first case, obviously there would be no revenue. However, you also wouldn't be able to fund any of the government.
While-at least in the short term-this would raise production to its highest possible level, limited only by the desire of workers for leisure. Of course, this would also starve and stifle the government. So there would be anarchy-and in time this would weaken the infrastructure of the money economy-Wanniski has two kinds of economies: the money economy and the barter economy. For more see pg. 98 in Wanniski.
http://www.amazon.com/Way-World-Works-Jude-Wanniski/dp/0895263440/ref=sr_1_1?s=books&ie=UTF8&qid=1374186013&sr=1-1&keywords=jude+wanniski
Lowering taxes increases output and can even raise revenue. This is what makes Laffer's Curve notorious-the idea that you can raise revenue while lowering rates. However, the point is that just because lowering the tax rate can raise revenue according to the LC doesn't mean that lowering tax rates always and necessarily will do so. i
The point is that there is an ideal level of taxation that the electorate 'wants to be taxed at.' It isn't always, necessarily lower. Sometimes it will actually be for a higher rate of taxation. This ideal spot for the tax code is where production and revenue are maximized. Once at this spot, lowering taxes further will not increase production or revenue but the reverse.
Based on what you've heard from most conservative politicians over the last 30 plus years since the 'Reagan Revolution' the idea that the electorate can actually want a higher rate of taxation sounds like the most unbelievable thing in the world. Yet, here is Wanniski-I think it's safe to say that he and Laffer are the two godfathers of the Supply-Side revolution-saying that the electorate can actually desire higher taxes-and that this is preferrable for the economy.
Here he is on page 98 talking about the ideal tax rate the electorate wants to be taxed at-here he refers to it as point E on the Laffer Curve. There are only two points on the Laffer Curve-0% and 100%. E on the other hand is a variable number.
"At points B and D, the electorate desires more government goods and services and wishes to pay the higher rates producing the revenues consistent with E."
He then goes on to say that at points A and C the electorate wants more private goods and services in the money economy and wants the government to lower taxes consistent with revenues at E.
Again, just to emphasize: the E curve-the ideal tax rate for the electorate-varies. During times of war it can actually be very high. During the German invasion of the USSR in WWII, the tax rate in the city of Leningrad during the siege was effectively 100%. Yet this was point E for the citizens of the city as they wanted to hold off the Nazi army.
This understanding of the Laffer Curve suggests in theory at least, it's hardly ideological and clearly can in certain circumstances justify a high-even very high to the point of being truly confiscatory-tax rate.
Yet this is not the view most people have of Supply Siders. Supply Side economics for the most part is associated with the Reagan Revolution and the Republican party since that time and there certainly hasn't been t time since Reagan that you've heard Republicans saying that it's a good time to raise taxes.
In theory, you could make the case that perhaps taxes were too high in 1980 and that the electorate did want the tax burden considerably lowered-after all it's what they voted for. However, in the last few years judging by how people vote-and in this book, Wanniski seems to believe that the electorate isn't fooled or duped but rather votes the right way. His theory more ore less seems to be a variation of Hegel.
For Hegel, History tends to make something that happened right. If it did happen, it was supposed to happen, and it is right that it did happen. Wanniski believes that election outcomes are always right-as long is there isn't gross fraud-which problematizes George W. Bush, but I digress.
Yet, despite this seeming pragmatism and logic of the Laffer Curve, it's Father seems to 'forget' that E sometimes does require higher taxes. He certainly doesn't seem to remember that here.
http://online.wsj.com/article/SB10000872396390444873204577537244225685010.html?mod=WSJ_Opinion_LEADTop
http://watchdogwire.com/blog/2012/10/10/video-renowned-economist-arthur-laffer-teaches-obama-a-math-lesson/
http://www.marketplace.org/topics/wealth-poverty/arthur-laffer-income-inequality-raising-taxes
http://marketmonetarist.files.wordpress.com/2012/08/bad-math-in-the-wsj2.pdf
http://marketmonetarist.com/tag/arthur-laffer/
Yes, in the last link you have Lars Christensen calling out Laffer for an 'embarrassing' argument against fiscal stimulus.
So, at this point in the book-I'm must on pg 105 admittedly-the LC strikes me has having some intuitive logic-of course, intuition can badly lead us astray. However, what gives me pause is the counterintutive way that it's Father is using it. Clearly with the LC, there are times when E calls for higher tax rates. Yet, this never seems to happen for Laffer and certainly never for his Republican followers.
The Laffer Curve isn't new, it's just the Law of Diminishing Returns applied to taxation.
ReplyDeleteI understand it's not new. Still as it's an idea that many believe in including policymakers-particulalry Republican policymakers-I thought it's best to understand it as well as possible.
ReplyDeleteStill as I noted above, it's interesting that the ideal tax rate-E-varies but it's way above zero. I don't see many Republicans considering that part of it.
There is a point according to LC where further tax cuts are not beneficial and not desired by the electorate. So while Laffer hates Obama and opposed his tax hikes on those making more than $400,000-you could make the LC argument that the electorate is at the opposite of where it was in 1980. Then the E tax rate was much lower than the current rate at the time. Now, arguably E is considerably higher.
In theory then the LC is about more than just categorical opposition to all taxes at any and all times. Yet when you look at Laffer that's pretty much what you get. So he seems to ignore the implications of his own Curve.
I've often thought the same thing about the Laffer Curve. The way it's used now is mostly in a super simplified context: "Reducing taxing brings in more revenue"... as if this was one of Newton's laws of motion. Using that concept then negative taxes should bring in even more revenue!
ReplyDeleteActually phantom curves in general in economics are something I'm becoming more and more wary of. Is there REALLY a supply curve or a demand curve?
I think economics is especially prone to creating abstractions to try to help explain something, but then putting too much stock in these abstractions when extrapolating or interpolating to some new concept. Adding fidelity to an already sketchy model is probably fruitless most of the time.
Yes Tom, there's a lot of disagreement on curves in economics.
ReplyDeleteThe "Laugher Curve" (as I call it) is one of the more ridiculous lies ever perpetrated on us. Noting that there might be two zero points at either end of a spectrum does not provide you with enough information to draw some curve between the the two points. Its the classic example of curve fitting, quite a trait amongst these modern conservatives.
ReplyDeleteWanniski was also the father of the "Two Santa Clauses" theory. Have you seen that yet?
Yes Greg, I haven't got to it in the book yet but I'm familiar with it-have written about it in the past if memory serves.
DeleteI just put up a new post about Wanniski's time adivisng the Reagan campaign in 1980. Wanniski had claimed that they wouldn't cut welfare or government spending at all-but that thanks to the higher revenue that camme from lower rates this would make spending a smaller number as a percentage of GDP and many would no longer receive benefits because they'd get better jobs make more money and end up in a higher tax rate.
'Using that concept then negative taxes should bring in even more revenue!'
ReplyDeleteReally, at a zero rate Laffer posits zero revenue, but at a negative rate you'd get positive revenue? This really is a place for high quality logicians to congregate.
However, I notice that you didn't respond to my point-that according the what Wanninski-and the Laffer Curve-there are times when E can only be reached by raising taxes.
DeleteYet, I never hear Laffer or any of all the Republicans who believe in the LC and Supply-Side econ consider that the electorate seems to be indicating that taxes have gotten too low in the last 30 years at least for the rich.
Yes, on that point Tom you made a mistake. The idea is that for any level of revenue there are two rates that can achieve it. One though will lower economic output, one will lower government goods and services.
DeletePoint E is the ideal rate where we would maximize both revenue and output.
Tom, the real lie in his "Reducing taxes bring in more revenue" statement is that he SEEMS concerned with bringing in more revenue, which is patently false. The whole point of supply side ideologues is to starve govt of funds, not increase revenue.
ReplyDeleteI know that. My point is just that point E is supposed to be the ideal rate where we maximize both economic output and tax revenue.
Delete