Day 1228 – Laffer versus The World

Day 1228 – Laffer versus The World

Saturday May 30, 2020 

155 Days until the election on November 3^rd

235 Days until the Inauguration on January 20, 2021

My conservative friend has asked me what I don’t like about the Laffer Curve and what I would do differently. Let me respond. This will take the better part of several screeds. I will break it up into several sections. I have been asked to state my opinions, not those of others, and I have been told I don’t back up what I say with any sources. So hang on, here goes.

First let’s deal with some sources and background. Let me suggest three books: 

The Fifth Element – Michael Lewis,

Democracy in Chains – Barbra MacLean,

Lost to The West – Lars Brownsworth.

Lewis lays out what he found various people who had worked in positions of responsibility in our government worried about and what they did to make the government better.

MacLean is a historian, who before this book, wrote on the Klan – based on boxes of material she found in a basement of a former Klan person high up in the organization. This book, Democracy Unchained, talks about her discovery of papers of an economist who was supported by the Koch brothers to the tune of hundreds of thousands of dollars to try and subvert our democracy. In other words, he was being dishonest about his intentions from the get-go because he knew they wouldn’t be popular. What he did through various high sounding logical and patriotic arguments was to make the case that the rich should keep their money and that politicians couldn’t be trusted so the only way to keep power would be to change the constitution of the political entity. Something he was able to achieve in Chile. MacLean also points out that another tenant of his thinking was that the best place to hold power was at the state level because people don’t really pay attention to what a state does and one can use it to influence the Federal government and suppress the local governments.

Lost to The West describes the fall of Constantinople to the Turks and the history that led up to that event. It documents how time and again the rich became powerful and how they then subverted the laws to their advantage. In this case the rich and powerful were the landowners and the church. Every time they took control of the government they changes the tax laws so the big land owners and the church didn’t have to pay taxes. Every time the people who got squeezed. They were the middle class and the poor. The middle class became poor, and the poor took to the hills – literally!

Aside from those resources I would say having a foundational understanding of economics is essential, college level, two semesters: macro and micro. Economists come in many flavors and theories. The dominant economists over the last one hundred years are: Keynes, Friedman, and Samuleson. There are the Austrians whom Ran and Ron Paul like. There is the guy in Democracy Unchained, all of whom whose names I forget at this moment. There are also lots of people who pretend to be economists, but are really pushing a political agenda. More on them later, as we encounter them. The most respected, mainstream, Nobel winning economist of our day is Paul Krugman. His work is often sited and remains pivotal to understanding what is going on in the world economically. Because he writes for The New York Times (and maybe other reasons) right wing conservatives tend to not like him. He also refuses to advance their self serving agenda. If you want more conservative mainstream go with Larry Summers. He has the ability to piss off just about anyone, although he makes some valid points. Finally, if you want to understand how recent policies were enacted and how they affected you and me and the nation I would say Austan Goolsbee would be the guy.

Okay, ready? Have you read Paul’s 27 books? Good let’s go. 

Oh, one more thing – economists like computer geeks tend to keep switching terms and meanings, redefining things and the like, all to keep us confused or perhaps to make a slightly different twist on the same argument. It’s the way technology is by the high priests who practice it. 

Let’s deal with Laffer and call it a screed. Btw I thought it was Lafler – with a “L” after the “F” – ha, I was wrong. That is the first time I’ve been wrong, btw, if you are keeping score.

Okay, Laffer was Reagan’s guy via David Stockman. His well known Laffer Curve was the idea that taxes could be between 0% and 100% and that depending on the amount of taxation the gross revenue of the – in this case the nation ie the Federal government – would vary and that at a certain percentage was the perfect spot to maximize the government revenue. Sounds good, right? Well, it is – in theory. 

However, as economists point out there are assumptions made here that in theory sound good but in practice aren’t true. Mainly, that revenue is continuous as is the taxation function. Neither is true. Ah, the fancy terms! What that means is that they were assuming that by lowering the tax rate from what it was to another number the government would make more money because this would be incentive to work more, to produce more, and thus there would be more to tax and hence the government would make more in taxes. 

That idea, that lowering the tax rate would allow the government to make more revenue due to the fact that the revenue base would expand is true to a limited degree, but it is not a giant faucet that the more you turn it the large it gets. That is to say it works to a limited degree, within certain bounds, and outside of those bounds it goes in the toilet. What are those bounds? Ah, Grasshopper, we the all knowing political economists (read Stockman and the like) are/were still working on that.

At this point the question is posed, “Do you support a 90% tax rate?” (Like what was true when Eisenhower was in office?) And “Do think it’s a good idea to limit how much money a person can make?” A cruel twist on the phenomena actually being described. I’ll address both questions here, below.

Ah, wait. You want answers? Screw all those words? Okay, “Yes” and “No.” Happy?  Shall we move on, or would you like some background? Yes? No? Maybe? Welcome to economics 301, the advanced course.

Laffer and his idea has been used throughout the last forty or fifty years to reduce the tax rate on the wealthy. However, the reason for so doing was to increase the revenue flowing to the Federal government. To Reagan’s surprise and Stockman’s chagrin that didn’t happen. In other words, in the 1980s adjusting the tax rate on the very wealthy didn’t have the desired effect. The other part of this economic argument was that by reducing the tax rate on the rich the money would “trickle down” to the rest of us and the economy would grow. That didn’t happen either.

The rich became richer, the Federal government had to borrow more (Reagan did it by taking the money from Social Security. The highway fund had already been looted by previous Republican administrations.) and the middle class and the poor got taxed more. In other words, it wasn’t “trickle-down” but “pissed-on.” 

But the Republicans being the good economic scientists they are thought that they hadn’t tried hard enough, and like Peter Pan restoring life to Tinkerbell, they tried real real hard. Papa Bush tried it. His son W tried it. Paul Ryan tried it. Trump tried it. Funny thing, in every case the rich got richer and the Federal government had to borrow more. We now have the largest gap in wealth between rich and everyone else that we have ever had.

Let’s move on to the idea of “Would I tax people at 90%?” and “Would you limit how much a person can make?” The answers are: “Yes, No, Maybe, and That depends” – just to be clear.

The 90% tax is referring to the idea of what is known as a “Progressive Tax.” That is to say the idea is that the more you make, the more the high end of what you make would get taxed. So am I for taxing everything you make at 90%? No. Am I for taxing some high-end portion of what you make at 90%? That depends.

What a stepped tax system has demonstrated, and you can try this at home right now, is that if you get taxed more on a higher amount of earned income you will try to avoid that higher amount of income. This is the case for a progressive tax.

Let’s try it with an example. Say people who make $25,000 or less get taxed 1%,

$25-50,000 2%,

50-100 – 3%

100-200 – 4%

200-500 – 5%

500 and above 70%.

So if you earned a million dollars the last $500K would be taxed at 70% and the rest would be taxed in declining increments. What would you do, or try to do?

Think about it, what would you do.

I’ll tell you what I’d do. I’d do everything I could to avoid that 70% tax rate.

Hum, how could you do that?

Let’s say you own a business, you have a lot of people working for you, and you have a lot of equipment too. Let’s say it’s a restaurant. You know the whole staff, been with you for years, you like them all. They are like family. 

You are set to make a cool million in taxable income. You can take that last $500K and give $350 of it to the government or you could give everyone a big fat Christmas bonus, buy that new super-duper refrigerator for the place and upgrade the kitchen ovens.

What would you do? Do you really need the $150K that the $500K would net you or is the kitchen upgrade and the bonuses a better way to go? You decide.

What happened in this country when the high end rate was high, the rich folks invested in their companies and maybe even in their people. Anything to avoid the high end tax rate. 

So, would I tax at 90%? I think within a narrow band I would let Mr. Laffer and his curve help me.

Meanwhile, in the news president Trump quoted a Ku Klux Klan racist quote in regard to the black man killed by police in Minneapolis. He said he didn’t know where the quote came from, but regardless, it was true. He also said that about his quote of Mussolini during the campaign. His sons have said it about the racist homophobic stuff they have posted. The only person in that group who seems not to deny where he got it is Stephen Miller. He’s a dyed to the bone friggin’ racist. Of course, his allusions to racist stuff is the kind of thing that can’t be ascribed to anything else.

More econ in the subsequent screeds.

155 Days until the election on November 3^rd

235 Days until the Inauguration on January 20, 2021

PS Apple? Anyone?