I’ve written favorably about the pro-growth policies of low-tax states such as Texas, Florida, and Tennessee, while criticizing the anti-growth policies of high-tax states such as Illinois, California, and New York.
Does that mean we should conclude that “red states” are better than “blue states”? In this video for Prager University, Steve Moore says the answer is yes.
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The most persuasive part of the video is the data on people “voting with their feet” against the blue states.
There’s lots of data showing a clear relationship between the tax burden and migration patterns. Presumably for two reasons:
People don’t like being overtaxed and thus move from high-tax states to low-tax states.
More jobs are created in low-tax states, and people move for those employment opportunities.
There’s a debate about whether people also move because they want better weather.
I’m sure that’s somewhat true, but Steve points out in the video that California has the nation’s best climate yet also is losing taxpayers to other states.
Since we’re discussing red states vs blue states, let’s look at some excerpts from a column by Nihal Krishan of the Washington Examiner.
States run by Republican governors on average have economically outperformed states run by Democratic governors in recent months. …Overall, Democratic-run states, particularly those in the Northeast and Midwest, had larger contractions in gross domestic product than Republican-run states in the Plains and the South,according to the latest state GDP data for the second quarter of 2020, released by the Commerce Department on Friday. Of the 20 states with the smallest decrease in state GDP, 13 were run by Republican governors, while the bottom 25 states with the highest decrease in state GDP were predominantly Democratic-run states. …Republican-controlled Utah had the second-lowest unemployment rate in the country in August at 4.1%, and the second-lowest GDP drop, at just over 18% in the second quarter. Nevada, run by Democrats, had the highest unemployment rate, at 13.2%. It was closely followed by Democratic-run Rhode Island, 12.8%, and New York, 12.5%.
Krishan notes that this short-run data is heavily impacted by the coronavirus and the shutdown policies adopted by various states, so it presumably doesn’t tell us much about the overall quality (or lack thereof) of economic policy.
I wrote about some multi-year data last year (before coronavirus was a problem) and found that low-tax states were creating jobs at a significantly faster rate than high-tax states.
But even that data only covered a bit more than three years.
I prefer policy comparisons over a longer period of time since that presumably removes randomness. Indeed, when comparing California, Texas, and Kansasa few years ago, I pointed out how a five-year set of data can yield different results (and presumably less-robust and less-accurate results) than a fifteen-year set of data.
P.S. What would be best is if we had several decades of data that could be matched with rigorous long-run measures of economic freedom in various states – similar to the data I use for my convergence/divergence articles that compare nations. Sadly, we have the former, but don’t have the latter (there are very good measures of economic freedom in the various states today, but we don’t have good historical estimates).
I shared some data last month from the National Association of State Budget Officers to show that Texas lawmakers have been more fiscally responsible than California lawmakers over the past couple of years.
California politicians were more profligate in 2021 when politicians in Washington were sending lots of money to states because of the pandemic.
And California politicians also increased spending faster in 2022 when conditions (sort of) returned to normal.
What may be a surprise, however, is that (relative) frugality in Texas has only existed for a handful of years. Here are some excerpts from a report written for the Texas Public Policy Foundation by Vance Ginn and Daniel Sánchez-Piñol.
Over the last two decades, Texas’ total state biennial budget growth has had two different phases. The first phase had budget growth above the rate of population growth plus inflation for five of the six budgets from 2004–05 to 2014–15. The second phase…had budget growth below this rate… Figure 1 shows the average biennial growth rates for the six state budgets passed before 2015 and for the four since then.The average biennial budget growth rate in the former period was 12% compared with the rate of population growth plus inflation of 7.4%. In the latter period, the average biennial growth rate of the budget was cut by more than half to 5.2%, which was well below the estimated rate of population growth plus inflation of 9.4%. This improved budget picture must be maintained to correct for the excessive budget growth in the earlier period. …there could be a $27 billion GR surplus at the end of the current 2022–23 biennium. …the priority should be to effectively limit or, even better, freeze the state budget. Texas should use most, if not all, of the resulting surplus to reduce…property tax collections…these taxes could be cut substantially by restraining spending and using the surplus to reduce school district M&O property taxes to ultimately eliminate them over time.
The article has this chart, which is a good illustration of the shift to fiscal restraint in Texas.
For all intents and purposes, Texas in 2016 started abiding by fiscal policy’s Golden Rule.
And this means the burden of government is slowly but surely shrinking compared to the private sector.
That approach is paying big dividends. Spending restraint means there is now a big budget surplus, which is enabling a discussion of how to reduce property taxes (Texas has no income tax).
P.S. I shared data back in 2020 looking at the fiscal performance of Texas and Florida compared to New York and California.
Texas has better government policy than California, most notably in areas such as taxation and regulation.
Since people are moving from the Golden State to the Lone Star State, public policy seems to matter more than natural beauty.
Now let’s look at a bunch of evidence to support those three sentences.
We’ll start with an article by Joel Kotkin of Chapman University.
If one were to explore the most blessed places on earth, California, my home for a half century, would surely be up there. …its salubrious climate, spectacular scenery, vast natural resources… President Biden recently suggested that he wants to “make America California again”. Yet…he should consider whether the California model may be better seen as a cautionary tale than a roadmap to a better future… California now suffers the highest cost-adjusted poverty rate in the country, and the widest gap between middle and upper-middle income earners. …the state has slowly morphed into a low wage economy. Over the past decade, 80% of the state’s jobs have paid under the median wage — half of which are paid less than $40,000…minorities do better today outside of California, enjoying far higher adjusted incomes and rates of homeownership in places like Atlanta and Dallas than in San Francisco and Los Angeles. Almost one-third of Hispanics, the state’s largest ethnic group, subsist below the poverty line, compared with 21% outside the state. …progressive…policies have not brought about greater racial harmony, enhanced upward mobility and widely based economic growth.
Next we have some business news from the San Francisco Chronicle.
Business leaders fear tech giant Oracle’s recent announcement that it is leaving the Bay Area for Austin, Texas, will lead to more exits unless some fundamental political and economic changes are made to keep the region attractive and competitive. “This is something that we have been warning people about for several years. California is not business friendly, we should be honest about it,” said Kenneth Rosen, chairman of the UC Berkeley Fisher Center for Real Estate and Urban Economics.Bay Area Council President Jim Wunderman said… “From consulting companies to tax lawyers to bankers and commercial real estate firms, every person I talk with who provides services to big Bay Area corporations are telling me that their clients are strategizing about leaving…” Charles Schwab, McKesson and Hewlett Packard Enterprise have all exited the high-cost, high-tax, high-regulation Bay Area for a less-expensive, less-regulated and business-friendlier political climate. All of them rode off to Texas. …the pace of the departures appears to be increasing. …A recent online survey of 2,325 California residents, taken between Nov. 4 and Nov. 23 by the Public Policy Institute of California, found 26% of residents have seriously considered moving out of state and that 58% say that the American Dream is harder to achieve in California than elsewhere.
Not according to this column by Hank Adler in the Wall Street Journal.
California’s Legislature is considering a wealth tax on residents, part-year residents, and any person who spends more than 60 days inside the state’s borders in a single year. Even those who move out of state would continue to be subject to the tax for a decade… Assembly Bill 2088 proposes calculating the wealth tax based on current world-wide net worth each Dec. 31. For part-year and temporary residents, the tax would be proportionate based on their number of days in California. The annual tax would be on current net worth and therefore would include wealth earned, inherited or obtained through gifts or estates long before and long after leaving the state. …The authors of the bill estimate the wealth tax will provide Sacramento $7.5 billion in additional revenue every year. Another proposal—to increase the top state income-tax rate to 16.8%—would annually raise another $6.8 billion. Today, California’s wealthiest 1% pay approximately 46% of total state income taxes. …the Legislature looks to the wealthiest Californians to fill funding gaps without considering the constitutionality of the proposals and the ability of people and companies to pick up and leave the state, which news reports suggest they are doing in large numbers. …As of this moment, there are no police roadblocks on the freeways trying to keep moving trucks from leaving California. If A.B. 2088 becomes law, the state may need to consider placing some.
The late (and great) Walter Williams actually joked back in 2012that California might set up East German-style border checkpoints. Let’s hope satire doesn’t become reality.
But what isn’t satire is that people are fleeing the state (along with other poorly governed jurisdictions).
Simply state, the blue state model of high taxes and big government is not working (just as it isn’t working in countries with high taxes and big government).
Interestingly, even the New York Times recognizes that there is a problem in the state that used to be a role model for folks on the left.
Opining for that outlet at the start of the month, Brett Stephens raised concerns about the Golden State.
…today’s Democratic leaders might look to the very Democratic state of California as a model for America’s future. You remember California: People used to want to move there, start businesses, raise families, live their American dream. These days, not so much. Between July 2019 and July 2020, more people — 135,400 to be precise — left the state than moved in… No. 1 destination: Texas, followed by Arizona, Nevada and Washington. Three of those states have no state income tax.
California, by contrast, has very high taxes. Not just an onerous income tax, but high taxes across the board.
Californians also pay some of the nation’s highest sales tax rates (8.66 percent) and corporate tax rates (8.84 percent), as well as the highest taxes on gasoline (63 cents on a gallon as of January, as compared with 20 cents in Texas).
Sadly, these high taxes don’t translate into good services from government.
The state ranks 21st in the country in terms of spending per public school pupil, but 27th in its K-12 educational outcomes. It ties Oregon for third place among states in terms of its per capita homeless rate. Infrastructure? As of 2019, the state had an estimated $70 billion in deferred maintenance backlog. Debt? The state’s unfunded pension liabilities in 2019 ran north of $1.1 trillion, …or $81,300 per household.
Makes you wonder whether the rest of the nation should copy that model?
Democrats hold both U.S. Senate seats, 42 of its 53 seats in the House, have lopsided majorities in the State Assembly and Senate, run nearly every big city and have controlled the governor’s mansion for a decade. If ever there was a perfect laboratory for liberal governance, this is it. So how do you explain these results? …If California is a vision of the sort of future the Biden administration wants for Americans, expect Americans to demur.
Some might be tempted to dismiss Stephens’ column because he is considered the token conservative at the New York Times.
But Ezra Klein also acknowledges that California has a problem, and nobody will accuse him of being on the right side of the spectrum.
Here’s some of what he wrote in his column earlier this month for the New York Times.
I love California. I was born and raised in Orange County. I was educated in the state’s public schools and graduated from the University of California system… But for that very reason, our failures of governance worry me. California has the highest poverty rate in the nation,when you factor in housing costs, and vies for the top spot in income inequality, too. …but there’s a reason 130,000 more people leave than enter each year. California is dominated by Democrats, but many of the people Democrats claim to care about most can’t afford to live there. …California, as the biggest state in the nation, and one where Democrats hold total control of the government, carries a special burden. If progressivism cannot work here, why should the country believe it can work anywhere else?
Kudos to Klein for admitting problems on his side (just like I praise the few GOPers who criticized Trump’s big-government policies).
But his column definitely had some quirky parts, such as when he wrote that, “There are bright spots in recent years…a deeply progressive plan to tax the wealthy.”
That’s actually a big reason for the state’s decline, not a “bright spot.”
I’m not the only one to recognize the limitations of his column.
Who but Ezra Klein could survey the wreck left-wing Democrats have made of California and conclude that the state’s problem is its excessive conservatism? …Klein the rhetorician anticipates objections on this front and writes that he is not speaking of “the political conservatism that privatizes Medicare, but the temperamental conservatism that” — see if this formulation sounds at all familiar — “stands athwart change and yells ‘Stop!’”…California progressives have progressive policies and progressive power, and they like it that way. That is the substance of their conservatism. …Klein and others of his ilk like to present themselves as dispassionate pragmatists, enlightened empiricists who only want to do “what works.” …Klein mocks San Francisco for renaming schools (Begone, Abraham Lincoln!) while it has no plan to reopen them, but he cannot quite see that these are two aspects of a single phenomenon. …Klein…must eventually understand that the troubles he identifies in California are baked into the progressive cake. …That has real-world consequences, currently on display in California to such a spectacular degree that even Ezra Klein is able dimly to perceive them. Maybe he’ll learn something.
I especially appreciate this passage since it excoriates rich leftists for putting teacher unions ahead of disadvantaged children.
Intentions do not matter very much, and mere stated intentions matter even less. Klein is blind to that, which is why he is able to write, as though there were something unusual on display: “For all the city’s vaunted progressivism, [San Francisco] has some of the highest private school enrollment numbers in the country.” Rich progressives have always been in favor of school choice and private schools — for themselves. They only oppose choice for poor people, whose interests must for political reasons be subordinated to those of the public-sector unions from which Democrats in cities such as San Francisco derive their power.
Let’s conclude with some levity.
Here’s a meme that contemplates whether California emigrants bring bad voting habits with them.
Much of my writing is focused on the real-world impact of government policy, and this is why I repeatedly look at the relative economic performance of big government jurisdictions and small government jurisdictions.
So we’ve looked at high-tax states that are languishing, such as California and Illinois, and compared them to zero-income-tax states such as Texas.
With this in mind, you can understand that I was intrigued to see that even the establishment media is noticing that Texas is out-pacing the rest of the nation.
Here are some excerpts from a report by CNN Money on rapid population growth in Texas.
More Americans moved to Texas in recent years than any other state: A net gain of more than 387,000 in the latest Census for 2013. …Five Texas cities — Austin, Houston, San Antonio, Dallas and Fort Worth — were among the top 20 fastest growing large metro areas. Some smaller Texas metro areas grew even faster. In oil-rich Odessa, the population grew 3.3% and nearby Midland recorded a 3% gain.
But why is the population growing?
Well, CNN Money points out that low housing prices and jobs are big reasons.
And on the issue of housing, the article does acknowledge the role of “easy regulations” that enable new home construction.
But on the topic of jobs, the piece contains some good data on employment growth, but no mention of policy.
Jobs is the No. 1 reason for population moves, with affordable housing a close second. …Jobs are plentiful in Austin, where the unemployment rate is just 4.6%. Moody’s Analytics projects job growth to average 4% a year through 2015. Just as important, many jobs there are well paid: The median income of more than $75,000 is nearly 20% higher than the national median.
That’s it. Read the entire article if you don’t believe me, but the reporter was able to write a complete article about the booming economy in Texas without mentioning – not even once – that there’s no state income tax.
But that wasn’t the only omission.
The article doesn’t mention that Texas is the 4th-best state in the Tax Foundation’s ranking of state and local tax burdens.
The article doesn’t mention that Texas was the least oppressive state in the Texas Public Policy Foundation’s Soft Tyranny Index.
The article doesn’t mention that Texas was ranked #11 in the Tax Foundation’s State Business Tax Climate Index.
The article doesn’t mention that Texas is in 14th place in the Mercatus ranking of overall freedom for the 50 states (and in 10th place for fiscal freedom).
By the way, I’m not trying to argue that Texas is the best state.
Indeed, it only got the top ranking in one of the measures cited above.
My point, instead, is simply to note that it takes willful blindness to write about the strong population growth and job performance of Texas without making at least a passing reference to the fact that it is a low-tax, pro-market state.
At least compared to other states. And especially compared to the high-tax states that are stagnating.
Such as California, as illustrated by this data and this data, as well as this Lisa Benson cartoon.
Such as Illinois, as illustrated by this data and this Eric Allie cartoon.
P.S. Paul Krugman has tried to defend California, which has made him an easy target. I debunked him earlier this year, and I also linked to a superb Kevin Williamson takedown of Krugman at the bottom of this post.
P.P.S. Once again, I repeat the two-part challenge I’ve issued to the left. I’ll be happy if any statists can successfully respond to just one of the two questions I posed.
California is the Greece of the USA, but Texas is not perfect either!!! Just Because California Is Terrible, that Doesn’t Mean Texas Is Perfect January 21, 2013 by Dan Mitchell Texas is in much better shape than California. Taxes are lower, in part because Texas has no state income tax. No wonder the Lone Star State […]
We should lower federal taxes because jobs are going to states like Texas that have low taxes. (We should lower state taxes too!!) What Can We Learn by Comparing the Employment Situation in Texas vs. California? April 3, 2013 by Dan Mitchell One of the great things about federalism, above and beyond the fact that it […]
I got on the Arkansas Times Blog and noticed that a person on there was bragging about the high minimum wage law in San Francisco and how everything was going so well there. On 2-15-13 on the Arkansas Times Blog I posted: Couldn’t be better (the person using the username “Couldn’t be better) is bragging […]
Does Government Have a Revenue or Spending Problem? People say the government has a debt problem. Debt is caused by deficits, which is the difference between what the government collects in tax revenue and the amount of government spending. Every time the government runs a deficit, the government debt increases. So what’s to blame: too […]
Former California Governor Arnold Schwarzenegger with his family I posted a portion of an article by John Fund of the Wall Street Journal that pointed out that many businesses are leaving California because of all of their government red tape and moving to Texas. My username is SalineRepublican and this is […]
John Fund at Chamber Day, Part 1 Last week I got to attend the first ever “Conservative Lunch Series” presented by KARN and Americans for Prosperity Foundation at the Little Rock Hilton on University Avenue. This monthly luncheon will be held the fourth Wednesday of every month. The speaker for today’s luncheon was John Fund. John […]
___________ California and France have raised taxes so much that it has hurt economic growth!!! Mirror, Mirror, on the Wall, which Nation and State Punish Success Most of All? September 25, 2014 by Dan Mitchell I’ve shared some interested rankings on tax policy, including a map from the Tax Foundation showing which states have the earliest […]
___________ Jerry Brown raised taxes in California and a rise in the minimum wage, but it won’t work like Krugman thinks!!!! This cartoon below shows what will eventually happen to California and any other state that keeps raising taxes higher and higher. Krugman’s “Gotcha” Moment Leaves Something to Be Desired July 25, 2014 by […]
Open letter to President Obama (Part 573) (Emailed to White House on 7-29-13.) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get […]
Open letter to President Obama (Part 561) (Emailed to White House on 6-25-13.) President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get […]
These people call themselves national conservatives, though I think of them as reincarnated Rockefeller Republicans (what else would you call people who favor awful policies such as industrial policy and tax increases?).
Today’s column explains why they are wrong.
…many of Reagan’s reforms have been eroded over the past 30-plus years, and the United States is once again facing major economic challenges. Is it time for Reaganomics 2.0? Some argue that America faces different problems that require different solutions. They assert that pushing for the same policies is “Zombie Reaganism.”Many of those critics are avowed leftists, so their antipathy is not surprising. But there are also some self-described conservatives who use the same term to express hostility. …To assess the merits of modern-day small-government conservatism, this paper will briefly explain the problems Reagan faced and the solutions he pursued, followed by an examination of today’s problems and the degree to which similar policies could and should apply. In short, America faces remarkably similar challenges to those that confronted President Reagan. …Policymakers who wish to boost middle-class incomes would be wise to emulate President Reagan.
For what it’s worth, I think some of the national conservatives are not statists. Instead, they merely think they should reject Reaganism for non-economic reasons.
So I included a section about being in favor of limited government regardless of views on other topics.
They assume support for Reagan-style small government conservatism:
implies support for other policies adopted during the Reagan years, such as immigration amnesty.
comes at the expense of conservative social policy.
means no concern for the value of a defense industrial base.
means being in favor of a “neoconservative” nation-building agenda.
is somehow inconsistent with communitarian values.
This paper does not address those issues, other than to state that the desirability of Reagan’s four-pillar agenda does not depend on those other topics.
The bottom line is that everyone should be united by a desire for greater prosperity. And that explicitly implies being in favor of free markets and limited government.
President Biden wants to take the opposite approach.
A few days ago, Dan Balz of the Washington Postprovided some “news analysis” about Biden’s fiscal agenda. Some of what he wrote was accurate, noting that the president wants to increase spending by an additional $6 trillion over the next 10 years.
…the scope and implications of his domestic agenda have come sharply into focus. Together they represent the most dramatic shift in federal economic and social welfare policy since Ronald Reagan was elected 40 years ago.…The politics of redistribution, which are at the heart of what Biden is proposing, could test decades of assumptions that Democrats should be afraid of being tagged as the party of big government. …Together, the already approved coronavirus relief plan, the infrastructure proposal that was unveiled a few weeks ago and the newly proposed plan to invest in social welfare programs would total roughly $6 trillion.
But Mr. Balz then decided to be either sloppy or dishonest, writing that we’ve had decades of Reagan-style policies that have squeezed domestic spending and disproportionately lowered tax burden for rich people.
Reagan’s small-government philosophy resulted in a decades-long squeeze on the federal government, especially domestic spending, and on tax policies that mainly benefited the wealthiest Americans. …Government spending on social safety-net programs has been reduced compared with previous years.
Balz is wrong, wildly wrong.
You don’t have to take my word for it. Here’s a chart, taken from an October 2020 report by the Congressional Budget Office. As you can see, people in the lowest income quintile have been the biggest winners,, with their average tax rate dropping from about 10 percent to about 2 percent..
Here’s a chart showing marginal tax rates from a January 2019 CBO report. As you can see, Reagan lowered marginal tax rates for everyone, but Balz’s assertion that the rich got the lion’s share of the benefits is hard to justify considering that people in the bottom quintile now have negative marginal tax rates.
Balz’s mistakes on tax policy are significant.
But his biggest error (or worst dishonesty) occurred when he wrote about a “decades-long squeeze” on domestic spending and asserted that “spending on social safety-net programs has been reduced.”
A quick visit to the Office of Management and Budget’s Historical Tables is all that’s needed to debunk this nonsense. Here’s a chart, based on Table 8.2, showing the inflation-adjusted growth of entitlements and domestic discretionary programs.
Call me crazy, but I’m seeing a rapid increase in domestic spending after Reagan left office.
P.P.S. I also can’t resist noting that Balz wrote how Biden wants to “invest” in social welfare programs, as if there’s some sort of positive return from creating more dependency. Reminds me of this Chuck Asay cartoon from the Obama years.
March 3, 2021
President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
Dear Mr. President,
______________________________
Dan Mitchell shows how ignoring the Laffer Curve is like running a stop sign!!!!
I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.
Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such asAustralia or Switzerland that has a relatively low risk of long-run fiscal collapse.
That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.
We also know that many states and cities suffer from the same problems.
A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.
The most spectacular mess, though, is about to happen in Michigan.
After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.
I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.
Detroit obviously is an example of a government that is collapsing sooner rather than later.
Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.
More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.
Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.
Check out this sentence.
Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.
This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.
The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?
And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.
In some cases, higher tax rates will discourage people from earning more taxable income.
In some cases, higher tax rates will discourage people from reporting all the income they earn.
In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.
In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.
The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733,
We got to cut spending or we will be in a fiscal crisis like Greece!!! Question of the Week: Has the European Fiscal Crisis Ended? January 12, 2013 by Dan Mitchell I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation […]
The Flat Tax: How it Works and Why it is Good for America Uploaded by afq2007 on Mar 29, 2010 This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. President Obama really does think that all his answers lie in raising taxes on the rich when the […]
__________ President Reagan, Nancy Reagan, Tom Selleck, Dudley Moore, Lucille Ball at a Tribute to Bob Hope’s 80th birthday at the Kennedy Center. 5/20/83. __________________________ Dan Mitchell is very good at giving speeches and making it very simple to understand economic policy and how it affects a nation. Mitchell also talks about slowing the growth […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. The way […]
Dan Mitchell does a great job explaining the Laffer Curve President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. Today’s cartoon deals with the Laffer curve. Revenge of the Laffer Curve…Again and Again and Again March 27, 2013 […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the sequester, economy, eternal unemployment benefits, socialism, minimum wage laws, tax increases, social security, high taxes in California, Obamacare, Greece, welfare state or on gun control. President Obama’s favorite state must be California because […]
Class Warfare just don’t pay it seems. Why can’t we learn from other countries’ mistakes? Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake? December 31, 2012 by Dan Mitchell Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising […]
Republicans would be stupid to raise taxes. Don’t Get Bamboozled by the Fiscal Cliff: Five Policy Reasons and Five Political Reasons Why Republicans Should Keep their No-Tax-Hike Promises December 6, 2012 by Dan Mitchell The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
Dan Mitchell’s article and the video from his organization takes a hard look at President Obama’s tax record. Dissecting Obama’s Record on Tax Policy October 30, 2012 by Dan Mitchell The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos […]
The Laffer Curve, Part I: Understanding the Theory Uploaded by afq2007 on Jan 28, 2008 The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows […]
I got to hear Arthur Laffer speak back in 1981 and he predicted what would happen in the next few years with the Reagan tax cuts and he was right with every prediction. The Laffer Curve Wreaks Havoc in the United Kingdom July 1, 2012 by Dan Mitchell Back in 2010, I excoriated the new […]
You can’t blame someone for leaving one state for another if they have a better an opportunity to make money. Maryland to Texas, but Not Okay to Move from the United States to Singapore? July 12, 2012 by Dan Mitchell I’ve commented before about entrepreneurs, investors, and small business owners migrating from high tax states such […]
Raising taxes will not work. Liberals act like the Laffer Curve does not exist. The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue April 10, 2012 by Dan Mitchell The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and […]
Dan Mitchell of the Cato Institute shows why Obama’s plan to tax the rich will not solve our deficit problem. Explaining in the New York Post Why Obama’s Soak-the-Rich Tax Policy Is Doomed to Failure April 17, 2012 by Dan Mitchell I think high tax rates on certain classes of citizens are immoral and discriminatory. If the […]
You want the rich to pay more? Dan Mitchell observed:I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent. Liberals don’t understand good tax policies. Against 3-1 Odds, Promoting Good Tax Policy on Government TV April 12, 2012 by […]
Class warfare again from President Obama. Rejecting the Buffett Rule and Fighting Obama’s Class Warfare on CNBC April 10, 2012 by Dan Mitchell I’ve already explained why Warren Buffett is either dishonest or clueless about tax policy. Today, on CNBC, I got to debate the tax scheme that President Obama has named after the Omaha investor. […]
When Reagan campaigned for the White House, his economic plan was based on four pillars. I wrote a study about those policies for the Club for Growth Foundation and I wanted to answer two questions.
First, was Reaganomics successful? Second, should similar policies be pursued today?
Today’s column is Part IV of a five-part series.
In Part I, we reviewed Reagan’s successful record of spending restraint and explained why the same approach is needed today, particularly to control entitlements.
In Part II, we examined Reagan’s much-needed supply-side tax reforms and said the same insights are needed today to address the problem of double taxation.
In Part III, we looked at Reagan’s track record on red tape, noting that he arrested the growth of regulatory restrictions and regulatory budgets and urged the same policies today.
For Part IV, let’s look at Reagan’s approach to inflation.
We’ll start with Figure 14 from the study, which shows how inflation dramatically increased during the 1970s.
That was the problem Reagan faced when he took office.
Here’s some of what I wrote in the study.
The United States was plagued by double-digit inflation when Reagan was elected. Rising prices were a problem throughout the 1970s, and the problem became particularly acute during the Carter Administration (see Figure 14), with prices climbing by nearly 50 percent in just four years.…The Federal Reserve deserved the blame for the surge in prices. The central bank created too much liquidity, motivated in part by a belief in Keynesian monetary policy and in part by a desire to appease politicians who like the sugar high of easy money. To make a bad situation worse, prices were increasing faster than income, which meant that the average household was falling behind. According to the Census Bureau, when Reagan took office in 1981, both median and mean household income was several hundred dollars lower than when Carter took office in 1977.
Here’s what Reagan achieved.
Unlike other presidents, who favored the sugar high of easy money, Reagan understood that the Federal Reserve needed a restrictive policy to bring inflation under control. He supported Chair Paul Volcker’s efforts to slow monetary growth even when it became politically unpopular. He courageously did what was best for the nation, even though it hurt his party in the 1982 mid-term elections. …Reagan’s courage paid dividends. The inflation rate came down very quickly. As shown Figure 15 below, inflation was down to about 4 percent in 1988:
Here’s the chart showing what Reagan achieved.
As I did with Part I, Part II, and Part III, let’s now consider whether Reagan’s policies are still relevant today.
In the case of monetary policy, the answer clearly is yes. The Federal Reserve (and other central banks) recklessly expanded their balance sheets during the pandemic. In effect, they repeated the mistakes of the 1970s, albeit for a different reason.
Regardless of the reason for bad policy, the solution is the same. Replicate Reagan’s courage and bring inflation under control.
The bottom line is that Reaganism was the right approach in the 1980s and it is the right approach today
Ross Kaminsky of KHOW and I discussed how this is already happening.
I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.
Especially when they are very anxious to stifle tax competition.
For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatchertriggered a four-decade trend of lower tax rates and pro-growth tax reform.
That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.
And it’s the reason they now want the rate to be even higher.
Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.
Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said.The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.
Other kleptocratic governments naturally want the same thing.
A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.
Needless to say, I’m not surprised that Argentina is on the wrong side.
And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.
In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.
I can’t resist making two observations about this ideological screed.
Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.
The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.
P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.
P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.
P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.
I enjoyed this article below because it demonstrates that the Laffer Curve has been working for almost 100 years now when it is put to the test in the USA. I actually got to hear Arthur Laffer speak in person in 1981 and he told us in advance what was going to happen the 1980’s and it all came about as he said it would when Ronald Reagan’s tax cuts took place. I wish we would lower taxes now instead of looking for more revenue through raised taxes. We have to grow the economy:
Mitt Romney repeatedly said last night that he would not allow tax cuts to add to the deficit. He repeatedly said it because over and over again Obama blathered the liberal talking point that cutting taxes necessarily increased deficits.
Romney’s exact words: “I want to underline that — no tax cut that adds to the deficit.”
The fact of the matter is that we can go back to Calvin Coolidge who said very nearly THE EXACT SAME THING to his treasury secretary: he too would not allow any tax cuts that added to the debt. Andrew Mellon – quite possibly the most brilliant economic mind of his day – did a great deal of research and determined what he believed was the best tax rate. And the Coolidge administration DID cut income taxes and MASSIVELY increased revenues. Coolidge and Mellon cut the income tax rate 67.12 percent (from 73 to 24 percent); and revenues not only did not go down, but they went UP by at least 42.86 percent (from $700 billion to over $1 billion).
That’s something called a documented fact. But that wasn’t all that happened: another incredible thing was that the taxes and percentage of taxes paid actually went UP for the rich. Because as they were allowed to keep more of the profits that they earned by investing in successful business, they significantly increased their investments and therefore paid more in taxes than they otherwise would have had they continued sheltering their money to protect themselves from the higher tax rates. Liberals ignore reality, but it is simply true. It is a fact. It happened.
Then FDR came along and raised the tax rates again and the opposite happened: we collected less and less revenue while the burden of taxation fell increasingly on the poor and middle class again. Which is exactly what Obama wants to do.
People don’t realize that John F. Kennedy, one of the greatest Democrat presidents, was a TAX CUTTERwho believed the conservative economic philosophy that cutting tax rates would in fact increase tax revenues. He too cut taxes, and he too increased tax revenues.
So we get to Ronald Reagan, who famously cut taxes. And again, we find that Reagan cut that godawful liberal tax rate during an incredibly godawful liberal-caused economic recession, and he increased tax revenue by 20.71 percent (with revenues increasing from $956 billion to $1.154 trillion). And again, the taxes were paid primarily by the rich:
“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”
So we get to George Bush and the Bush tax cuts that liberals and in particular Obama have just demonized up one side and demagogued down the other. And I can simply quote the New York Times AT the time:
WASHINGTON, July 12 – For the first time since President Bush took office, an unexpected leap in tax revenue is about to shrink the federal budget deficit this year, by nearly $100 billion.
A Jump in Corporate Payments On Wednesday, White House officials plan to announce that the deficit for the 2005 fiscal year, which ends in September, will be far smaller than the $427 billion they estimated in February.
Mr. Bush plans to hail the improvement at a cabinet meeting and to cite it as validation of his argument that tax cuts would stimulate the economy and ultimately help pay for themselves.
Based on revenue and spending data through June, the budget deficit for the first nine months of the fiscal year was $251 billion, $76 billion lower than the $327 billion gap recorded at the corresponding point a year earlier.
The Congressional Budget Office estimated last week that the deficit for the full fiscal year, which reached $412 billion in 2004, could be “significantly less than $350 billion, perhaps below $325 billion.”
The big surprise has been in tax revenue, which is running nearly 15 percent higher than in 2004. Corporate tax revenue has soared about 40 percent, after languishing for four years, and individual tax revenue is up as well.
And of course the New York Times, as reliable liberals, use the adjective whenever something good happens under conservative policies and whenever something bad happens under liberal policies: ”unexpected.” But it WASN’T ”unexpected.” It was EXACTLY what Republicans had said would happen and in fact it was exactly what HAD IN FACT HAPPENED every single time we’ve EVER cut income tax rates.
The truth is that conservative tax policy has a perfect track record: every single time it has ever been tried, we have INCREASED tax revenues while not only exploding economic activity and creating more jobs, but encouraging the wealthy to pay more in taxes as well. And liberals simply dishonestly refuse to acknowledge documented history.
Now let’s take a look at the utterly fallacious view that tax cuts in general create higher deficits.
Let’s take a trip back in time, starting with the 1920s. From Burton Folsom’s book, New Deal or Raw Deal?:
In 1921, President Harding asked the sixty-five-year-old [Andrew] Mellon to be secretary of the treasury; the national debt [resulting from WWI] had surpassed $20 billion and unemployment had reached 11.7 percent, one of the highest rates in U.S. history. Harding invited Mellon to tinker with tax rates to encourage investment without incurring more debt. Mellon studied the problem carefully; his solution was what is today called “supply side economics,” the idea of cutting taxes to stimulate investment. High income tax rates, Mellon argued, “inevitably put pressure upon the taxpayer to withdraw this capital from productive business and invest it in tax-exempt securities. . . . The result is that the sources of taxation are drying up, wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the Government nor profit to the people” (page 128).
Mellon wrote, “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower taxes.” And he compared the government setting tax rates on incomes to a businessman setting prices on products: “If a price is fixed too high, sales drop off and with them profits.”
And what happened?
“As secretary of the treasury, Mellon promoted, and Harding and Coolidge backed, a plan that eventually cut taxes on large incomes from 73 to 24 percent and on smaller incomes from 4 to 1/2 of 1 percent. These tax cuts helped produce an outpouring of economic development – from air conditioning to refrigerators to zippers, Scotch tape to radios and talking movies. Investors took more risks when they were allowed to keep more of their gains. President Coolidge, during his six years in office, averaged only 3.3 percent unemployment and 1 percent inflation – the lowest misery index of any president in the twentieth century.
Furthermore, Mellon was also vindicated in his astonishing predictions that cutting taxes across the board would generate more revenue. In the early 1920s, when the highest tax rate was 73 percent, the total income tax revenue to the U.S. government was a little over $700 million. In 1928 and 1929, when the top tax rate was slashed to 25 and 24 percent, the total revenue topped the $1 billion mark. Also remarkable, as Table 3 indicates, is that the burden of paying these taxes fell increasingly upon the wealthy” (page 129-130).
Now, that is incredible upon its face, but it becomes even more incredible when contrasted with FDR’s antibusiness and confiscatory tax policies, which both dramatically shrunk in terms of actual income tax revenues (from $1.096 billion in 1929 to $527 million in 1935), and dramatically shifted the tax burden to the backs of the poor by imposing huge new excise taxes (from $540 million in 1929 to $1.364 billion in 1935). See Table 1 on page 125 of New Deal or Raw Deal for that information.
FDR both collected far less taxes from the rich, while imposing a far more onerous tax burden upon the poor.
It is simply a matter of empirical fact that tax cuts create increased revenue, and that those [Democrats] who have refused to pay attention to that fact have ended up reducing government revenues even as they increased the burdens on the poorest whom they falsely claim to help.
Let’s move on to John F. Kennedy, one of the most popular Democrat presidents ever. Few realize that he was also a supply-side tax cutter.
“It is a paradoxical truth that tax rates are too high and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now … Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”
– John F. Kennedy, Nov. 20, 1962, president’s news conference
“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”
– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964
“In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.”
– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
“It is no contradiction – the most important single thing we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.”
– John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
“Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.”
– John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session.
“A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education and investment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.”
– John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill
Which is to say that modern Democrats are essentially calling one of their greatest presidents a liar when they demonize tax cuts as a means of increasing government revenues.
So let’s move on to Ronald Reagan. Reagan had two major tax cutting policies implemented: the Economic Recovery Tax Act (ERTA) of 1981, which was retroactive to 1981, and the Tax Reform Act of 1986.
Did Reagan’s tax cuts decrease federal revenues? Hardly:
We find that 8 of the following 10 years there was a surplus of revenue from 1980, prior to the Reagan tax cuts. And, following the Tax Reform Act of 1986, there was a MASSIVE INCREASEof revenue.
So Reagan’s tax cuts increased revenue. But who paid the increased tax revenue? The poor? Opponents of the Reagan tax cuts argued that his policy was a giveaway to the rich (ever heard that one before?) because their tax payments would fall. But that was exactly wrong. In reality:
“The share of the income tax burden borne by the top 10 percent of taxpayers increased from 48.0 percent in 1981 to 57.2 percent in 1988. Meanwhile, the share of income taxes paid by the bottom 50 percent of taxpayers dropped from 7.5 percent in 1981 to 5.7 percent in 1988.”
So Ronald Reagan a) collected more total revenue, b) collected more revenue from the rich, while c) reducing revenue collected by the bottom half of taxpayers, and d) generated an economic powerhouse that lasted – with only minor hiccups – for nearly three decades. Pretty good achievement considering that his predecessor was forced to describe his own economy as a “malaise,” suffering due to a “crisis of confidence.” Pretty good considering that President Jimmy Carter responded to a reporter’s question as to what he would do about the problem of inflation by answering,“It would be misleading for me to tell any of you that there is a solution to it.”
Reagan whipped inflation. Just as he whipped that malaise and that crisis of confidence.
This week is focusing on Reaganomics, both to learn what happened in the 1980s and to determine whether similar policies are needed today.
I’m citing a paper I wrote for the Club for Growth Foundation.
In Part I, we reviewed Reagan’s successful record of spending restraint and explained why the same approach is needed today, particularly to control entitlements.
In Part II, we examined Reagan’s much-needed supply-side tax reforms and said the same insights are needed today to address the problem of double taxation.
Today, in Part III, let’s look at Reagan’s record with regards to red tape.
This chart from the study summarizes Reagan’s biggest achievement. He was able to arrest the growth of both regulatory restrictions and regulatory spending during his eight years in office.
Here’s some of what I wrote in the study, including some recognition of some good policies enacted at the end of the Carter years.
The chart…captures the broader impact of Reagan’s presidency. You can see that both regulatory budgets and regulatory restrictions were rising before Reagan took office, were basically flat when he was in office, and then resumed rising after he left office…Incidentally, it should be noted that Reagan’s predecessor got the ball rolling on deregulation. Airlines, trucking, and rail were partially or fully deregulated during the Carter Administration. Those policies were very successful in lowering prices and increasing efficiency in the respective industries. Reagan’s appointees helped implement those good reforms.
That’s the good news.
The bad news is that subsequent presidents have not shared Reagan’s belief in competitive markets.
…there has been a regulatory tsunami since Reagan left office. There are now almost twice as many pages in the federal register as there were in the late 1980s. Meanwhile, regulatory budgets have tripled and regulatory restrictions have doubled since the end of the Reagan years.
Since regulatory policy covers so many areas, dealing with excessive red tape requires several reforms.
In the study, I listed some changes that would help.
Require the elimination of a certain number of existing regulations before a bureaucracy can impose a new regulation.
Insist that all regulations pass a cost-benefit test overseen by independent economists at the Office of Information and Regulatory Affairs.
Enact a regulatory budget to limit the overall cost of red tape.
Implement a competitiveness requirement so that regulation is never stricter than our foreign competitors with regards to so-called agreements like the Paris Climate Accord.
Require stand-alone approval by both the House and Senate before any major regulation (costing $100 million and above) can be finalized.
Adopt “mutual recognition” agreements with advanced allied nations so that Americans can access everything from baby formula to prescription drugs without waiting for bureaucratic approval in the U.S.
Create a Regulatory Bill of Rights to give anyone investigated by a regulatory agency the same legal rights as accused criminals, as well as the right to recover damages if bureaucrats engage in abusive behavior.
I’ll close by sharing another chart from the study.
Here is the Competitive Enterprise Institute’s estimate of how much regulation is costing the U.S. economy.
So yes, there is a need for a renewed commitment to control red tape.
During the debate about the Trump tax plan, proponents made three main arguments in favor of reducing the federal corporate tax rate from 35 percent to 21 percent.
The last item involves the “Laffer Curve,” which is a graphical representation of the non-linear relationship between tax rates and tax revenue.
Put in simple terms, entrepreneurs, investors, and business owners have more incentive to earn moneywhen tax rates are modest.
High tax rates, by contrast, discourage productive behavior while also giving people a bigger incentive to find loopholes and other ways of avoiding tax.
This does not mean that lower tax rates produce more revenue, though that sometimes happens.
The main takeaway is the most modest observation that lower tax rates will lead to more taxable income, which means some revenue feedback.
In other words, tax cuts don’t lose as much revenue as predicted by simplistic models (and tax increases don’t generate as much revenue as predicted).
And here’s another. Look at how corporate tax revenues in the United States are increasing at a faster rate than projected.
The chart comes from Chris Edwards, and he helpfully explains what has happened.
The revenue surge came as a surprise to government economists. The chart…compares the new Office of Management and Budget March 2022 baseline projections to prior baseline projections from the OMB in May 2021 and the Congressional Budget Office in July 2021.…congressional estimators figured that the government would lose an average $76 billion a year the first four years… Corporate tax revenues were down from 2018 to 2020, but then soared in 2021. Revenues in 2021 of $372 billion (with a 21 percent tax rate) are 25 percent higher than revenues in 2017 of $297 billion (with a 35 percent tax rate). …we’re learning that a lower corporate tax rate is consistent with strong corporate tax revenues. …lower rates…broaden bases automatically through reduced tax avoidance and higher economic activity. Other nations have learned the same lesson. Keeping the corporate tax rate low is a winner for businesses and workers, but it can also be a winner for government budgets.
The Wall Street Journal has a new editorial on this topic. Here are some relevant excerpts.
…the 2017 tax reform that cut corporate tax rates…has been a winner for the economy and federal tax coffers. …Corporate revenue was supposed to fall to historic lowsas a share of the economy. Big business supposedly got a windfall and government was robbed. It hasn’t turned out that way. …the big news now is that more corporate tax revenue is flowing into the Treasury at record levels even with the lower rate. …In June 2017, before tax reform passed, CBO predicted corporate tax revenue of $383 billion in fiscal 2021. But in April 2018, after reform passed, CBO lowered its estimate to $327 billion.
So what happened in the real world?
Actual corporate income tax revenue in 2021 was $372 billion—nearly as much at a 21% rate as CBO expected at the 35% rate that was among the highest in the world.Fiscal 2022 is turning out to be even better for the Treasury. Corporate tax revenue for the first six months was up 22% from a year earlier to $127 billion. …What accounts for this windfall for Uncle Sam…? …the Occam’s razor policy answer is that corporate tax reform worked as its sponsors predicted: Lowering the rates while broadening the base by eliminating loopholes created incentives for more efficient investment decisions that paid off for shareholders, workers and the government.
Notice, by the way, that corporate tax revenues have increased faster than projected in both the 2017 forecast and the 2021 forecast.
All of which shows that I may have been insufficiently optimistic when I wrote about this issuelast year.
P.S. The goal of tax policy (either in general or when looking at business taxation) is not to maximize revenue for politicians, but rather to maximize prosperity for people. Indeed, if better tax policy leads to a lot of revenue feedback, that’s an argument for further reductions in tax rates.
P.P.S. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.
March 3, 2021
President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
Dear Mr. President,
______________________________
Dan Mitchell shows how ignoring the Laffer Curve is like running a stop sign!!!!
I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.
Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such asAustralia or Switzerland that has a relatively low risk of long-run fiscal collapse.
That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.
We also know that many states and cities suffer from the same problems.
A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.
The most spectacular mess, though, is about to happen in Michigan.
After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.
I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.
Detroit obviously is an example of a government that is collapsing sooner rather than later.
Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.
More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.
Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.
Check out this sentence.
Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.
This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.
The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?
And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.
In some cases, higher tax rates will discourage people from earning more taxable income.
In some cases, higher tax rates will discourage people from reporting all the income they earn.
In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.
In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.
The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733,
We got to cut spending or we will be in a fiscal crisis like Greece!!! Question of the Week: Has the European Fiscal Crisis Ended? January 12, 2013 by Dan Mitchell I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation […]
The Flat Tax: How it Works and Why it is Good for America Uploaded by afq2007 on Mar 29, 2010 This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. President Obama really does think that all his answers lie in raising taxes on the rich when the […]
__________ President Reagan, Nancy Reagan, Tom Selleck, Dudley Moore, Lucille Ball at a Tribute to Bob Hope’s 80th birthday at the Kennedy Center. 5/20/83. __________________________ Dan Mitchell is very good at giving speeches and making it very simple to understand economic policy and how it affects a nation. Mitchell also talks about slowing the growth […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. The way […]
Dan Mitchell does a great job explaining the Laffer Curve President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. Today’s cartoon deals with the Laffer curve. Revenge of the Laffer Curve…Again and Again and Again March 27, 2013 […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the sequester, economy, eternal unemployment benefits, socialism, minimum wage laws, tax increases, social security, high taxes in California, Obamacare, Greece, welfare state or on gun control. President Obama’s favorite state must be California because […]
Class Warfare just don’t pay it seems. Why can’t we learn from other countries’ mistakes? Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake? December 31, 2012 by Dan Mitchell Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising […]
Republicans would be stupid to raise taxes. Don’t Get Bamboozled by the Fiscal Cliff: Five Policy Reasons and Five Political Reasons Why Republicans Should Keep their No-Tax-Hike Promises December 6, 2012 by Dan Mitchell The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
Dan Mitchell’s article and the video from his organization takes a hard look at President Obama’s tax record. Dissecting Obama’s Record on Tax Policy October 30, 2012 by Dan Mitchell The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos […]
The Laffer Curve, Part I: Understanding the Theory Uploaded by afq2007 on Jan 28, 2008 The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows […]
I got to hear Arthur Laffer speak back in 1981 and he predicted what would happen in the next few years with the Reagan tax cuts and he was right with every prediction. The Laffer Curve Wreaks Havoc in the United Kingdom July 1, 2012 by Dan Mitchell Back in 2010, I excoriated the new […]
You can’t blame someone for leaving one state for another if they have a better an opportunity to make money. Maryland to Texas, but Not Okay to Move from the United States to Singapore? July 12, 2012 by Dan Mitchell I’ve commented before about entrepreneurs, investors, and small business owners migrating from high tax states such […]
Raising taxes will not work. Liberals act like the Laffer Curve does not exist. The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue April 10, 2012 by Dan Mitchell The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and […]
Dan Mitchell of the Cato Institute shows why Obama’s plan to tax the rich will not solve our deficit problem. Explaining in the New York Post Why Obama’s Soak-the-Rich Tax Policy Is Doomed to Failure April 17, 2012 by Dan Mitchell I think high tax rates on certain classes of citizens are immoral and discriminatory. If the […]
You want the rich to pay more? Dan Mitchell observed:I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent. Liberals don’t understand good tax policies. Against 3-1 Odds, Promoting Good Tax Policy on Government TV April 12, 2012 by […]
Class warfare again from President Obama. Rejecting the Buffett Rule and Fighting Obama’s Class Warfare on CNBC April 10, 2012 by Dan Mitchell I’ve already explained why Warren Buffett is either dishonest or clueless about tax policy. Today, on CNBC, I got to debate the tax scheme that President Obama has named after the Omaha investor. […]
In Part II, let’s look at Reagan’s track record on tax policy and ask whether we need another dose of “supply-side economics.”
When he took office, one of Reagan’s main goals was to lower marginal tax rates on American households. This was necessary for two reasons.
First, tax rates were too high, including a staggering 70-percent top rate for the personal income tax.
Second, more and more Americans were being hit by punitive tax rates because of “bracket creep.”
Since I’ve already written a lot about the problem of high tax rates, let’s address the second point.
During the 1970s, when inflation was high, there was understandable pressure to increase wages and salaries so that workers did not fall behind.
But when employees got pay raises to keep pace with inflation, that often meant they had to pay higher tax rates even though their inflation-adjusted incomes stayed constant.
This was not a trivial problem. Here’s a table from the study I recently wrote for the Club for Growth Foundation. As you can see, middle class households wound up paying much higher marginal tax rates as the 1970s came to a close.
President Reagan recognized this problem and he did two things to help American families.
First, he lowered tax rates across board as part of his 1981 tax cut and his 1986 tax reform, with the top tax rate dropping from 70 percent in 1980 to 28 percent in 1988.
Second, he “indexed” the personal income tax for inflation, meaning households no longer would be pushed into higher tax brackets because of bad monetary policy.
In 1981, Reagan convinced Congress to enact the Economic Recovery Tax Act, which phased in lower income tax rates for all taxpayers. …Equally important, Reagan got Congress to adopt “indexing,” which meant that tax brackets were automatically adjusted for inflation. That reform ensured that government no longer profited from inflation. During his second term, Reagan then worked with Congress to approve the Tax Reform Act of 1986. That legislation further lowered tax rates for all taxpayers. …the Reagan tax cuts helped trigger an economic boom. The United States experienced a record economic expansion, with millions of jobs being created and family incomes rising to record levels after the malaise and stagnation of the Carter years. Households earned more money, and they got to keep a greater share of their earnings. Net worth also increased substantially, putting America’s middle class in a very strong position.
By the way, even though my left-leaning friends are viscerally opposed to lower tax rates for upper-income taxpayers, it’s worth noting that the IRS wound up collecting more money from the rich after Reagan slashed tax rates. A lot more money.
But is Reagan’s supply-side tax policy still relevant today?
Some people think tax policy is no longer a problem because individual income tax rates are lower than they were when Reagan took office and indexing is still protecting people from inflation (which has recently been a problem).
For what it’s worth, I think personal income tax rates are still far too high.
But the main reason that we need Reaganomics 2.0 is that the United States faces a major problem with double taxation. To be more specific, the IRS imposes very harsh tax rates on income that is saved and invested.
Here’s Figure 9 from the paper. You can see on the left that America’s personal income tax rate is only slightly higher than the average of other rich nations and the corporate tax rate is only somewhat higher.
But you can see on the right where America really lags, with significantly higher tax burdens on capital gainsand dividend income.
Incidentally, the chart also shows that the United States would be wildly uncompetitive if Biden’s tax proposals were enacted.
P.S. The capital gains tax is not indexed for inflation, so people often are hit by that tax even when they lose money on an investment. That’s obviously another area where we need Reaganomics 2.0.
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This past article below from Dan Mitchell tells the story of Ronald Reagan’s successful strategy against inflation. I had a front row seat since I got to read the book and see the film FREE TO CHOOSE by Milton Friedman in 1980 who Reagan agreed with on this issue and I have included below the episode on inflation!
He also restored America’s national defenses and reoriented foreign policy, both of which led to the collapse of the Soviet Empire, a stupendous achievement that makes Reagan worthy of Mount Rushmore.
But he also has another great achievement, one that doesn’t receive nearly the level of appreciation that it deserves. President Reagan demolished the economic cancer of inflation.
Even Paul Krugman has acknowledged that reining in double-digit inflation was a major positive achievement. Because of his anti-Reagan bias, though, he wants to deny the Gipper any credit.
Robert Samuelson, in a column for the Washington Post, corrects the historical record.
Krugman recently wrote acolumnarguing that the decline of double-digit inflation in the 1980s was the decade’s big economic event, not the cuts in tax rates usually touted by conservatives. Actually, I agree with Krugman on this. But then he asserted that Ronald Reagan had almost nothing to do with it. That’s historically incorrect. Reagan was crucial. …Krugman’s error is so glaring.
Samuelson first provides the historical context.
For those too young to remember, here’s background. From 1960 to 1980, inflation — the general rise of retail prices —marched relentlessly upward. It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979. The higher it rose, the more unpopular it became. …Worse, government seemed powerless to defeat it. Presidents deployed complex wage and price controls and guidelines. They didn’t work. The Federal Reserve — custodian of credit policies — veered between easy money and tight money, striving both to subdue inflation and to maintain “full employment” (taken as a 4 percent to 5 percent unemployment rate). It achieved neither. From the late 1960s to the early 1980s, there werefour recessions. Inflation became a monster, destabilizing the economy.
The column then explains that there was a dramatic turnaround in the early 1980s, as Fed Chairman Paul Volcker adopted a tight-money policy and inflation was squeezed out of the system much faster than almost anybody thought was possible.
But Krugman wants his readers to think that Reagan played no role in this dramatic and positive development.
Samuelson says this is nonsense. Vanquishing inflation would have been impossible without Reagan’s involvement.
What Reagan provided was political protection. The Fed’s previous failures to stifle inflation reflected its unwillingness to maintain tight-money policies long enough… Successive presidents preferred a different approach: the wage-price policies built on the pleasing (but unrealistic) premise that these could quell inflation without jeopardizing full employment. Reagan rejected this futile path. As the gruesome social costs of Volcker’s policies mounted — the monthly unemployment rate would ultimately rise to a post-World War II high of10.8 percent— Reagan’s approval ratings plunged. In May 1981, they were at 68 percent; by January 1983, 35 percent. Still, he supported the Fed. …It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing.
What’s the bottom line?
What Volcker and Reagan accomplished was an economic and political triumph. Economically, ending double-digit inflation set the stage for a quarter-century of near-automatic expansion… Politically, Reagan and Volcker showed that leaders can take actions that, though initially painful and unpopular, served the country’s long-term interests. …There was no explicit bargain between them. They had what I’ve called a “compact of conviction.”
By the way, Krugman then put forth a rather lame response to Samuelson, including the rather amazing claim that “[t]he 1980s were a triumph of Keynesian economics.”
As preached and practiced since the 1960s, Keynesian economics promised to stabilize the economy at levels of low inflation and high employment. By the early 1980s, this vision was in tatters, and many economists were fatalistic about controlling high inflation. Maybe it could be contained. It couldn’t be eliminated, because the social costs (high unemployment, lost output) would be too great. …This was a clever rationale for tolerating high inflation, and the Volcker-Reagan monetary onslaught demolished it. High inflation was not an intrinsic condition of wealthy democracies. It was the product of bad economic policies. This was the 1980s’ true lesson, not the contrived triumph of Keynesianism.
If anything, Samuelson is being too kind.
One of the key tenets of Keynesian economics is that there’s a tradeoff between inflation and unemployment (the so-called Phillips Curve).
Yet in the 1970s we had rising inflation and rising unemployment.
While in the 1980s, we had falling inflation and falling unemployment.
But if you’re Paul Krugman and you already have a very long list of mistakes (see here, here, here, here,here,here,here, here, andherefor a few examples), then why not go for the gold and try to give Keynes credit for the supply-side boom of the 1980s
P.S. Since today’s topic is Reagan, it’s a good opportunity to share my favorite poll of the past five years.
P.P.S. Here are some great videos of Reagan in action. And here’s one more if you need another Reagan fix.
Milton Friedman’s FREE TO CHOOSE “How to cure inflation” Transcript and Video (60 Minutes)
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, and – Power of the Market.“If we could just stop the printing presses, we would stop inflation,” Milton Friedman says in “How to Cure Inflation” from the Free To Choose series. Now as then, there is only one cause of inflation, and that is when governments print too much money. Milton explains why it is that politicians like inflation, and why wage and price controls are not solutions to the problem.
http://www.freetochoosemedia.org/freetochoose/detail_ftc1980_transcript.php?page=9While many people have a fairly good grasp of what inflation is, few really understand its fundamental cause. There are many popular scapegoats: labor unions, big business, spendthrift consumers, greed, and international forces. Dr. Friedman explains that the actual cause is a government that has exclusive control of the money supply. Friedman says that the solution to inflation is well known among those who have the power to stop it: simply slow down the rate at which new money is printed. But government is one of the primary beneficiaries of inflation. By inflating the currency, tax revenues rise as families are pushed into higher income tax brackets. Thus, inflation transfers wealth and resources from the private to the public sector. In short, inflation is attractive to government because it is a way of increasing taxes without having to pass new legislation to raise tax rates. Inflation is in fact taxation without representation. Wage and price controls are not the cure for inflation because they treat only the symptom (rising prices) and not the disease (monetary expansion). History records that such controls do not work; instead, they have perverse effects on both prices and economic growth and undermine the fundamental productivity of the economy. There is only one cure for inflation: slow the printing presses. But the cure produces the painful side effects of a temporary increase in unemployment and reduced economic growth. It takes considerable political courage to undergo the cure. Friedman cites the example of Japan, which successfully underwent the cure in the mid-seventies but took five years to squeeze inflation out of the system. Inflation is a social disease that has the potential for destroying a free society if it is unchecked. Prolonged inflation undermines belief in the basic equity of the free market system because it tends to destroy the link between effort and reward. And it tears the social fabric because it divides society into winners and losers and sets group against group.(Taxation without representation: Getting knocked up to higher tax brackets because of inflation pt 1)http://www.youtube.com/watch?v=b1dTWDNKH3c
Volume 9 – How to Cure Inflation
Transcript:
Friedman: The Sierra Nevada’s in California 10,000 feet above sea level, in the winter temperatures drop to 40 below zero, in the summer the place bakes in the thin mountain air. In this unlikely spot the town of Body sprang up. In its day Body was filled with prostitutes, drunkards and gamblers part of a colorful history of the American West.
A century ago, this was a town of 10,000 people. What brought them here? Gold. If this were real gold, people would be scrambling for it. The series of gold strikes throughout the West brought people from all over the world, all kinds of people. They came here for one purpose and one purpose only, to strike it rich, quick. But in the process, they built towns, cities, in places where nobody would otherwise have dreamed of building a city. Gold built these cities and when the gold was exhausted, the cities collapsed and became ghost towns. Many of the people who came here ended up the way they began, broke and unhappy. But a few struck it rich. For them, gold was real wealth. But was it for the world as a whole. People couldn’t eat the gold, they couldn’t wear the gold, they couldn’t live in houses made of gold. Because there was more gold, they had to pay a little more gold to buy goods and services. The prices of things in terms of gold went up.
At tremendous cost, at sacrifice of lives, people dug gold out of the bowels of the earth. What happened to that gold? Eventually, at long last, it was transported to distant places only to be buried again under the ground. This time in the vaults of banks throughout the world. There is hardly anything that hasn’t been used for money; rock salt in Ethiopia, brass rings in West Africa, Calgary shells in Uganda, even a toy cannon. Anything can be used as money. Crocodile money in Malaysia, absurd isn’t it?
That beleaguered minority of the population that still smokes may recognize this stuff as the raw material from which their cigarettes are made. But in the early days of the colonies, long before the U.S. was established, this was money. It was the common money of Virginia, Maryland and the Carolinas. It was used for all sorts of things. The legislature voted that it could be used legally to pay taxes. It was used to buy food, clothing and housing. Indeed, one of the most interesting sites was to see the husky young fellows at that time, lug 100 pounds of it down to the docks to pay the costs of the passage of the beauteous young ladies who had come over from England to be their brides.
Now you know how money is. There’s a tendency for it to grow, for more and more of it to be produced and that’s what happened with this tobacco. As more tobacco was produced, there was more money. And as always when there’s more money, prices went up. Inflation. Indeed, at the very end of the process, prices were 40 times as high in terms of tobacco as they had been at the beginning of the process. And as always when inflation occurs, people complained. And as always, the legislature tried to do something. And as always, to very little avail. They prohibited certain classes of people from growing tobacco. They tried to reduce the total amount of tobacco grown, they required people to destroy part of their tobacco. But it did no good. Finally, many people took it into their own hands and they went around destroying other people’s tobacco fields. That was too much. Then they passed a law making it a capital offense, punishable by death, to destroy somebody else’s tobacco. Grecian’s Law, one of the oldest laws in economics, was well illustrated. That law says that cheap money drives out dear money and so it was with tobacco. Anybody who had a debt to pay, of course, tried to pay it in the worst quality of tobacco he had. He saved the good tobacco to sell overseas for hard money. The result was that bad money drove out good money.
Finally, almost a century after they had started using tobacco as money, they established warehouses in which tobacco was deposited in barrels, certified by an inspector according to his views as to it’s quality and quantity. And they issued warehouse certificates which people gave from one to another to pay for the bills that they accumulated.
These pieces of green printed paper are today’s counterparts of those tobacco certificates. Except that they bear no relation to any commodity. In this program I want to take you to Britain to see how inflation weakens the social fabric of society. Then to Tokyo, where the Japanese have the courage to cure inflation. To Berlin, where there is a lesson to be learned from the West Germans and how so called cures are often worse than the disease. And to Washington where our government keeps these machines working overtime. And I am going to show you how inflation can be cured.
The fact is that most people enjoy the early stages of the inflationary process. Britain, in the swinging 60’s, there was plenty of money around, business was brisk, jobs were plentiful and prices had not yet taken off. Everybody seemed happy at first. But by the early 70’s, as the good times rolled along, prices started to rise more and more rapidly. Soon, some of these people are going to lose their jobs. The party was coming to an end.
The story is much the same in the U.S. Only the process started a little later. We’ve had one inflationary party after another. Yet we still can’t seem to avoid them. How come?
Before every election our representatives would like to make us think we are getting a tax break. When they are able to do it, while at the same time actually raising our taxes because of a bit of magic they have in their kit bag. That magic is inflation. They reduced the tax rates but the taxes we have to pay go up because we are automatically shoved into higher brackets by the effective inflation. A neat trick. Taxation without representation.
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Pt 2 Many a political leader has been tempted to turn to wage and price controls despite their repeated failure in practice. On this subject they never seem to learn. But some lessons may be learned. That happened to British P
Bob Crawford: The more I work, it seems like the more they take off me. I know if I work an extra day or two extra days, what they take in federal income tax alone is almost doubled because apparently it puts you in a higher income tax bracket and it takes more off you.
Friedman: Bob Crawford lives with his wife and three children in a suburb of Pittsburgh. They’re a fairly average American family.
Mrs. Crawford: Don’t slam the door Daphne. Okay. Alright. What are you doing? Making your favorite dish.
Friedman: We went to the Crawford’s home after he had spent a couple of days working out his federal and state income taxes for the year. For our benefit, he tried to estimate all the other taxes he had paid as well. In the end, though, he didn’t discover much that would surprise anybody.
Bob Crawford: Inflation is going up, everything is getting more expensive. No matter what you do, as soon as you walk out of the house, everything went up. Your gas bills keep going up, electric bills, your gasoline, you can name a thousand things that are going up. Everything is going sky high. Your food. My wife goes to the grocery store. We used to live on say, $60 or $50 every two weeks just for our basic food. Now it’s $80 or $90 every two weeks. Things are just going out of sight as far as expense to live on. Like I say it’s getting tough. It seems like every month it gets worse and worse. And I don’t know where it’s going to end. At the end of the day that I spend nearly $6,000 of my earnings on taxes. That leaves me with a total of $12,000 to live on. It might seem like a lot of money, but five, six years ago I was earning $12,000.
Friedman: How does taxation without representation really effect how much the Crawford family has left to spend after it’s paid its income taxes. Well in 1972 Bob Crawford earned $12,000. Some of that income was not subject to income tax. After paying income tax on the rest he had this much left to spend. Six years later he was earning $18,000 a year. By 1978 the amount free from tax was larger. But he was now in a higher tax bracket so his taxes went up by a larger percentage than his income. However, those dollars weren’t worth anything like as much. Even his wages, let alone his income after taxes, hadn’t kept up with inflation. His buying power was lower than before. That is taxation without representation in practice.
Unnamed Individual: We have with us today you brothers that are sitting here today that were with us on that committee and I’d like to tell you….
Friedman: There are many traditional scapegoats blamed for inflation. How often have you heard inflation blamed on labor unions for pushing up wages. Workers, of course, don’t agree.
Unnamed Individual: But fellows this is not true. This is subterfuge. This is a myth. Your wage rates are not creating inflation.
Friedman: And he’s right. Higher wages are mostly a result of inflation rather than a cause of it. Indeed, the impression that unions cause inflation arises partly because union wages are slow to react to inflation and then there is pressure to catch up.
Worker: On a day to day basis, try to represent our own numbers. But that in fact is not the case. Not only can we not play catch up, we can’t even maintain a wage rate commensurate with the cost of living that’s gone up in this country.
Friedman: Another scapegoat for inflation is the cost of goods coming from abroad. Inflation, we’re told, is imported. Higher prices abroad driving up prices at home. It’s another way government can blame someone else for inflation. But this argument, too, is wrong. The prices of imports and the countries from which they come are not in terms of dollars, they are in terms of lira or yen or other foreign currencies. What happens to their prices in dollars depends on exchange rates which in turn reflect inflation in the United States.
Since 1973 some governments have had a field day blaming the Arabs for inflation. But if high oil prices were the cause of inflation, how is it that inflation has been less here in Germany, a country that must import every drop of oil and gas that it uses on the roads and in industry, then for example it is in the U.S. which produces half of its own oil. Japan has no oil of its own at all. Yet at the very time the Arabs were quadrupling oil prices, the Japanese people were bringing inflation down from 30 to less than 5% a year. The fallacy is to confuse particular prices like the price of oil, with prices in general. Back at home, President Nixon understood this.
Nixon: “Now here’s what I will not do. I will not take this nation down the road of wage and price controls however politically expedient that may seem. The pros of rationing may seem like an easy way out, but they are really an easy way in for more trouble. To the explosion that follows when you try to clamp a lid on a rising head of steam without turning down the fire under the pot, wage and price controls only postpone the day of reckoning. And in so doing, they rob every American of a very important part of his freedom.
Friedman: Now listen to this:
Nixon: “The time has come for decisive action. Action that will break the vicious circle of spiraling prices and costs. I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. In addition, I call upon corporations to extend the wage price freeze to all dividends.”
Friedman: Many a political leader has been tempted to turn to wage and price controls despite their repeated failure in practice. On this subject they never seem to learn. But some lessons may be learned. That happened to British Prime Minister James Callahan who finally discovered that a very different economic myth was wrong. He told the Labor Party Conference about it in 1976.
James Callahan: “We used to think that you could use, spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that option no longer exists. It only works on each occasion since the war by injecting a bigger dose of inflation into the economy followed by a higher level of unemployment as the next step. That’s the history of the last 20 years.”
Friedman: Well, it’s one thing to say it. One reason why inflation does so much harm is because it effects different groups differently. Some benefit and of course they attribute that to their own cleverness. Some are hurt, but of course they attribute that to the evil actions of other people. And the whole problem is made far worse by the false cures which government adopts, particularly wage and price control.
The garbage collectors in London felt justifiably aggrieved because their wages had not been permitted to keep pace with the cost of living. They struck, hurting not the people who impose the controls, but their friends and neighbors who had to live with mounting piles of rat infested garbage. Hospital attendants felt justifiably aggrieved because their wages had not been permitted to keep up with the cost of living. They struck, hurting not the people who impose the controls, but cancer patients who were turned out of hospital beds. The attendants behaved as a group in a way they never would have behaved as individuals. One group is set against another group. The social fabric of society is torn apart inflicting scars that it will take decades to heal and all to no avail because wage and price controls, far from being a cure for inflation, only make inflation worse.
Within the memory of most of our political leaders, there’s one vivid example of how economic ruin can be magnified by controls. And the classic demonstration of what to do when it happens.
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(Wage and Price Controls don’t work)
Inflation is just like alcoholism. In both cases when you start drinking or when you start printing too much money, the good effects come first. The bad effects only come later.
That’s why in both cases there is a strong temptation to overdo it. To drink too much and to print too much money. When it comes to the cure, it’s the other way around. When you stop drinking or when you stop printing money, the bad effects come first and the good effects only come later.
Pt 3
Germany, 1945, a devastated country. A nation defeated in war. The new governing body was the Allied Control Commission, representing the United States, Britain, France and the Soviet Union. They imposed strict controls on practically every aspect of life including wages and prices. Along with the effects of war, the results were tragic. The basic economic order of the country began to collapse. Money lost its value. People reverted to primitive barter where they used cameras, fountain pens, cigarettes, whiskey as money. That was less than 40 years ago.
This is Germany as we know it today. Transformed into a place a lot of people would like to live in. How did they achieve their miraculous recovery? What did they know that we don’t know?
Early one Sunday morning, it was June 20, 1948, the German Minister of Economics, Ludwig Earhardt, a professional economist, simultaneously introduced a new currency, today’s Deutsche Mark, and in one fell swoop, abolished almost all controls on prices and wages. Why did he do it on a Sunday morning? It wasn’t as you might suppose because the Stock Markets were closed on that day, it was, as he loved to confess, because the offices of the American, the British, and the French occupation authorities were closed that day. He was sure that if he had done it when they open they would have countermanded the order. It worked like a charm. Within days, the shops were full of goods. Within months, the German economy was humming along at full steam. Economists weren’t surprised at the results, after all, that’s what a price system is for. But to the rest of the world it seemed an economic miracle that a defeated and devastated country could in little more than a decade become the strongest economy on the continent of Europe.
In a sense this city, West Berlin, is something of a unique economic test tube. Set as it is deep in Communist East Germany. Two fundamentally different economic systems collide here in Europe. Ours and theirs, separated by political philosophies, definitions of freedom and a steel and concrete wall.
To digress from inflation, economic freedom does not stand alone. It is part of a wider order. I wanted to show you how much difference it makes by letting you see how the people live on the other side of that Berlin Wall. But the East German authorities wouldn’t let us. The people over there speak the same language as the people over here. They have the same culture. They have the same for bearers. They are the same people. Yet you don’t need me to tell you how differently they live. There is one simple explanation. The political system over there cannot tolerate economic freedom. The political system over here could not exist without it.
But political freedom cannot be preserved unless inflation is kept in bounds. That’s the responsibility of government which has a monopoly over places like this. The reason we have inflation in the United States or for that matter anywhere in the world is because these pieces of paper and the accompanying book entry or their counterparts in other nations are growing more rapidly than the quantity of goods and services produced. The truth is inflation is made in one place and in one place only. Here in Washington. This is the only place were there are presses like this that turn out these pieces of paper we call money. This is the place where the power resides to determine how rapidly the amount of money shall increase.
What happened to all that noise? That’s what would happen to inflation if we stop letting the amount of money grow so rapidly. This is not a new idea. It’s not a new cure. It’s not a new problem. It’s happened over and over again in history. Sometimes inflation has been cured this way on purpose. Sometimes it’s happened by accident. During the Civil War the North, late in the Civil War, overran the place in the South where the printing presses were sitting up, where the pieces of paper were being turned out. Prior to that point, the South had a very rapid inflation. If my memory serves me right, something like 4% a month. It took the Confederacy something over two weeks to find a new place where they could set up their printing presses and start them going again. During that two week period, inflation came to a halt. After the two week period, when the presses started running again, inflation started up again. It’s that clear, that straightforward. More recently, there’s another dramatic example of the only effective way to deal with rampant inflation.
In 1973, Japanese housewives going to market were faced with an unpleasant fact. The cash in their purses seemed to be losing its value. Prices were starting to sore as the awful story of inflation began to unfold once again. The Japanese government knew what to do. What’s more, they were prepared to do it. When it was all over, economists were able to record precisely what had happened. In 1971 the quantity of money started to grow more rapidly. As always happens, inflation wasn’t affected for a time. But by late 1972 it started to respond. In early 73 the government reacted. It started to cut monetary growth. But inflation continued to soar for a time. The delayed reaction made 1973 a very tough year of recession. Inflation tumbled only when the government demonstrated its determination to keep monetary growth in check. It took five years to squeeze inflation out of the system. Japan attained relative stability. Unfortunately, there’s no way to avoid the difficult road the Japanese had to follow before they could have both low inflation and a healthy economy. First they had to live through a recession until slow monetary growth had its delayed effect on inflation.
Inflation is just like alcoholism. In both cases when you start drinking or when you start printing too much money, the good effects come first. The bad effects only come later.
That’s why in both cases there is a strong temptation to overdo it. To drink too much and to print too much money. When it comes to the cure, it’s the other way around. When you stop drinking or when you stop printing money, the bad effects come first and the good effects only come later. That’s why it’s so hard to persist with the cure. In the United States, four times in the 20 years after 1957, we undertook the cure. But each time we lacked the will to continue. As a result, we had all the bad effects and none of the good effects. Japan on the other hand, by sticking to a policy of slowing down the printing presses for five years, was by 1978 able to reap all the benefits, low inflation and a recovering economy. But there is nothing special about Japan. Every country that has had the courage to persist in a policy of slow monetary growth has been able to cure inflation and at the same time achieve a healthy economy.
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Pt 4
The job of the Federal Reserve is not to run government spending; it’s not to run government taxation. The job of the Federal Reserve is to control the money supply and I believe, frankly, I have always believed as you know, that these are excuses and not reasons for the performance.
DISCUSSION
Participants: Robert McKenzie, Moderator; Milton Friedman; Congressman Clarence J. Brown; William M. Martin, Chairman of Federal Reserve 1951_1970; Beryl W. Sprinkel, Executive Vice President, Harris Bank, Chicago; Otmar Emminger, President, Ieutsche Bundesbank, Frankfurt West Germany
MCKENZIE: And here at the Harper Library of the University of Chicago, our distinguished guests have their own ideas, too. So, lets join them now.
BROWN: If you could control the money supply, you can certainly cut back or control the rate of inflation. I’d have to say that that prescription is a little bit easier to write than it is to fill. I think there are some other ways to do it and I would relate the money supply __ I think inflation is a measure of the relationship between money and the goods and services that money is meant to cover. And so if you can stimulate the goods, the production of goods and services, it’s helpful. It’s a little tougher to control the money supply, although I think it can be done, than just saying that you should control it, because we’ve got the growth of credit cards, which is a form of money; created, in effect, by the free enterprise system. It isn’t all just printed in Washington, but that may sound too defensive. I think he was right in saying that the inflation is Washington based.
MCKENZIE: Mr. Martin, nobody has been in the firing line longer than you, 17 years head of the Fed. Could you briefly comment on that and we’ll go around the group.
MARTIN: I want to say 19 years.
(Laughter)
MARTIN: I wouldn’t be out here if it weren’t for Milton Friedman, today. He came down and gave us advice from time to time.
FRIEDMAN: You’ve never taken it.
(Laughter)
MCKENZIE: He’s going to do some interviewing later, I warn you.
MARTIN: And I’m rather glad we didn’t take it __
(Laughter)
MARTIN: __ all the time.
SPRINKEL: In your 19 years as Chairman of the Federal Reserve, Bill, the average growth in the money supply was 3.1 percent per year. The inflation rate was 2.2 percent. Since you left, the money supply has exactly doubled. The inflation rate is average over 7 percent, and, of course, in recent times the money supply has been growing in double-digit territory as has our inflation rate.
EMMINGER: May I, first of all, confirm two facts which have been so vividly brought out in the film of Professor Friedman; namely, that at the basis of the relatively good performance of Western Germany were really two events. One, the establishment of a new sound money which we try to preserve sound afterwards. And, secondly, the jump overnight into a free market economy without any controls over prices and wages. These are the two fundamental facts. We have tried to preserve monetary stability by just trying to follow this prescription of Professor Friedman; namely, monetary discipline. Keeping monetary growth relatively moderate. I must, however, warn you it’s not so easy as it looks. If you just say, governments have to have the courage to persist in that course.
FRIEDMAN: Nobody does disagree with the proposition that excessive growth in money supply is an essential element in the inflationary process and that the real problem is not what to do, but how to have the courage and the will to do it. And I want to go and start, if I may, on that subject; because I think that’s what we ought to explore. Why is it we haven’t had the courage and don’t, and under what circumstances will we? And I want to start with Bill Martin because his experience is a very interesting experience. His 19 years was divided into different periods. In the first period, that average that Beryl Sprinkel spoke about, averaged two very different periods. An early period of very slow growth and slow inflation; a later period of what at the time was regarded as creeping inflation __ now we’d be delighted to get back to it. People don’t remember that at the time that Mr. Nixon introduced price and wage controls in 1971 to control an outrageous inflation, the rate of inflation was four-and-a-half percent per year. Today we’d regard that as a major achievement; but the part of the period when you were Chairman, was a period when the inflation rate was starting to creep up and money growth rate was also creeping up. Now if I go from your period, you were eloquent in your statements to the public, to the press, to everyone, about the evils of inflation, and about the determination on the Federal Reserve not to be the architect of inflation. Your successor, Arthur Burns, was just as eloquent. Made exactly the same kinds of statements as effectively, and again over and over again said the Federal Reserve will not be the architect of inflation. His successor, Mr. G. William Miller, made the same speeches, and the same statements, and the same protestations. His successor, Paul Volcker, he is making the same statements. Now my question to you is: Why is it that there has been such a striking difference between the excellent pronouncements of all Chairmen of the Fed, therefore it’s not personal on you. You have a lot of company, unfortunately for the country. Why is it that there has been such a wide diversion between the excellent pronouncements on the one hand and what I regard as a very poor performance on the other?
MARTIN: Because monetary policy is not the only element. Fiscal policy is equally important.
FRIEDMAN: You’re shifting the buck to the Treasury.
MARTIN: Yes.
FRIEDMAN: To the Congress. We’ll get to Mr. Brown, don’t worry.
MARTIN: Yeah, that’s right.
(Laughter)
MARTIN: The relationship of fiscal policy to monetary policy is one of the important things.
MCKENZIE: Would you remind us, the general audience, when you say “fiscal policy”, what you mean in distinction to “monetary policy”?
MARTIN: Well, taxation.
MCKENZIE: Yeah.
MARTIN: The raising revenue.
FRIEDMAN: And spending.
MARTIN: And spending.
FRIEDMAN: And deficits.
MARTIN: And deficits, yes, exactly. And I think that you have to realize that when I’ve talked for a long time about the independence of the Federal Reserve. That’s independence within the government, not independence of the government. And I’ve worked consistently with the Treasury to try to see that the government is financed. Now this gets back to spending. The government says they’re gonna spend a certain amount, and then it turns out they don’t spend that amount. It doubles.
FRIEDMAN: The job of the Federal Reserve is not to run government spending; it’s not to run government taxation. The job of the Federal Reserve is to control the money supply and I believe, frankly, I have always believed as you know, that these are excuses and not reasons for the performance.
MARTIN: Well that’s where you and I differ, because I think we would be irresponsible if we didn’t take into account the needs and what the government is saying and doing. I think if we just went on our own, irresponsibly, I say it on this, because I was in the Treasury before I came to this __
FRIEDMAN: I know. I know.
MARTIN: __ go to the Fed; and I know the other side of the picture. I think we’d be rightly condemned by the American people and by the electorate.
FRIEDMAN: Every central bank in this world, including the German Central Bank, including the Federal Reserve System, has the technical capacity to make the money supply do over a period of two or three or four months, not daily, but over a period, has the technical capacity to control it.
(Several people talking at once.)
FRIEDMAN: I cannot explain the kind of excessive money creation that has occurred, in terms of the technical incapacity of the Federal Reserve System or of the German Central Bank, or of the Bank of England, or any other central bank in the world.
EMMINGER: I wouldn’t say technically we are incapable of doing that, although we have never succeeded in controlling the money supply month that way. But I would say we can, technically, control it half yearly, from one half-year period to the next and that would be sufficient __
FRIEDMAN: That would be sufficient.
EMMINGER: __ for controlling inflation. But however I __
VOICE OFF SCREEN: It doesn’t move.
FRIEDMAN: I’m an economic scientist, and I’m trying to observe phenomena, and I observe that every Federal Reserve Chairman says one thing and does another. I don’t mean he does, the system does.
MCKENZIE: Yeah. How different is your setup in Germany? You’ve heard this problem of governments getting committed to spending and the Fed having, one way or the other, to accommodate itself to it. Now what’s your position on this very interesting problem?
EMMINGER: We are very independent of the government, from the government, but, on the other hand, we are an advisor of the government. Also on the budget deficits and they would not easily go before Parliament with a deficit which much of it is openly criticized and disapproved by the same bank. Why because we have a tradition in our country that we can also publicly criticize the government on his account. And second, as if happened in our case too, the government goes beyond what is tolerable for the sake of moral equilibrium. We have let it come through in the capital markets. That is to say they have enough interest rates that has drawn public criticism and that has had some effect on their attitude.
_________________________________________
Pt 5
I think that is a very important point that Dr. Emminger just made because there is not a one-to-one relationship between government deficits and what happens to the money supply at all. The pressure on the Federal Reserve comes indirectly. It comes because large government deficits, if they are financed in the general capital market, will drive up interest rates and then we have the right patents in Congress and their successors pressuring the Federal Reserve to enter in and finance the deficit by printing money as a way of supposedly holding down interest rates. Now before I turn to Mr. Brown and ask him that, I just want to make one point which is very important. The Federal Reserve’s activities in trying to hold down interest rates have put us in a position where we have the highest interest rates in history. It’s another example of how, of the difference between the announced intentions of a policy, and the actual results. But now I want to come to Clarence Brown and ask him, shift the buck to him, and put him on the hot seat for a bit. The government spending has been going up rapidly, Republican administration or Democratic administration. This is a nonpartisan issue, it doesn’t matter. Government deficits have been going up rapidly. Republican administration or Democratic administration. Why is it that here again you have the difference between pronouncements and performance? There is no Congressman, no Senator, who will come out and say, “I am in favor of inflation.” There is not a single one who will say, “I am in favor of big deficits.” They’ll all say we want to balance the budget, we want to hold down spending, we want an economical government. How do you explain the difference between performance and talk on the side of Congress?
BROWN:
FRIEDMAN: I think that is a very important point that Dr. Emminger just made because there is not a one-to-one relationship between government deficits and what happens to the money supply at all. The pressure on the Federal Reserve comes indirectly. It comes because large government deficits, if they are financed in the general capital market, will drive up interest rates and then we have the right patents in Congress and their successors pressuring the Federal Reserve to enter in and finance the deficit by printing money as a way of supposedly holding down interest rates. Now before I turn to Mr. Brown and ask him that, I just want to make one point which is very important. The Federal Reserve’s activities in trying to hold down interest rates have put us in a position where we have the highest interest rates in history. It’s another example of how, of the difference between the announced intentions of a policy, and the actual results. But now I want to come to Clarence Brown and ask him, shift the buck to him, and put him on the hot seat for a bit. The government spending has been going up rapidly, Republican administration or Democratic administration. This is a nonpartisan issue, it doesn’t matter. Government deficits have been going up rapidly. Republican administration or Democratic administration. Why is it that here again you have the difference between pronouncements and performance? There is no Congressman, no Senator, who will come out and say, “I am in favor of inflation.” There is not a single one who will say, “I am in favor of big deficits.” They’ll all say we want to balance the budget, we want to hold down spending, we want an economical government. How do you explain the difference between performance and talk on the side of Congress?
BROWN: Well, first I think we have to make one point. I’m not so much with the government as I am against it.
FRIEDMAN: I understand.
BROWN: As you know, I’m a minority member of Congress.
FRIEDMAN: Again, I’m not __ I’m not directing this at you personally.
BROWN: I understand, of course; and while the administrations, as you’ve mentioned, Republican and Democratic administrations, have both been responsible for increases in spending, at least in terms of their recommendations. It is the Congress and only the Congress that appropriates the funds and determines what the taxes are. The President has no authority to do that and so one must lay it at the feet of the U.S. Congress. Now, I guess we’d have to concede that it’s a little bit more fun to give away things than it is to withhold them. And this is the reason that the Congress responds to a general public that says, “I want you to cut everybody else’s program but the one in which I am most particularly interested. Save money, but incidentally, my wife is taking care of the orphanages and so lets try to help the orphanages,” or whatever it is. Let me try to make a point, if I can, however, on what I think is a new spirit moving within the Congress and that is that inflation, as a national affliction, is beginning to have an impact on the political psychology of many Americans. Now the Germans, the Japanese and others have had this terrific postwar inflation. The Germans have been through it twice, after World War I and World War II, and it’s a part of their national psyche. But we are affected in this country by the depression. Our whole tax structure is built on the depression. The idea of the tax structure in the past has been to get the money out of the mattress where it went after the banks failed in this country and jobs were lost, and out of the woodshed or the tin box in the back yard, get it out of there and put it into circulation. Get it moving, get things going. And one of the ways to do that was to encourage inflation. Because if you held on to it, the money would depreciate; and the other way was to tax it away from people and let the government spend it. Now there’s a reaction to that and people are beginning to say, “Wait just a minute. We’re not afflicted as much as we were by depression. We’re now afflicted by inflation, and we’d like for you to get it under control.” Now you can do that in another way and that without reducing the money supply radically. I think the Joint Economic Committee has recommended that we do it gradually. But the way that you can do it is to reduce taxes and the impact of government, that is the weight of government and increase private savings so that the private savings can finance some of the debt that you have.
FRIEDMAN: There is no way you can do it without reducing, in my opinion, the rate of monetary growth. And I, recognizing the facts, even though they ought not to be that way, I wonder whether you can reduce the rate of monetary growth unless Congress actually does reduce government spending as well as government taxes.
BROWN: The problem is that every time we use demand management, we get into a kind of an iron maiden kind of situation. We twist this way and one of the spikes grabs us here, so we twist that way and a spike over here gets us. And every recession has had higher basic unemployment rates than the previous recession in the last several years and every inflation has had higher inflation. We’ve got to get that tilt out of the society.
MCKENZIE: Wouldn’t it be fair to say, though, that a fundamental difference is the Germans are more deeply fearful of a return to inflation, having had the horrifying experience between the wars, especially. We tend to be more afraid of recession turning into depression.
EMMINGER: I think there is something in it and in particular in Germany the government would have to fear very much in their electoral prospects if they went into such an election period with a high inflation rate. But there is another important difference.
MARTIN: We fear unemployment more than inflation it seems.
EMMINGER: You fear unemployment, but unemployment is feared with us, too, but inflation is just as much feared. But there is another difference; namely, once you have got into that escalating inflation, every time the base, the plateau is higher, it’s extremely difficult to get out of it. You must avoid getting into that, now that’s very cheap advice from me because you are now.
(Laughing)
EMMINGER: But we had, for the last fifteen, twenty years, always studied foreign experiences, and told ourselves we never must get into this vicious circle. Once you are in, it takes a long time to get out of it. That is what I am preaching now, that we should avoid at all costs to get again into this vicious circle as we had it already in ’73_’74. It took us, also, four years to get out of it, although we were only at eight percent inflation. Four years to get down to three percent. So you __
MCKENZIE: Those were __ yes.
EMMINGER: You have, I think, the question of whether you can do if in a gradualist way over many, many years, or whether you don’t need a sort of shock treatment.
____________________________________
her we go into a period of still higher unemployment later on and have it to do all over again. That’s the only choice we face. And when the public at large recognizes that, they will then elect people to Congress, and a President to office who is committed to less government spending and to less government printing of money and until that happens we will not cure inflation
Pt 6
SPRINKEL: The film said it took the Japanese _ what _ four years?
FRIEDMAN: Five years.
SPRINKEL: Five years. But one of my greatest concerns is that we haven’t suffered enough yet. Most of the nations that have finally got their inflations __
BROWN: Bad election speech.
SPRINKEL: __ well, I’m not running for office, Clarence.
(Laughter)
SPRINKEL: Most countries that finally got their inflation under control had 20, 30 percent or worse inflation. Germany had much worse and the public supports them. We live in a Democracy, and we’re getting constituencies that gain from inflation. You look at people that own real estate, they’ve done very well.
MCKENZIE: Yes.
SPRINKEL: And how can we get there without going through even more pain, and I doubt that we will.
FRIEDMAN: If you ask who are the constituencies that have benefited most from inflation there are no doubt, it is the homeowners.
SPRINKEL: Yes.
FRIEDMAN: But it’s also the __ it’s also the Congressmen who have been able to vote higher spending without having to vote higher taxes. They have in fact __
BROWN: That’s right.
FRIEDMAN: __ Congress has in fact voted for inflation. But you have never had a Congressman on record to that effect. It’s the government civil servants who have their own salaries are indexed and tied to inflation. They have a retirement benefit, a retirement pension that’s tied to inflation. They qualify, a large fraction of them, for Social Security as well, which is tied to inflation. So that the beneficial __
BROWN: Labor contracts that are indexed and many pricing things that are tied to it.
FRIEDMAN: But the one thing that isn’t tied to inflation and here I want to come back and ask why Congress has been so __ so bad in this area, is our taxes. It has been impossible to get Congress to index the tax system so that you don’t have the present effect where every one percent increase in inflation pushes people up into higher brackets and forces them to pay higher taxes.
BROWN: Well, as you know, I’m an advocate of that.
FRIEDMAN: I know you are.
MCKENZIE: Some countries do that, of course.
FRIEDMAN: Oh, of course.
MCKENZIE: Canada does that. Indexes the __
BROWN: And I went up to Canada on a little weekend seminar program on indexing and came back an advocate of indexing because I found out that the people who are delighted with indexing are the taxpayers.
FRIEDMAN: Absolutely.
BROWN: Because as the inflation rate goes up their tax level either maintains at the same level or goes down. The people who are least __ well, the people who are very unhappy with it are the people who have to plan government spending because it is reducing the amount of money that the government has rather than watching it go up by ten or twelve billion. You get a little dividend to spend in this country, the bureaucrats do every year, but the politicians are unhappy with it too, as Dr. Friedman points out because, you see, politicians don’t get to vote a tax reduction, it happens automatically.
MCKENZIE: Yeah.
BROWN: And so you can’t go back and in a praiseworthy way tell your constituents that I am for you, I voted a tax reduction. And I think we ought to be able to index the tax system so that tax reduction is automatic, rather than have what we’ve had in the past, and that is an automatic increase in the taxes. And the politicians say, “Well, we’re sorry about inflation, but __”.
FRIEDMAN: You’re right and I want to __ I want to go and make a very different point. I sit here and berate you and you as government officials, and so on, but I understand very well that the real culprits are not the politicians, are not the central bankers, but it’s I and my fellow citizens. I always say to people when I talk about this, “If you want to know who’s responsible for inflation, look in the mirror.” It’s not because of the way you spend you money. Inflation doesn’t arise because you got consumers who are spendthrifts; they’ve always been spendthrifts. It doesn’t arise because you’ve got businessmen who are greedy. They’ve always been greedy. Inflation arises because we as citizens have been asking you as politicians to perform an impossible task. We’ve been asking you to spend somebody else’s money on us, but not to spend our money on anybody else.
BROWN: You don’t want us to cut back those dollars for education, right?
FRIEDMAN: Right. And, therefore, __ well, no, I do.
MCKENZIE: We’ve already had a program on that.
FRIEDMAN: We’ve already had a program on that and there’s no viewer of these programs who will be in any doubt about my position on that. But the public at large has not and this is where we come to the political will that Dr. Emminger quite properly talked about. It is __ everybody talks against inflation, but what he means is that he wants the prices of the things he sells to go up and the prices of the things he buys to go down. But, sooner or later, we come to the point where it will be politically profitable to end inflation. This is the point that __
SPRINKEL: Yes.
FRIEDMAN: __ I think you were making.
SPRINKEL: The suffering idea.
FRIEDMAN: Where do you think the __ you know, what do you think the rate of inflation has to be and judged by the experience of other countries before we will be in that position and when do you think that will happen?
SPRINKEL: Well, the evidence says it’s got to be over 20 percent. Now you would think we could learn from others rather than have to repeat mistakes.
FRIEDMAN: Apparently nobody can learn from history.
SPRINKEL: But at the present time we’re going toward higher and not lower inflation.
MCKENZIE: You said earlier, if you want to see who causes inflation look in the mirror.
FRIEDMAN: Right.
MCKENZIE: Now, for everybody watching and taking part in this, there must be some moral to that. What does need __ what has to be the change of attitude of the man in the mirror you’re looking at before we can effectively implement what you call a tough policy that takes courage?
FRIEDMAN: I think that the man in the mirror has to come to recognize that inflation is the most destructive disease known to modern society. There is nothing which will destroy a society so thoroughly and so fully as letting inflation run riot. He must come to recognize that he doesn’t have any good choices. That there are no easy answers. That once you get in this situation where the economy is sick of this insidious disease, there’s gonna be no miracle drug which will enable them to be well tomorrow. That the only choices he has, do I go through a tough period for four or five years of relatively high unemployment, relatively low growth or do I try to push it off by taking some more of the hair of the dog that bit me and get around it now at the cost of still higher unemployment, as Clarence Brown said, later on. The only choice this country faces, is whether we have temporary unemployment for a short period, as a side effect of curling inflation or whether we go into a period of still higher unemployment later on and have it to do all over again. That’s the only choice we face. And when the public at large recognizes that, they will then elect people to Congress, and a President to office who is committed to less government spending and to less government printing of money and until that happens we will not cure inflation.
____________________________________
FRIEDMAN: And therefore the crucial thing is to cut down total government spending from the point of view of inflation. From the point of view of productivity, some of the other measures you were talking about are far more important.
BROWN
Pt 7
BROWN: But, Dr. Friedman, let me __
(Applause)
BROWN: Let me differ with you to this extent. I think it is important that at the time you are trying to get inflation out of the economy that you also give the man in the street, the common man, the opportunity to have a little bit more of his own resources to spend. And if you can reduce his taxes at that time and then reduce government in that process, you give him his money to spend rather than having to yield up all that money to government. If you cut his taxes in a way to encourage it, to putting that money into savings, you can encourage the additional savings in a private sense to finance the debt that you have to carry, and you can also encourage the stimulation of growth in the society, that is the investment into the capital improvements of modernization of plant, make the U.S. more competitive with other countries. And we can try to do it without as much painful unemployment as we can get by with. Don’t you think that has some merit?
FRIEDMAN: The only way __ I am all in favor, as you know, of cutting government spending. I am all in favor of getting rid of the counterproductive government regulation that reduces productivity and disrupts investment. But __
BROWN: And we do that, we can cut taxes some, can we not?
FRIEDMAN: We should __ taxes __ but you are introducing a confusion that has confused the American people. And that is the confusion between spending and taxes. The real tax on the American people is not what you label taxes. It’s total spending. If Congress spends fifty billion dollars more than it takes in, if government spends fifty billion dollars, who do you suppose pays that fifty billion dollars?
BROWN: Of course, of course.
FRIEDMAN: The Arab Sheiks aren’t paying it. Santa Claus isn’t paying it. The Tooth Fairy isn’t paying it. You and I as taxpayers are paying it indirectly through hidden taxation.
MCKENZIE: Your view __
FRIEDMAN: And therefore the crucial thing is to cut down total government spending from the point of view of inflation. From the point of view of productivity, some of the other measures you were talking about are far more important.
BROWN: But if you concede that inflation and taxes are both part and parcel of the same thing, and if you cut spending __
FRIEDMAN: They’re not part and parcel of the same thing.
BROWN: If you cut spending you __ well, but, you take the money from them in one way or another. The average citizen.
FRIEDMAN: Absolutely.
BROWN: To finance the growth of government.
FRIEDMAN: That’s right.
BROWN: So if you cut back the size of government, you can cut both their inflation and their taxes.
FRIEDMAN: That’s right.
BROWN: If you __
FRIEDMAN: I am all in favor of that.
BROWN: All right.
FRIEDMAN: All I am saying is don’t kid yourself into thinking that there is some painless way to do it. There just is not.
BROWN: One other way is productivity. If you can __ if you can increase production, then the impact of inflation is less because you have more goods chasing __
FRIEDMAN: Absolutely, but you have to have a sense of proportion. From the point of view of the real income of the American people, nothing is more important than increasing productivity. But from the point of view of inflation, it’s a bit actor. It would be a miracle if we could raise our productivity from three to five percent a year, that would reduce inflation by two percent.
BROWN: No question, it won’t happen overnight, but it’s part of the __ it’s part of a long range squeezing out of inflation.
FRIEDMAN: There is only one way to ease the __ in my opinion there is only one way to ease the pains of curing inflation and that way is not available. That way is to make it credible to the American people that you are really going to follow the policy you say you’re going to follow. Unfortunately I don’t see any way we can do that.
(Several people talking at once.)
EMMINGER: Professor Friedman, that’s exactly the point which I wanted to illustrate by our own experience. We also had to squeeze out inflation and there was a painful time of one-and-a-half years, but after that we had a continuous lowering of the inflation rate with a slow upward movement in the economy since 1975. Year by year inflation went down and we had a moderate growth rate which has led us now to full employment.
FRIEDMAN: That’s what __
EMMINGER: So you can shorten this period by just this credibility and by a consensus you must have, also with the trade unions, with the whole population that they acknowledge that policy and also play their part in it. Then the pains will be much less.
SPRINKEL: You see in our case, expectations are that inflation’s going to get worse because it always has. This means we must disappoint in a very painful way those expectations and it’s likely to take longer, at least the first time around. Now our real problem has not been that we haven’t tried. We have tried and brought inflation down. Our real problem was, we didn’t stick to it. And then you have it all to do over.
BROWN: Well I would __ I would concede that psychology plays a great, perhaps even the major part, but I do believe that if you have private savings stimulated by your tax system, rather than discouraged by your tax system, you can finance some of that public debt by private savings rather than by inflation and the result will be to ease to some degree the paint of that heavy unemployment that you seem to suggest is the only way to deal with the problem.
FRIEDMAN: The talk is fine, but the problem is that it’s used to evade the key issue: How do you make it credible to the public that you are really going to stick to a policy? Four times we’ve tried it and four times we’ve stopped before we’ve run the course.
(Several people talking at once.)
MCKENZIE: There we leave the matter for tonight, and next week’s concluding program in this series is not to be missed.
Milton Friedman The Power of the Market 1-5 How can we have personal freedom without economic freedom? That is why I don’t understand why socialists who value individual freedoms want to take away our economic freedoms. I wanted to share this info below with you from Milton Friedman who has influenced me greatly over the […]
Milton Friedman: Free To Choose – The Failure Of Socialism With Ronald Reagan (Full) Published on Mar 19, 2012 by NoNationalityNeeded Milton Friedman’s writings affected me greatly when I first discovered them and I wanted to share with you. We must not head down the path of socialism like Greece has done. Abstract: Ronald Reagan […]
Worse still, America’s depression was to become worldwide because of what lies behind these doors. This is the vault of the Federal Reserve Bank of New York. Inside is the largest horde of gold in the world. Because the world was on a gold standard in 1929, these vaults, where the U.S. gold was stored, […]
George Eccles: Well, then we called all our employees together. And we told them to be at the bank at their place at 8:00 a.m. and just act as if nothing was happening, just have a smile on their face, if they could, and me too. And we have four savings windows and we […]
Milton Friedman’s Free to Choose (1980), episode 3 – Anatomy of a Crisis. part 1 FREE TO CHOOSE: Anatomy of Crisis Friedman Delancy Street in New York’s lower east side, hardly one of the city’s best known sites, yet what happened in this street nearly 50 years ago continues to effect all of us today. […]
Friedman Friday” Free to Choose by Milton Friedman: Episode “What is wrong with our schools?” (Part 3 of transcript and video) Here is the video clip and transcript of the film series FREE TO CHOOSE episode “What is wrong with our schools?” Part 3 of 6. Volume 6 – What’s Wrong with our Schools Transcript: If it […]
Here is the video clip and transcript of the film series FREE TO CHOOSE episode “What is wrong with our schools?” Part 2 of 6. Volume 6 – What’s Wrong with our Schools Transcript: Groups of concerned parents and teachers decided to do something about it. They used private funds to take over empty stores and they […]
Here is the video clip and transcript of the film series FREE TO CHOOSE episode “What is wrong with our schools?” Part 1 of 6. Volume 6 – What’s Wrong with our Schools Transcript: Friedman: These youngsters are beginning another day at one of America’s public schools, Hyde Park High School in Boston. What happens when […]
Friedman Friday” Free to Choose by Milton Friedman: Episode “Created Equal” (Part 3 of transcript and video) Liberals like President Obama want to shoot for an equality of outcome. That system does not work. In fact, our free society allows for the closest gap between the wealthy and the poor. Unlike other countries where free enterprise and other […]
Free to Choose by Milton Friedman: Episode “Created Equal” (Part 2 of transcript and video) Liberals like President Obama want to shoot for an equality of outcome. That system does not work. In fact, our free society allows for the closest gap between the wealthy and the poor. Unlike other countries where free enterprise and other freedoms are […]
Milton Friedman and Ronald Reagan Liberals like President Obama (and John Brummett) want to shoot for an equality of outcome. That system does not work. In fact, our free society allows for the closest gap between the wealthy and the poor. Unlike other countries where free enterprise and other freedoms are not present. This is a seven part series. […]
I am currently going through his film series “Free to Choose” which is one the most powerful film series I have ever seen. PART 3 OF 7 Worse still, America’s depression was to become worldwide because of what lies behind these doors. This is the vault of the Federal Reserve Bank of New York. Inside […]
I am currently going through his film series “Free to Choose” which is one the most powerful film series I have ever seen. For the past 7 years Maureen Ramsey has had to buy food and clothes for her family out of a government handout. For the whole of that time, her husband, Steve, hasn’t […]
Friedman Friday:(“Free to Choose” episode 4 – From Cradle to Grave, Part 1 of 7) Volume 4 – From Cradle to Grave Abstract: Since the Depression years of the 1930s, there has been almost continuous expansion of governmental efforts to provide for people’s welfare. First, there was a tremendous expansion of public works. The Social Security Act […]
_________________________ Pt3 Nowadays there’s a considerable amount of traffic at this border. People cross a little more freely than they use to. Many people from Hong Kong trade in China and the market has helped bring the two countries closer together, but the barriers between them are still very real. On this side […]
Aside from its harbor, the only other important resource of Hong Kong is people __ over 4_ million of them. Like America a century ago, Hong Kong in the past few decades has been a haven for people who sought the freedom to make the most of their own abilities. Many of them are […]
“FREE TO CHOOSE” 1: The Power of the Market (Milton Friedman) Free to Choose ^ | 1980 | Milton Friedman Posted on Monday, July 17, 2006 4:20:46 PM by Choose Ye This Day FREE TO CHOOSE: The Power of the Market Friedman: Once all of this was a swamp, covered with forest. The Canarce Indians […]
Milton Friedman: Free To Choose – The Failure Of Socialism With Ronald Reagan (Full) Published on Mar 19, 2012 by NoNationalityNeeded Milton Friedman’s writings affected me greatly when I first discovered them and I wanted to share with you. We must not head down the path of socialism like Greece has done. Abstract: Ronald Reagan […]
In the report, I ask “Is it time for Reaganomics 2.0?”
This week, I’m going to look at key economic issues and see whether Reagan’s policies worked and whether similar policies are needed again today.
We’ll start with fiscal policy. Here’s Figure 2 from the study, showing that the burden of federal spending, measured as a share of economic output, increased significantly during the 1970s.
Most troubling, almost all of the increase was because of additional domestic spending.
What happened during the Reagan years? Did policy improve?
As you can see from this next chart, Figure 3, Reagan reversed that worrisome trend. The burden of government spending fell during his years in office (Reagan’s budgets covered 1981-1989, but I also included 1980 and 1988 for people who focus on election years).
Most impressively, Reagan reduced the burden of domestic spending (both entitlements and discretionary) by 2.5 percentage points of GDP.
For those who want more information on Reagan’s successful spending restraint, I recommend this 2011 video.
The purpose of today’s column, though, is to focus on the future. Specifically, what are the challenges we face today and would a Reagan-style approach be appropriate?
The first part of that question is easy to answer. The federal government is far too big and America’s fiscal burden is projected to become an even bigger problem in the near future.
In the study, I included this chart from the Congressional Budget Office, which shows that the burden of federal spending is on a very bad upward trajectory over the next three decades.
The second part of the question also is easy to answer.
Reagan’s approach was to restrain spending and that same approach is needed today. Here’s some of what I wrote.
America’s spending problem today is worse than it was when Reagan was elected and inaugurated. The overall burden of spending has reached more than 24 percent of economic output and domestic spending by itself consumes more than 19 percent of GDP. …All this spending…undermines growth by diverting resources from the productive sector of the economy. …Domestic discretionary spending is a very ripe target for budget savings. …Entitlements are the major budget challenge. More than 70 percent of the federal budget is allocated to these programs, and that share will increase since entitlement spending is projected to become an even bigger burden in the future. …some sort of spending restraint would be desirable. One option is a…spending cap. The best model in the United States is Colorado’s Taxpayer Bill of Rights. The TABOR provision in Colorado’s constitution effectively limits spending so that it cannot grow faster than the combination of inflation plus population. …Globally, the best model is Switzerland’s spending cap.
And I also make the case for entitlement reform, including Medicare, Medicaid, and Social Security.
To conclude this column, let’s look at the big picture.
I wrote that some sort of spending cap is needed. To help make the case, I showed what would have happened to federal spending if Washington was subjected to a TABOR-style spending cap at the start of the Trump years.
As you can see in Figure 5. the savings would be enormous. Limiting spending increases to population plus inflation would have resulted in a federal budget of about $5 trillion for 2023, which is more than $1 trillion less than politicians actually spent.
There is a real debate about the shape of the Laffer Curve and the ideal point on the curve.
The fifth point recognizes that well-meaning and knowledgeable people can vigorously disagree.
Do changes in tax policy have big effects or small effects on the economy? How much revenue feedback will occur if there is a change in tax rates?
Just a couple of examples of questions that I have endlessly debated with reasonable folks on the left.
But let’s focus today on the unreasonable left. Or, to be more specific, let’s look at an editorial from the St. Louis Post-Dispatch.
Here are some portions of that newspaper’s simplistic screed.
…the deficit explosion…effectively disproved his theory that cutting taxes on the rich would increase government tax revenue. …Laffer continues to be unchastened…, even as Britain reels from a leadership shuffle caused by the catastrophic application of his very theories. Hand it to Laffer: Seldom does someone who is so often proven wrong have the gumption to maintain he’s right…His famous “Laffer curve” presumes to prove that tax cuts for the rich will spur economic investment, causing such strong economic growth that the government’s tax revenue would actually rise instead of falling. …Yes, the economy was robust in the 1980s after Reagan’s historic tax cuts. But that’s also when the era of big budget deficits began. …congressional Republicans and President Donald Trump in 2017 slashed corporate taxes in what they claimed was a necessary economy-booster… Then-Treasury Secretary Stephen Mnuchin’s famous vow that the tax-cut plan would “pay for itself” in growth — the very definition of Laffer’s theory — has since been exposed as the voodoo it always was.
Almost every sentence in the above excerpt cries out for correction.
For instance, Reagan and his team never claimed that the 1981 tax cuts would be self-financing (though IRS data shows that lower tax rates on the rich did produce more revenue).
And it’s absurd to blame the United Kingdom’s political instability on tax cuts that never occurred.
If Secretary Mnunchin claimed the entire tax cut would pay for itself, he clearly deserves to be mocked, but it’s worth noting that the lower corporate tax rate from the 2017 reform is very close to being self-financing.
Not that we should be surprised. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.
The bottom line is that the editorial board of the St. Louis Post-Dispatch obviously puts ideology above accuracy.
P.S. I can’t resist sharing one other excerpt from the editorial.
“The Kansas Experiment,” was a debacle. The state’s economy didn’t skyrocket, but the deficit did, forcing deep cuts to education before the legislature finally acknowledged defeat and reversed the tax cuts.
Once again, the editors are showing that ideology trumps accuracy. Here’s what really happened in Kansas. I hope we can have more defeats like that! Though I’ll be the first to admit that North Carolina is a much better role model.
In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.
Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.
Corporate receipts actually climbed as a share of GDP.
And this was during the decades when economic output was rapidly expanding.
Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.
In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0%arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.
The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.
When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).
But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).
I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.
P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.
March 3, 2021
President Biden c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500
Dear Mr. President,
______________________________
Dan Mitchell shows how ignoring the Laffer Curve is like running a stop sign!!!!
I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.
Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such asAustralia or Switzerland that has a relatively low risk of long-run fiscal collapse.
That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.
We also know that many states and cities suffer from the same problems.
A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.
The most spectacular mess, though, is about to happen in Michigan.
After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.
I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.
Detroit obviously is an example of a government that is collapsing sooner rather than later.
Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.
More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.
Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.
Check out this sentence.
Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.
This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.
The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?
And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.
In some cases, higher tax rates will discourage people from earning more taxable income.
In some cases, higher tax rates will discourage people from reporting all the income they earn.
In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.
In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.
The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733,
We got to cut spending or we will be in a fiscal crisis like Greece!!! Question of the Week: Has the European Fiscal Crisis Ended? January 12, 2013 by Dan Mitchell I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation […]
The Flat Tax: How it Works and Why it is Good for America Uploaded by afq2007 on Mar 29, 2010 This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. President Obama really does think that all his answers lie in raising taxes on the rich when the […]
__________ President Reagan, Nancy Reagan, Tom Selleck, Dudley Moore, Lucille Ball at a Tribute to Bob Hope’s 80th birthday at the Kennedy Center. 5/20/83. __________________________ Dan Mitchell is very good at giving speeches and making it very simple to understand economic policy and how it affects a nation. Mitchell also talks about slowing the growth […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. The way […]
Dan Mitchell does a great job explaining the Laffer Curve President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. Today’s cartoon deals with the Laffer curve. Revenge of the Laffer Curve…Again and Again and Again March 27, 2013 […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the sequester, economy, eternal unemployment benefits, socialism, minimum wage laws, tax increases, social security, high taxes in California, Obamacare, Greece, welfare state or on gun control. President Obama’s favorite state must be California because […]
Class Warfare just don’t pay it seems. Why can’t we learn from other countries’ mistakes? Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake? December 31, 2012 by Dan Mitchell Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising […]
Republicans would be stupid to raise taxes. Don’t Get Bamboozled by the Fiscal Cliff: Five Policy Reasons and Five Political Reasons Why Republicans Should Keep their No-Tax-Hike Promises December 6, 2012 by Dan Mitchell The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
Dan Mitchell’s article and the video from his organization takes a hard look at President Obama’s tax record. Dissecting Obama’s Record on Tax Policy October 30, 2012 by Dan Mitchell The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos […]
The Laffer Curve, Part I: Understanding the Theory Uploaded by afq2007 on Jan 28, 2008 The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows […]
I got to hear Arthur Laffer speak back in 1981 and he predicted what would happen in the next few years with the Reagan tax cuts and he was right with every prediction. The Laffer Curve Wreaks Havoc in the United Kingdom July 1, 2012 by Dan Mitchell Back in 2010, I excoriated the new […]
You can’t blame someone for leaving one state for another if they have a better an opportunity to make money. Maryland to Texas, but Not Okay to Move from the United States to Singapore? July 12, 2012 by Dan Mitchell I’ve commented before about entrepreneurs, investors, and small business owners migrating from high tax states such […]
Raising taxes will not work. Liberals act like the Laffer Curve does not exist. The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue April 10, 2012 by Dan Mitchell The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and […]
Dan Mitchell of the Cato Institute shows why Obama’s plan to tax the rich will not solve our deficit problem. Explaining in the New York Post Why Obama’s Soak-the-Rich Tax Policy Is Doomed to Failure April 17, 2012 by Dan Mitchell I think high tax rates on certain classes of citizens are immoral and discriminatory. If the […]
You want the rich to pay more? Dan Mitchell observed:I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent. Liberals don’t understand good tax policies. Against 3-1 Odds, Promoting Good Tax Policy on Government TV April 12, 2012 by […]
Class warfare again from President Obama. Rejecting the Buffett Rule and Fighting Obama’s Class Warfare on CNBC April 10, 2012 by Dan Mitchell I’ve already explained why Warren Buffett is either dishonest or clueless about tax policy. Today, on CNBC, I got to debate the tax scheme that President Obama has named after the Omaha investor. […]
And when people are sinking – or even if they are treading water – that is a recipe for dissatisfaction.
Yet people like Paul Krugman claim that there is a “Biden boom.”
Today, we are going to look at other examples of how journalists are trying to rationalize and defend Bidenomics.
We’ll start with a conversation in the New York Timesbetween Peter Coy and Binyamin Appelbaum.
Peter Coy: …Americans seem very grumpy about the economy lately, despite what looks like some pretty good news. …Binyamin Appelbaum: …there are basically two flavors of answers to this question. The first looks at the economic data and sees good reason for America’s bad mood. …The second concludes that people are mad despite the economic data. Our colleague Paul Krugman is on that side of the debate. I want to introduce a third kind of explanation. …when people say they’re unhappy about the economy, we should understand that primarily as a statement of concern about where we’re headed. …Coy: …To an economist, Bidenomics is a set of policies… More public investment. Empowering workers. More competition. …But when most people hear “Bidenomics,” they just think “Biden’s economy” — the state of the economy while President Biden is in office. And they aren’t happy about it. …Appelbaum:In an NBC News poll released last weekend, only 19 percent of respondents said that they were confident the next generation would have better lives than their own generation. …this is the great failure of the Biden administration and its economic policies: Americans simply aren’t convinced that the future is bright. …Coy: Yeah, pessimism is a tough problem to fix. We need someone like Franklin Roosevelt, who lifted the spirits of the nation when things were much worse than they are now. Actually, Mr. Biden has modeled himself a bit on Roosevelt. He’s inveighing against crony capitalists, saying the government is here to help and so on. …Appelbaum: I’m skeptical that prices are the problem. ..Americans aren’t behaving like people crushed by inflation. Consumer spending has been a lot stronger this year than pretty much anyone predicted. And the pace of price increases has slowed down to something close to normal… I think what we’re experiencing is a crisis of faith in the narrative of capitalism — at least as practiced in the United States in 2023 — as an engine of shared prosperity.
Some of the above conversation is reasonable. People won’t be happy, for instance, if they think the future is grim (and there are reasons to be worried).
But they largely ignored or dismissed the elephant in the room, which is that inflation-adjusted earnings have been declining or – at best – stagnant.
And I rolled my eyes when Coy described Bidenomics as being about “empowering workers.”
I also didn’t know whether to laugh or cry when Appelbaum asserted that the current malaise is because people are having “a crisis of faith in the narrative of capitalism.”
In other words, Biden makes government bigger and more expensive. And when the economy suffers, people at the New York Times think that’s the fault of capitalism?!?
Next we have an article in the Washington Post by Jeff Stein and Taylor Lorenz.
Olive’s video about a $16 McDonald’s order went viral, racking up hundreds of thousands of views. After a McDonald’s revenue report recently, the same post went viral again earlier this month… Posts…tied the cost to President Biden’s economic management: Inflation, the theory went, had gotten so out of control that the price of a fast-food burger was approaching $20.…In reality, inflation has been steadily subsiding… The Big Mac conundrum reflects what Biden aides and senior Democratic officials regard as one of their most vexing challenges… Even as inflation has fallen…and although the labor market has remained hot amid strong growth, voters still don’t like the economy, and they blame the president. …Some economists…have been astounded by polling data on Biden’s economic approval and surveys of consumer sentiment, where results during the Biden administration are similar to the Great Recession…and that it is vital to make clear that this remains by many measures one of the best recoveries in modern U.S. history.
Stein and Taylor also ignore the elephant in the room. They dismiss concerns about inflation and they totally ignore the problem of what’s happened to inflation-adjusted income.
But the most absurd part of the article was the assertion from “some economists” that the country is experiencing “one of the best recoveries in modern U.S. history.”
I went to the Minneapolis Federal Reserve’s webpagewhere you can compare recessions and recoveries.
Here’s the chart that the site auto-generated when I compared Reaganomics (in green) and Bidenomics (in red). Reaganomics wins by so much that the chart doesn’t even show the peak for Reagan.
To fully visualize and appreciate the superiority of Reaganomics, I created my own version of the chart, based on the Minneapolis Fed’s data.
You can see that GDP expanded nearly twice as much during Reagan’s recovery (13.1 percent) as during Biden’s recovery (7.4 percent).
Game, set, and match.
Let’s conclude by looking at a column in the New York Times by Karen Petrou. She admits that voters are unhappy and she writes that they have good reason to be unhappy.
As the White House proclaimed U.S. prosperity, a New York Times/Siena College poll found that 59 percent of voters in six key swing states said they had more confidence in Mr. Trump’s ability to manage the economy than in Mr. Biden’s, regardless of whom they thought they’d vote for.Zero — yes, zero — respondents under 30 in three of the swing states said they considered the economy “excellent.” The West Wing may believe Bidenomics is working because the macroeconomic gurus at the Federal Reserve are telling the White House it’s working. But Bidenomics has failed to create sufficient tangible improvement in the lives of most voters in a world in which groceries still cost more than they did a year ago, average rent and mortgage rates have spiked and health and child care grow ever more unaffordable.
The column has plenty of good analysis, especially her observation that prices have been rising faster than incomes.
But I think her main point is wrong. She wants readers to think that the real problem is inequality.
…income inequality is worse than ever. …In a nation this unequal, the income generated by a growing G.D.P. is so unevenly shared that the impression of widespread prosperity falls apart. …America’s top 1 percent always got far more than 1 percent of national income and wealth, but they have rarely gotten as much as they do now. …What’s different now is not only that inequality is more deeply entrenched but also that Americans are less inclined to hope that even as they fall behind, they and their children will soon catch up.
Needless to say, Ms. Petrou presents no evidence to suggest that voters with modest incomes be happier if rich people suddenly had less income.
And the reason that she presents no evidence is that only a small share of the population is motivated by envy. Normal people with modest incomes are more interested in having their incomes go up instead of having someone else’s income go down.
There is a real debate about the shape of the Laffer Curve and the ideal point on the curve.
The fifth point recognizes that well-meaning and knowledgeable people can vigorously disagree.
Do changes in tax policy have big effects or small effects on the economy? How much revenue feedback will occur if there is a change in tax rates?
Just a couple of examples of questions that I have endlessly debated with reasonable folks on the left.
But let’s focus today on the unreasonable left. Or, to be more specific, let’s look at an editorial from the St. Louis Post-Dispatch.
Here are some portions of that newspaper’s simplistic screed.
…the deficit explosion…effectively disproved his theory that cutting taxes on the rich would increase government tax revenue. …Laffer continues to be unchastened…, even as Britain reels from a leadership shuffle caused by the catastrophic application of his very theories. Hand it to Laffer: Seldom does someone who is so often proven wrong have the gumption to maintain he’s right…His famous “Laffer curve” presumes to prove that tax cuts for the rich will spur economic investment, causing such strong economic growth that the government’s tax revenue would actually rise instead of falling. …Yes, the economy was robust in the 1980s after Reagan’s historic tax cuts. But that’s also when the era of big budget deficits began. …congressional Republicans and President Donald Trump in 2017 slashed corporate taxes in what they claimed was a necessary economy-booster… Then-Treasury Secretary Stephen Mnuchin’s famous vow that the tax-cut plan would “pay for itself” in growth — the very definition of Laffer’s theory — has since been exposed as the voodoo it always was.
Almost every sentence in the above excerpt cries out for correction.
For instance, Reagan and his team never claimed that the 1981 tax cuts would be self-financing (though IRS data shows that lower tax rates on the rich did produce more revenue).
And it’s absurd to blame the United Kingdom’s political instability on tax cuts that never occurred.
If Secretary Mnunchin claimed the entire tax cut would pay for itself, he clearly deserves to be mocked, but it’s worth noting that the lower corporate tax rate from the 2017 reform is very close to being self-financing.
Not that we should be surprised. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.
The bottom line is that the editorial board of the St. Louis Post-Dispatch obviously puts ideology above accuracy.
P.S. I can’t resist sharing one other excerpt from the editorial.
“The Kansas Experiment,” was a debacle. The state’s economy didn’t skyrocket, but the deficit did, forcing deep cuts to education before the legislature finally acknowledged defeat and reversed the tax cuts.
Once again, the editors are showing that ideology trumps accuracy. Here’s what really happened in Kansas. I hope we can have more defeats like that! Though I’ll be the first to admit that North Carolina is a much better role model.
In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.
Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.
Corporate receipts actually climbed as a share of GDP.
And this was during the decades when economic output was rapidly expanding.
Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.
In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0%arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.
The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.
When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).
But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).
I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.
P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.
March 3, 2021
President Biden c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500
Dear Mr. President,
______________________________
Dan Mitchell shows how ignoring the Laffer Curve is like running a stop sign!!!!
I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.
Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such asAustralia or Switzerland that has a relatively low risk of long-run fiscal collapse.
That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.
We also know that many states and cities suffer from the same problems.
A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.
The most spectacular mess, though, is about to happen in Michigan.
After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.
I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.
Detroit obviously is an example of a government that is collapsing sooner rather than later.
Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.
More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.
Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.
Check out this sentence.
Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.
This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.
The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?
And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.
In some cases, higher tax rates will discourage people from earning more taxable income.
In some cases, higher tax rates will discourage people from reporting all the income they earn.
In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.
In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.
The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733,
We got to cut spending or we will be in a fiscal crisis like Greece!!! Question of the Week: Has the European Fiscal Crisis Ended? January 12, 2013 by Dan Mitchell I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation […]
The Flat Tax: How it Works and Why it is Good for America Uploaded by afq2007 on Mar 29, 2010 This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. President Obama really does think that all his answers lie in raising taxes on the rich when the […]
__________ President Reagan, Nancy Reagan, Tom Selleck, Dudley Moore, Lucille Ball at a Tribute to Bob Hope’s 80th birthday at the Kennedy Center. 5/20/83. __________________________ Dan Mitchell is very good at giving speeches and making it very simple to understand economic policy and how it affects a nation. Mitchell also talks about slowing the growth […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. The way […]
Dan Mitchell does a great job explaining the Laffer Curve President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. Today’s cartoon deals with the Laffer curve. Revenge of the Laffer Curve…Again and Again and Again March 27, 2013 […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the sequester, economy, eternal unemployment benefits, socialism, minimum wage laws, tax increases, social security, high taxes in California, Obamacare, Greece, welfare state or on gun control. President Obama’s favorite state must be California because […]
Class Warfare just don’t pay it seems. Why can’t we learn from other countries’ mistakes? Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake? December 31, 2012 by Dan Mitchell Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising […]
Republicans would be stupid to raise taxes. Don’t Get Bamboozled by the Fiscal Cliff: Five Policy Reasons and Five Political Reasons Why Republicans Should Keep their No-Tax-Hike Promises December 6, 2012 by Dan Mitchell The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
Dan Mitchell’s article and the video from his organization takes a hard look at President Obama’s tax record. Dissecting Obama’s Record on Tax Policy October 30, 2012 by Dan Mitchell The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos […]
The Laffer Curve, Part I: Understanding the Theory Uploaded by afq2007 on Jan 28, 2008 The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows […]
I got to hear Arthur Laffer speak back in 1981 and he predicted what would happen in the next few years with the Reagan tax cuts and he was right with every prediction. The Laffer Curve Wreaks Havoc in the United Kingdom July 1, 2012 by Dan Mitchell Back in 2010, I excoriated the new […]
You can’t blame someone for leaving one state for another if they have a better an opportunity to make money. Maryland to Texas, but Not Okay to Move from the United States to Singapore? July 12, 2012 by Dan Mitchell I’ve commented before about entrepreneurs, investors, and small business owners migrating from high tax states such […]
Raising taxes will not work. Liberals act like the Laffer Curve does not exist. The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue April 10, 2012 by Dan Mitchell The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and […]
Dan Mitchell of the Cato Institute shows why Obama’s plan to tax the rich will not solve our deficit problem. Explaining in the New York Post Why Obama’s Soak-the-Rich Tax Policy Is Doomed to Failure April 17, 2012 by Dan Mitchell I think high tax rates on certain classes of citizens are immoral and discriminatory. If the […]
You want the rich to pay more? Dan Mitchell observed:I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent. Liberals don’t understand good tax policies. Against 3-1 Odds, Promoting Good Tax Policy on Government TV April 12, 2012 by […]
Class warfare again from President Obama. Rejecting the Buffett Rule and Fighting Obama’s Class Warfare on CNBC April 10, 2012 by Dan Mitchell I’ve already explained why Warren Buffett is either dishonest or clueless about tax policy. Today, on CNBC, I got to debate the tax scheme that President Obama has named after the Omaha investor. […]
So-called emergency spending is not a trivial problem.
Here’s a chart from Romina Boccia and Dominik Lett, which documents $12 trillion of supposed emergency spending over the past three decades.
At the risk of understatement, that huge amount of money is a big reason Washington is a fiscal disaster.
Veronique de Rugy of the Mercatus Center wrote about the emergency scam in a column for the New York Sun. Here are some excerpts.
Remember…the debt-ceiling deal… Well, it took less than two months for politicians to start evading the caps with an old trick: emergency spending. …politicians shamelessly abuse the emergency label to push through non-emergency spending that would otherwise violate budget constraints. …If legislators believe more is needed, they should debate and allocate that money through the regular budget process. …putting the “emergency” label on anything important — or not-so important — but not unforeseen makes a mockery of budget rules and the debt-ceiling caps and, indeed, of the very concept of emergency spending. …There is always an excuse. …It’s time to fix the current process and stop an abuse that only further weakens the government’s fiscal condition. The best option would be to stop exempting emergency spending from budget rules. That would mean that supplemental spending, emergency or otherwise, must be offset with spending cuts on other programs.
Let’s look at a very recent example of the emergency-spending scam.
Kimberley Strassel of the Wall Street Journalopinedtwo months ago about Biden playing this fraudulent game.
Congress is trickling back from summer recess, and Senate Majority Leader Chuck Schumer intends to move swiftly to pass a giant “supplemental aid” package that funds Ukraine assistance, disaster relief and border security (for starters). The goal is to jam House Speaker Kevin McCarthy, forcing him to forgo whatever spending restraint was negotiated in the June debt-ceiling agreement…The White House bait—or cudgel—is “crisis” disaster-relief funding. The Federal Emergency Management Agency warned in April that its disaster fund could be out of money by July. Yet somehow the administration didn’t make a priority of this “critical” FEMA funding during the May debt ceiling talks, unwilling as it was then to cede any of its other domestic pork, such as green subsidies and its $80 billion IRS blowout. Only after next year’s spending levels were set did it cry poverty, asking for an “emergency” $16 billion for FEMA.
The bottom line is that the misuse of emergency spending is a serious problem. Politicians routinely slap an emergency label on things that are not emergencies. And, when there is an actual emergency, they use that as an excuse to include lots of non-emergency spending (as we saw during the Trump–Biden COVID spending spree).
But is there a solution? There are sometimes real emergencies, so banning supplemental spending bills presumably is not the answer.
Having a spending cap is good overall fiscal policy, of course, but a very relevant feature of the Swiss spending cap is that there is a provision for emergency spending, but any extra spending has to be offset by additional spending restraint in the future.
Which helps to explain why American politicians were nearly four times as profligate as Swiss politicians during the pandemic.
There is a real debate about the shape of the Laffer Curve and the ideal point on the curve.
The fifth point recognizes that well-meaning and knowledgeable people can vigorously disagree.
Do changes in tax policy have big effects or small effects on the economy? How much revenue feedback will occur if there is a change in tax rates?
Just a couple of examples of questions that I have endlessly debated with reasonable folks on the left.
But let’s focus today on the unreasonable left. Or, to be more specific, let’s look at an editorial from the St. Louis Post-Dispatch.
Here are some portions of that newspaper’s simplistic screed.
…the deficit explosion…effectively disproved his theory that cutting taxes on the rich would increase government tax revenue. …Laffer continues to be unchastened…, even as Britain reels from a leadership shuffle caused by the catastrophic application of his very theories. Hand it to Laffer: Seldom does someone who is so often proven wrong have the gumption to maintain he’s right…His famous “Laffer curve” presumes to prove that tax cuts for the rich will spur economic investment, causing such strong economic growth that the government’s tax revenue would actually rise instead of falling. …Yes, the economy was robust in the 1980s after Reagan’s historic tax cuts. But that’s also when the era of big budget deficits began. …congressional Republicans and President Donald Trump in 2017 slashed corporate taxes in what they claimed was a necessary economy-booster… Then-Treasury Secretary Stephen Mnuchin’s famous vow that the tax-cut plan would “pay for itself” in growth — the very definition of Laffer’s theory — has since been exposed as the voodoo it always was.
Almost every sentence in the above excerpt cries out for correction.
For instance, Reagan and his team never claimed that the 1981 tax cuts would be self-financing (though IRS data shows that lower tax rates on the rich did produce more revenue).
And it’s absurd to blame the United Kingdom’s political instability on tax cuts that never occurred.
If Secretary Mnunchin claimed the entire tax cut would pay for itself, he clearly deserves to be mocked, but it’s worth noting that the lower corporate tax rate from the 2017 reform is very close to being self-financing.
Not that we should be surprised. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.
The bottom line is that the editorial board of the St. Louis Post-Dispatch obviously puts ideology above accuracy.
P.S. I can’t resist sharing one other excerpt from the editorial.
“The Kansas Experiment,” was a debacle. The state’s economy didn’t skyrocket, but the deficit did, forcing deep cuts to education before the legislature finally acknowledged defeat and reversed the tax cuts.
Once again, the editors are showing that ideology trumps accuracy. Here’s what really happened in Kansas. I hope we can have more defeats like that! Though I’ll be the first to admit that North Carolina is a much better role model.
In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.
Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.
Corporate receipts actually climbed as a share of GDP.
And this was during the decades when economic output was rapidly expanding.
Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.
In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0%arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.
The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.
When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).
But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).
I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.
P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.
March 3, 2021
President Biden c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500
Dear Mr. President,
______________________________
Dan Mitchell shows how ignoring the Laffer Curve is like running a stop sign!!!!
I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.
Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such asAustralia or Switzerland that has a relatively low risk of long-run fiscal collapse.
That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.
We also know that many states and cities suffer from the same problems.
A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.
The most spectacular mess, though, is about to happen in Michigan.
After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.
I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.
Detroit obviously is an example of a government that is collapsing sooner rather than later.
Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.
More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.
Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.
Check out this sentence.
Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.
This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.
The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?
And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.
In some cases, higher tax rates will discourage people from earning more taxable income.
In some cases, higher tax rates will discourage people from reporting all the income they earn.
In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.
In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.
The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733,
We got to cut spending or we will be in a fiscal crisis like Greece!!! Question of the Week: Has the European Fiscal Crisis Ended? January 12, 2013 by Dan Mitchell I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation […]
The Flat Tax: How it Works and Why it is Good for America Uploaded by afq2007 on Mar 29, 2010 This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. President Obama really does think that all his answers lie in raising taxes on the rich when the […]
__________ President Reagan, Nancy Reagan, Tom Selleck, Dudley Moore, Lucille Ball at a Tribute to Bob Hope’s 80th birthday at the Kennedy Center. 5/20/83. __________________________ Dan Mitchell is very good at giving speeches and making it very simple to understand economic policy and how it affects a nation. Mitchell also talks about slowing the growth […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. The way […]
Dan Mitchell does a great job explaining the Laffer Curve President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. Today’s cartoon deals with the Laffer curve. Revenge of the Laffer Curve…Again and Again and Again March 27, 2013 […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the sequester, economy, eternal unemployment benefits, socialism, minimum wage laws, tax increases, social security, high taxes in California, Obamacare, Greece, welfare state or on gun control. President Obama’s favorite state must be California because […]
Class Warfare just don’t pay it seems. Why can’t we learn from other countries’ mistakes? Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake? December 31, 2012 by Dan Mitchell Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising […]
Republicans would be stupid to raise taxes. Don’t Get Bamboozled by the Fiscal Cliff: Five Policy Reasons and Five Political Reasons Why Republicans Should Keep their No-Tax-Hike Promises December 6, 2012 by Dan Mitchell The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
Dan Mitchell’s article and the video from his organization takes a hard look at President Obama’s tax record. Dissecting Obama’s Record on Tax Policy October 30, 2012 by Dan Mitchell The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos […]
The Laffer Curve, Part I: Understanding the Theory Uploaded by afq2007 on Jan 28, 2008 The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows […]
I got to hear Arthur Laffer speak back in 1981 and he predicted what would happen in the next few years with the Reagan tax cuts and he was right with every prediction. The Laffer Curve Wreaks Havoc in the United Kingdom July 1, 2012 by Dan Mitchell Back in 2010, I excoriated the new […]
You can’t blame someone for leaving one state for another if they have a better an opportunity to make money. Maryland to Texas, but Not Okay to Move from the United States to Singapore? July 12, 2012 by Dan Mitchell I’ve commented before about entrepreneurs, investors, and small business owners migrating from high tax states such […]
Raising taxes will not work. Liberals act like the Laffer Curve does not exist. The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue April 10, 2012 by Dan Mitchell The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and […]
Dan Mitchell of the Cato Institute shows why Obama’s plan to tax the rich will not solve our deficit problem. Explaining in the New York Post Why Obama’s Soak-the-Rich Tax Policy Is Doomed to Failure April 17, 2012 by Dan Mitchell I think high tax rates on certain classes of citizens are immoral and discriminatory. If the […]
You want the rich to pay more? Dan Mitchell observed:I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent. Liberals don’t understand good tax policies. Against 3-1 Odds, Promoting Good Tax Policy on Government TV April 12, 2012 by […]
Class warfare again from President Obama. Rejecting the Buffett Rule and Fighting Obama’s Class Warfare on CNBC April 10, 2012 by Dan Mitchell I’ve already explained why Warren Buffett is either dishonest or clueless about tax policy. Today, on CNBC, I got to debate the tax scheme that President Obama has named after the Omaha investor. […]
Two months ago, I wrote about a remarkable example of the Laffer Curve, involving Ireland’s low 12.5 percent corporate tax rate.
According to the New York Times, Ireland was collecting so much corporate tax revenue that the government was having a hard time figuring out what to do with all the money (as you might expect, I suggested that politicians lower other taxes).
Today, let’s look at a different story about Ireland’s corporate tax policy.
Only we’ll be talking about jealousy and bitterness rather than how to dispose of extra tax revenue.
Sarah Collins reports that some of the world’s best-known left-wing economists are upset that Ireland is so successful.
Three leading economists – including France’s Thomas Picketty and former IMF official Ashoka Mody – have accused Ireland of “siphoning” other countries’ tax revenues and operating a “parasitic” corporation tax policy. …Princeton professor Ashoka Mody, the former International Monetary Fund economist…, said Ireland’s policy was “parasitic”.…French economist Thomas Picketty, professor at France’s school for advanced studies in social studies (EHESS)…, said Ireland is “siphoning” taxes off other countries. …Their comments follow a tweet on Wednesday by French economist Gabriel Zucman, head of the EU Tax Observatory and author of a recent EU-funded report that called Ireland a tax haven. …It comes the same week corporation tax receipts were revealed to be up more than a quarter in November compared with the same month last year, boosting overall revenues and putting the State on track to beat last year’s record tax take.
What makes this story amusing (above and beyond the whining) is that left-wing economists should be happy with Ireland.
The OECD’s annual Revenue Statistics was just released and the data show that Ireland is collecting much more tax revenue from corporations.
So the government is collecting more than twice as much revenue from a pie that is more than five times larger.
You would think lefty economists would applaud.
Here’s some more data from the OECD report. It shows corporate tax revenue as a share of overall tax revenue.
This is another chart that the left should applaud. They complain that big companies don’t pay their “fair share.”
Yet when there’s an example of a country where corporate tax revenues have soared, they are not happy.
There are three reasons for their unhappiness.
They don’t like Ireland’s low corporate tax rate because it shows that supply-side tax policygenerates prosperity and it shows that the Laffer Curve is real.
They don’t like Ireland’s low corporate tax rate because they are mostly motivated by envy and they like punitive tax rates even more than they like tax revenue.
They don’t like Ireland’s low corporate tax rate because it puts pressure on other countries to lower their corporate rates to become more competitive.
Let’s look at a favorable article about Ireland.
Lawrence Reed wrote earlier this year that the Emerald Isle is a case study for economic freedom Here are some excerpts.
Though fewer people today live in Ireland than did almost two centuries ago, they’re busy teaching the world that economic freedom works. The Heritage Foundation’s Index of Economic Freedom ranks the Irish economy as the third freest in the world, behind Singapore and Switzerland.…In 2022, the Irish economy grew at the astonishing rate of 12.2 percent, the fastest on the European continent. (By comparison, the US economy grew by 2.1 percent in 2022.) If you think there’s no connection between Irish freedom and Irish prosperity, contact your economics teachers and demand a refund. …Ireland ranks high because property rights and contracts are well protected. The business climate is friendly because regulations aren’t nutty and intrusive, while tax rates are competitive. …It’s freedom, not the “luck of the Irish,” that explains Ireland’s remarkable economic success.
I agree that Ireland is a success story, but I also warn that it is not quite as successful as some people think.
Way back in 2011, I explained that the presence of so many companies created a distorted picture of Irish prosperity and that it’s better to use gross national income rather than gross domestic product.
Ireland is still a success story with GNI numbers, to be sure, but you won’t find 12.2 percent annual growth.
For wonky readers, I recommend this thread on Irish economic data.
And if you want to understand how Ireland wound up enacting a good corporate tax system, here’s another very illuminating thread.
I’ll close with a couple of negative observations about Ireland. First, Ireland does not get a good score on the Tax Foundation’s International Tax Competitiveness Index, so it definitely should be using any extra tax revenue to finance lower personal income tax rates.
Second, it appears that Ireland has a relatively low burden of government spending (see the chart in Thursday’s column), but those numbers would look much worse if we used GNI rather than GDP. And Ireland has gotten in trouble before because of excessive spending.
About 15 years ago, I narrated a three-part series on the Laffer Curve. Here’s Part II, which looks at real-world evidence.
About halfway through the video (3:15-3:55), I discuss what happened when Ireland dramatically lowered its corporate tax rate.
The net result was an increase in tax revenue.
But not just by a small amount. I included a chart showing that corporate tax revenue as a share of GDP significantly increased in response to the lower rate.
And I made sure to point out that economic output also increased dramatically, meaning that the Irish government not only got a bigger slice of the pie, but also that the pie was much larger.
I’ve been asked a few times, however, whether that was a transitory phenomenon.
The answer is no. Using OECD data, I’ve updated the chart to also show what’s happened in the past 15 years. As you can see, corporate tax revenue has averaged close to 3 percent of economic output.
I realize that some folks on the left will be skeptical, even though I’m using data from the left-leaning OECD.
But perhaps they’ll believe the New York Times.
Ed O’Loughlin reports that Irish corporate tax revenues are so buoyant that the government in battling over how to allocate a budget surplus.
Ireland…is discovering that having too much money can…be a problem. Swollen by rising corporate tax revenue, mainly from American tech and pharmaceutical corporations, the government is expecting to have a record budget surplus of 10 billion euros ($10.9 billion) this year. Next year, the windfall is projected to be even larger, reaching €16 billion. For years, Ireland’s low corporate tax rate has lured multinational organizations to set up overseas subsidiaries here. Their tax payments have created a financial cushion for the government… Which leaves Irish lawmakers in a quandary. As the government prepares its annual budget statement in October, it must settle the tricky question of what to do with this pot of money. Chief among the options: save it for the future; pay off debts; invest in badly needed housing or some other infrastructure, like hospitals, schools and a subway system for Dublin; or give it away in tax cuts and support payments.
P.S. The NYT article also points out that big-ticket infrastructure projects suffer from massive cost overruns (sound familiar?).
…one obstacle to spending money on major projects, said Eoin Reeves, an economics professor at the University of Limerick, is that the Irish government has not been efficient at spending large sums of money on big investments. …Even by global standards, big infrastructure projects in Ireland tend to be completed late and far over budget. In 2015, a new 380-bed national children’s hospital in Dublin was projected to open by 2020, at a cost of €650 million. Its opening date has now been postponed until next year and at a cost of almost €2.2 billion — which reportedly could make it the most expensive hospital in the world, in terms of cost per bed. …plans for a line to its busy airport, with an estimated price tag in 2000 of €3.5 billion, have been repeatedly postponed or modified. The latest plan, if it ever gets underway, would take about 10 years to construct, at a cost of €7 billion to €12 billion.
…the Organization for Economic Cooperation and Development is leading an effort to create a global minimum corporate tax rate of 15 percent, which could flatten Ireland’s tax-rate advantage.
There is a real debate about the shape of the Laffer Curve and the ideal point on the curve.
The fifth point recognizes that well-meaning and knowledgeable people can vigorously disagree.
Do changes in tax policy have big effects or small effects on the economy? How much revenue feedback will occur if there is a change in tax rates?
Just a couple of examples of questions that I have endlessly debated with reasonable folks on the left.
But let’s focus today on the unreasonable left. Or, to be more specific, let’s look at an editorial from the St. Louis Post-Dispatch.
Here are some portions of that newspaper’s simplistic screed.
…the deficit explosion…effectively disproved his theory that cutting taxes on the rich would increase government tax revenue. …Laffer continues to be unchastened…, even as Britain reels from a leadership shuffle caused by the catastrophic application of his very theories. Hand it to Laffer: Seldom does someone who is so often proven wrong have the gumption to maintain he’s right…His famous “Laffer curve” presumes to prove that tax cuts for the rich will spur economic investment, causing such strong economic growth that the government’s tax revenue would actually rise instead of falling. …Yes, the economy was robust in the 1980s after Reagan’s historic tax cuts. But that’s also when the era of big budget deficits began. …congressional Republicans and President Donald Trump in 2017 slashed corporate taxes in what they claimed was a necessary economy-booster… Then-Treasury Secretary Stephen Mnuchin’s famous vow that the tax-cut plan would “pay for itself” in growth — the very definition of Laffer’s theory — has since been exposed as the voodoo it always was.
Almost every sentence in the above excerpt cries out for correction.
For instance, Reagan and his team never claimed that the 1981 tax cuts would be self-financing (though IRS data shows that lower tax rates on the rich did produce more revenue).
And it’s absurd to blame the United Kingdom’s political instability on tax cuts that never occurred.
If Secretary Mnunchin claimed the entire tax cut would pay for itself, he clearly deserves to be mocked, but it’s worth noting that the lower corporate tax rate from the 2017 reform is very close to being self-financing.
Not that we should be surprised. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.
The bottom line is that the editorial board of the St. Louis Post-Dispatch obviously puts ideology above accuracy.
P.S. I can’t resist sharing one other excerpt from the editorial.
“The Kansas Experiment,” was a debacle. The state’s economy didn’t skyrocket, but the deficit did, forcing deep cuts to education before the legislature finally acknowledged defeat and reversed the tax cuts.
Once again, the editors are showing that ideology trumps accuracy. Here’s what really happened in Kansas. I hope we can have more defeats like that! Though I’ll be the first to admit that North Carolina is a much better role model.
In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.
Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.
Corporate receipts actually climbed as a share of GDP.
And this was during the decades when economic output was rapidly expanding.
Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.
In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0%arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.
The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.
When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).
But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).
I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.
P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.
March 3, 2021
President Biden c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500
Dear Mr. President,
______________________________
Dan Mitchell shows how ignoring the Laffer Curve is like running a stop sign!!!!
I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.
Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such asAustralia or Switzerland that has a relatively low risk of long-run fiscal collapse.
That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.
We also know that many states and cities suffer from the same problems.
A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.
The most spectacular mess, though, is about to happen in Michigan.
After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.
I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.
Detroit obviously is an example of a government that is collapsing sooner rather than later.
Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.
More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.
Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.
Check out this sentence.
Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.
This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.
The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?
And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.
In some cases, higher tax rates will discourage people from earning more taxable income.
In some cases, higher tax rates will discourage people from reporting all the income they earn.
In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.
In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.
The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows the middle ground between those who claim “all tax cuts pay for themselves” and those who claim tax policy has no impact on economic performance. This video, focusing on the theory of the Laffer Curve, is Part I of a three-part series. Part II reviews evidence of Laffer-Curve responses. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org
Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733,
We got to cut spending or we will be in a fiscal crisis like Greece!!! Question of the Week: Has the European Fiscal Crisis Ended? January 12, 2013 by Dan Mitchell I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation […]
The Flat Tax: How it Works and Why it is Good for America Uploaded by afq2007 on Mar 29, 2010 This Center for Freedom and Prosperity Foundation video shows how the flat tax would benefit families and businesses, and also explains how this simple and fair system would boost economic growth and eliminate the special-interest […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. President Obama really does think that all his answers lie in raising taxes on the rich when the […]
__________ President Reagan, Nancy Reagan, Tom Selleck, Dudley Moore, Lucille Ball at a Tribute to Bob Hope’s 80th birthday at the Kennedy Center. 5/20/83. __________________________ Dan Mitchell is very good at giving speeches and making it very simple to understand economic policy and how it affects a nation. Mitchell also talks about slowing the growth […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. The way […]
Dan Mitchell does a great job explaining the Laffer Curve President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control. Today’s cartoon deals with the Laffer curve. Revenge of the Laffer Curve…Again and Again and Again March 27, 2013 […]
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the sequester, economy, eternal unemployment benefits, socialism, minimum wage laws, tax increases, social security, high taxes in California, Obamacare, Greece, welfare state or on gun control. President Obama’s favorite state must be California because […]
Class Warfare just don’t pay it seems. Why can’t we learn from other countries’ mistakes? Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake? December 31, 2012 by Dan Mitchell Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising […]
Republicans would be stupid to raise taxes. Don’t Get Bamboozled by the Fiscal Cliff: Five Policy Reasons and Five Political Reasons Why Republicans Should Keep their No-Tax-Hike Promises December 6, 2012 by Dan Mitchell The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is […]
The Laffer Curve – Explained Uploaded by Eddie Stannard on Nov 14, 2011 This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” […]
Dan Mitchell’s article and the video from his organization takes a hard look at President Obama’s tax record. Dissecting Obama’s Record on Tax Policy October 30, 2012 by Dan Mitchell The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos […]
The Laffer Curve, Part I: Understanding the Theory Uploaded by afq2007 on Jan 28, 2008 The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows […]
I got to hear Arthur Laffer speak back in 1981 and he predicted what would happen in the next few years with the Reagan tax cuts and he was right with every prediction. The Laffer Curve Wreaks Havoc in the United Kingdom July 1, 2012 by Dan Mitchell Back in 2010, I excoriated the new […]
You can’t blame someone for leaving one state for another if they have a better an opportunity to make money. Maryland to Texas, but Not Okay to Move from the United States to Singapore? July 12, 2012 by Dan Mitchell I’ve commented before about entrepreneurs, investors, and small business owners migrating from high tax states such […]
Raising taxes will not work. Liberals act like the Laffer Curve does not exist. The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue April 10, 2012 by Dan Mitchell The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and […]
Dan Mitchell of the Cato Institute shows why Obama’s plan to tax the rich will not solve our deficit problem. Explaining in the New York Post Why Obama’s Soak-the-Rich Tax Policy Is Doomed to Failure April 17, 2012 by Dan Mitchell I think high tax rates on certain classes of citizens are immoral and discriminatory. If the […]
You want the rich to pay more? Dan Mitchell observed:I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent. Liberals don’t understand good tax policies. Against 3-1 Odds, Promoting Good Tax Policy on Government TV April 12, 2012 by […]
Class warfare again from President Obama. Rejecting the Buffett Rule and Fighting Obama’s Class Warfare on CNBC April 10, 2012 by Dan Mitchell I’ve already explained why Warren Buffett is either dishonest or clueless about tax policy. Today, on CNBC, I got to debate the tax scheme that President Obama has named after the Omaha investor. […]
And I included a very appropriate poster from Jews for the Preservation of Firearms Ownership to emphasize how gun control often has been a go-to policy for the world’s most despicable tyrants.
What’s now happening in Israel underscores that message.
In a report from the Washington Post, Claire Parker, Jon Gerberg, Judith Sudilovsky, and John Hudson explain that October 7 was a wake-up calls for both lawmakers and citizens.
Since Hamas rampaged through Israeli communities on Oct. 7, the government here has promoted a simple message: Guns save lives. Using rhetoric redolent of gun rights advocates in the United States, hard-right national security minister Itamar Ben Gvir has pushed to loosen strictfirearm licensing requirements and create more civilian “standby teams” to harden communities against a repeat of the deadly surprise attack. …Under an expedited processing system, Ben Gvir’s ministry in the past two months has received more than 256,000 applications to carry private firearms… Jewish Israeli volunteers across Israel and West Bank settlers are arming themselves, training and forming groups to patrol the streets… Private gun ownership was rising before the war. But since Oct. 7, interest has exploded… Before the war, to be considered for a gun license civilians had to live or work in an area deemed to be under heightened security risk, be interviewed in person, submit a health declaration signed by a physician, undergo training and demonstrate they knew how to use a gun safely. The license limited bearers to one gun and 50 bullets. Now residents of more cities have been made eligible. They can be interviewed by telephone. It’s easier to renew licenses that have lapsed. And licensees are permitted 100 bullets.
The article also notes that armed Jews saved many lives on October 7.
The army took hours to respond, leaving men, women and children largely defenseless against the militants. In the aftermath, accounts emerged of volunteer security teams in some kibbutzim fending off Hamas attackers and saving lives. The teams, known in Israel as “kitat konenut,” have long been active in Jewish settlements in the West Bank and in Israeli communities near the Gazan border, where they act as first responders to security threats. For advocates of wider access to gun ownership, the accounts served as vindication of their cause — and helped build support for lowering barriers to firearms access.
In the New York Times, Aaron Boxerman and Talya Minsberg wrote about the expansion of private gun ownership in Israel.
…in the aftermath of Oct. 7, Israelis have submitted at least 256,000 applications for gun licenses, including many who had never before considered owning a weapon. Israel’s current far-right national security minister, Itamar Ben-Gvir, has long pushed for an expansion of gun ownership, and in mid-October, lawmakers signed off on eased gun ownership regulations promulgated by his office. Young adults with assault rifles slung over their shoulders are a common sight in Israel, where hundreds of thousands are soldiers on active duty or reservists with weapons stashed at home. But despite decades of insecurity, private gun ownership never approached the levels seen in the United States, where surveys show about one-third of adults own firearms. …national security minister, Itamar Ben-Gvir, has long pushed for an expansion of gun ownership…told a meeting…“If there had been more guns in the Gaza border area, more emergency response teams, more lives could have been saved.”
This passage is especially relevant.
Maayan Rosenberg-Schatz, said that like so many other Israelis, she no longer believed the Israeli military — which took hours to arrive at some embattled communities on Oct. 7 — would reach them in time in a crisis…said Ms. Rosenberg-Schatz, 42, who applied for a gun license along with her husband. “But in the end, there’s no replacement for having a weapon.”
P.S. Some American Jews also understand this issue. In a column for the Daily Wire, written nearly four years before the October 7 Hamas attack, Josh Hammer wrote about gun ownership among American Jews.
A Jew who is trained, armed, and proficient in the use of firearms is necessarily a Jew who the anti-Semites fear the most — which makes this Jew the very best kind of Jew. This is a Jew who is ready, willing, and able, if need be, to heed the Talmudic principle that one must rise to take the life of someone who is trying to take his/her own life. …This is a Jew who is physically capable and emotionally prepared to take down an active shooter, if need be. …I live in Texas, and it is hardly the least bit unusual for Jews here to pack heat while attending synagogue or attending any other kind of Jewish-themed event. …Why on Earth would Jews, the most systemically persecuted group of humans to have ever lived, delegate responsibility for their own lives to third-party actors?
Prime Minister Benjamin Netanyahu meets with Democratic nominee Hillary Clinton in New York, September 25, 2016 (Kobi Gideon/GPO)
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In this handout photo provided by the Israeli Government Press Office, Israeli prime minister Benjamin Netanyahu meets former U.S. President Bill Clinton, on November 8, 2010 in New York City. | Getty
BIBI AND OBAMA DISAGREED ON PALESTINIAN QUESTION!!!
We had a policy clash. Though our personalities were decidedly different in many respects, it was noted by some commentators that in one sense they were oddly similar. We both tended to the cerebral, and we came to politics to realize ideological convictions, viewing political power as a means to achieving our ends. But given our ideological divide, we differed sharply on what those ends should be. We clearly differed on the Palestinian issue, which Obama viewed through the distorted prism of the Palestinian narrative. He truly believed the Jews of Israel were neocolonials usurping the land from native Arab inhabitants, when the facts not only of ancient history but of modern times showed that things were the other way around. The Palestinian Arabs joined five Arab armies in their attempt in 1948 to uproot the Jews from their ancestral homeland and since then opposed any arrangement that would leave the Jewish state in place. In the extreme, Obama’s espousal of the Palestinian narrative manifested itself not only in flawed policy but also in personal attacks. He disregarded our history and disrespected Israel’s elected leader, who dared to disagree with him. I doubt that he applied the language and tactics he used against me to many, if any, other world leaders. In this I differed from him. No matter how deep the disagreement, I tried as best I could to avoid showing personal disrespect to democratically elected leaders.
Nine Senate Republicans, led by Sen. Marsha Blackburn, R-Tenn., demand that the Biden administration refreeze $6 billion intended for Iran, following Hamas’ terrorist attack on Israel. Pictured: Blackburn listens at a July 19 press conference at the Capitol. (Photo: Anna Moneymaker/Getty Images)
Senate Republicans called Tuesday for the Biden administration to refreeze $6 billion in Iranian funds amid the Israel-Hamas war, citing indications that Iran helped Hamas plan its Oct. 7 terrorist attack on the Jewish state.
“You can’t be pro-Israel and pro-Iran,” Sen. Roger Marshall, R-Kan., said.
“Joe Biden is the most pro-Iranian president we’ve ever had,” Marshall said. “Think about it. It goes way beyond the $6 billion we are talking about. Under this administration, the Iranian oil reserves went from $6 billion to $60 billion. How come? Since the moment [President] Joe Biden got into office, he turned his head to the [economic] sanctions we’ve had.”
Marshall was among nine GOP senators, led by Sen. Marsha Blackburn of Tennessee, who gathered Tuesday on Capitol Hill to demand that the Biden administration refreeze the $6 billion used as ransom for five American hostages held by Iran. That amount was to be released after being frozen under U.S. sanctions; the deal also included U.S. release of Iranian prisoners.
Blackburn and the other Senate Republicans spoke at a press conference called one day before Biden is set to arrive in Israel to meet with Israeli Prime Minister Benjamin Netanyahu.
Also Wednesday, the Senate Foreign Relations Committee is set to hold a confirmation hearing for Jacob Lew, a former treasury secretary in the Obama administration who Biden nominated to be ambassador to Israel.
For his part, Biden denounced Hamas’ surprise attack on Israel and compared the terrorist group to the Islamic State, a terrorist army also known as ISIS. Biden administration officials have insisted that Iranians have yet to get any of the $6 billion.
However, Marshall said the anticipated access to the $6 billion was likely enough for the world’s leading sponsor of terrorism.
“I have a hunch the moment the Biden administration unfroze the $6 billion was the signal moment when the Iranian Islamic Revolutionary Guard told Hamas, ‘Let’s go forward with this plan we’ve had going,’” Marshall said.
Blackburn said senators learned Biden’s trip to Israel was intentionally not announced until Secretary of State Antony Blinken received assurances from Netanyahu on a humanitarian aid package for Palestinians displaced by the war as the Israel Defense Force prepares to move into the Gaza Strip.
“The U.S. should not be placing conditions on our support for Israel because of demands made by the Squad,” Blackburn said, referring to a far-left group of pro-Palestinian House members that includes Reps. Illhan Omar, D-Minn., and Rashida Tlaib, D-Mich.
The Tennessee Republican said the United States also learned that Hamas accessed United Nations funding for Palestinian humanitarian relief, aid backed by U.S. tax dollars.
Blackburn warned about the dangers to the United States.
“As long as Biden allows our border to be open, an attack on our own soil isn’t a matter of if. It’s a matter of when,” Blackburn said. “Protecting our homeland and preventing Hamas sympathizers from entering our country is paramount, and the egregious actions of Hamas must not go unpunished.”
Sen. Lindsey Graham, R-S.C., suggested U.S. intervention in the Hamas-Israel conflict.
“Not only should we cut off the money, we should put on the table that if there is a second front opened against Israel by Hezbollah, [which] has 100,000 precision-guided rockets pointed at Israel, if that happens, there will not be a two-front war, there will be a three-front war,” Graham said.
“There is either going to be one front or three fronts. I’m begging the Biden administration to be clear. Just don’t say ‘Don’t,’” the South Carolina Reopublican said, referring to President Joe Biden’s recent warning to Hezbollah and other potential combatants not to join the conflict.
“Spell out what happens if Hezbollah is used to try to expand this war and destroy Israel,” Graham told reporters. “I believe the people behind me would rise to the occasion and I hope the people on the other side would rise to the occasion if this war escalates.”
Have an opinion about this article? To sound off, please email letters@DailySignal.com, and we’ll consider publishing your edited remarks in our regular “We Hear You” feature. Remember to include the URL or headline of the article plus your name and town and/or state.
The Bible and Archaeology – Is the Bible from God? (Kyle Butt 42 min)
We live in a world that, for the most part, has no absolute standard for life and behavior. We are under a system of morality by majority vote—in other words, whatever feels right sets the standard for behavior.
That philosophy, however, runs contrary to everything we know about our world. For example, in science there are absolutes. Our entire universe is built on fixed laws. We can send satellites and other spacecraft into space and accurately predict their behavior. Science—whether biology, botany, physiology, astronomy, mathematics, or engineering—is controlled by unalterable and inviolable laws.
Yet in the moral world many people want to live without laws or absolutes. They try to determine their points of reference from their own minds. However, that is impossible. When we move from the physical to the spiritual realm, fixed laws still exist. We cannot exist without laws in the moral and spiritual dimensions of life any more than we can do so in the physical dimension. Our Creator built morality into life. Just as there are physical laws, so there are spiritual laws. Let me give you an example.
People have asked me whether I believe that AIDS is the judgment of God. My response is that AIDS is the judgment of God in the same sense that cirrhosis of the liver is the judgment of God or that emphysema is the judgment of God. If you drink alcohol, you’re liable to get cirrhosis of the liver. If you smoke, you’re liable to get emphysema or heart disease. And if you choose to violate God’s standards for morality, you’re likely to contract venereal disease—even AIDS. It is a law that the Bible describes in terms of sowing and reaping.
We can explain this principle in another illustration. Gravity is a fixed law. You may choose not to believe in gravity, but regardless of what you choose to believe, if you jump off a building you’ll fall to the ground. You don’t have an option. It’s not a question of what you believe; it’s a question of law. The law will go into effect when you put it to the test. That is true in any other area of physical law.
The same thing is true in the moral and spiritual dimension. To segment life into a physical dimension in which fixed laws cannot be violated and a moral or spiritual dimension in which laws can be violated is an impossible dichotomization. The same God who controls the physical world by fixed laws controls the moral and spiritual world.
Where, then, do you find the laws of morality? How do you determine what is right and what is wrong? Has our Creator revealed such standards to mankind in a way we can understand?
The Bible claims to be the revelation of God to man. Although I have spent many years of my life studying the Bible, I wasn’t always committed to it. That commitment developed after my freshman year in col lege, when I came to grips with my life and future and wanted to know the source of truth. I discovered several compelling reasons for believing that the Bible is God’s Word. Five basic areas, which go from the lesser to the greater, help prove its authenticity.
The Authenticity of the Bible
Experience
First, the Bible is true because it gives us the experience it claims it will. For example, the Bible says God will forgive our sin (1 John 1:9). I believe that, and I can truly say that I have a sense of freedom from guilt. The Bible also says that “if any man is in Christ, he is a new creature; the old things passed away; behold, new things have come” (2 Corinthians 5:17 ). That’s what happened to me when I came to Jesus Christ. The Bible changes lives. Someone has said that a Bible that’s falling apart usually belongs to someone who isn’t. That’s true because the Bible can put lives together. Millions of people all over the world are living proof that that is true. Maybe you know one or two of them. They’ve experienced the Bible’s power.
That’s an acceptable argument in one sense, but it’s weak in another. If you base everything you believe on experience, you’re going to run into trouble. Followers of Muhammad, Buddha, and Hare Krishna can point to various experiences as the basis for their beliefs, but that doesn’t necessarily mean that their beliefs are correct. So although experience can help validate the power and authority of the Bible, we will need more evidence.
Science
The Bible also presents a most plausible, objective understanding of the universe and the existence of life. It presents a God who creates. That makes more sense than believing that everything came out of nothing, which is essentially what the theory of evolution says. I have an easier time assuming that someone produced everything. And the Bible tells me who that someone is: God.
The study of creation helps explain how the earth’s geology became the way it is. The Bible tells of a supernatural creation that took place in six days and of a catastrophic worldwide flood. These two events help explain many geological and other scientific questions, some of which we will soon explore.
You will find that the Bible is accurate when it intersects with modern scientific concepts. For example, Isaiah 40:26 says it is God who creates the universe. He holds the stars together by His power and not one of them is ever missing. In this way the Bible suggests the first law of thermodynamics—that ultimately nothing is ever destroyed.
We read in Ecclesiastes 1:10: “Is there anything of which one might say, ‘See this, it is new’?” The answer immediately follows: “Already it has existed for ages which were before us.” Ancient writers of the Bible, thousands of years before the laws of thermodynamics had been categorically stated, were affirming the conservation of mass and energy.
The second law of thermodynamics states that although mass and energy are always conserved, they nevertheless are breaking down and going from order to disorder, from cosmos to chaos, from system to non-system. The Bible, contrary to the theory of evolution, affirms that. As matter breaks down and energy dissipates, ultimately the world and universe as we know it will become dead. It will be unable to reproduce itself. Romans 8 says that all creation groans because of its curse, which is described at the beginning of the Bible (Genesis 3). That curse—and God’s plan to reverse the curse—is reflected throughout biblical teaching.
The science of hydrology studies the cycle of water, which consists of three major phases: evaporation, condensation, and precipitation. Clouds move over the land and drop water through precipitation. The rain runs into creeks, the creeks run into streams, the streams run into the sea, and the evaporation process takes place all the way along the path. That same process is described in Scripture. Ecclesiastes 1 and Isaiah 55 present the entire water cycle: “All the rivers flow into the sea, yet the sea is not full. To the place where the rivers flow, there they flow again” (Ecclesiastes 1:7). “For . . . the rain and the snow come down from heaven, and do not return there without watering the earth” (Isaiah 55:10). Also, Job 36:27-28 speaks of evaporation and condensation—centuries prior to any scientific discovery of the process: “He [God] draws up the drops of water, they distill rain from the mist, which the clouds pour down, they drip upon man abundantly.”
In the 1500s, when Copernicus first presented the idea that the earth was in motion, people were astounded. They previously believed that the earth was a flat disc and that if you went through the Pillars of Hercules at the Rock of Gibraltar you’d fall off the edge. In the seventeenth century, men like Kepler and Galileo gave birth to modern astronomy. Prior to that, the universe was generally thought to contain only about one thousand stars, which was the number that had been counted.
However, in Genesis, the first book of the Bible, the number of the stars of heaven is equated with the number of grains of sand on the seashore. God told Abraham, “I will greatly multiply your seed as the stars of the heavens, and as the sand which is on the seashore” ( 22:17 ). Jeremiah 33:22says that the stars can’t be counted. Again God is speaking: “As the host of heaven cannot be counted, and the sand of the sea cannot be measured, so I will multiply the descendants of David.” Today several million stars have been cataloged, though hundreds of millions remain unlisted.
The oldest book in the Bible, the Book of Job, pre-dates Christ by about two thousand years. YetJob 26:7 says, “He hangs the earth on nothing.” In the sacred books of other religions you may read that the earth is on the backs of elephants that produce earthquakes when they shake. The cosmogony of Greek mythology is at about the same level of sophistication. But the Bible is in a completely different class. It says, “He . . . hangs the earth on nothing” (emphasis added).
Job also says that the earth is “turned like the clay to the seal” (38:14, KJV*). In those days, soft clay was used for writing and a seal was used for applying one’s signature. One kind of seal was a hollow cylinder of hardened clay with a signature raised on it. A stick went through it so that it could be rolled like a rolling pin. The writer could, therefore, roll his signature across the soft clay and in that way sign his name. In saying the earth is turned like the clay to the seal, Job may have implied that it rotates on its axis. The Hebrew word translated “earth” (hug) refers to a sphere.
It’s also interesting to note that the earth maintains a perfect balance. If you’ve ever seen a basketball that’s out of balance, you know that it rotates unevenly. You can imagine what would happen if the earth were like that. The earth is a perfect sphere, and it is perfectly balanced. The depths of the sea have to be balanced with the height of the mountains. The branch of science that studies that balance is called isostasy. In Isaiah 40:12, centuries before science even conceived of this phenomenon, Isaiah said that God “has measured the waters in the hollow of His hand, and marked off the heavens by the span, and calculated the dust of the earth by the measure, and weighed the mountains in a balance, and the hills in a pair of scales.”
English philosopher Herbert Spencer, who died in 1903, was famous for applying scientific discoveries to philosophy. He listed five knowable categories in the natural sciences: time, force, motion, space, and matter. However, Genesis 1:1, the first verse in the Bible, says, “In the beginning [time] God [force] created [motion] the heavens [space] and the earth [matter].” God laid it all out in the very first verse of Scripture.
The Bible truly is the revelation of God to mankind. He wants us to know about Him and the world He created. Although the Bible does not contain scientific terminology, it is amazingly accurate whenever it happens to refer to scientific truth. But someone might say, “Wait a minute. The Old Testament says that the sun once stood still, and if that happened, the sun didn’t really stand still; the earth stopped revolving.” Yes, but that statement is based on the perception of someone on earth. When you got up this morning, you didn’t look east and say, “What a lovely earth rotation!” From your perspective, you saw a sunrise. And because you permit yourself to do that, you must permit Scripture to do that as well.
Miracles
A third evidence for the authenticity of the Bible is its miracles. We would expect to read of those in a revelation from God Himself, who by definition is supernatural. Miracles are a supernatural alteration of the natural world—a great way to get man’s attention.
The Bible includes supportive information to establish the credibility of the miracles it records. For example, Scripture says that after Jesus had risen from the dead more than five hundred people saw Him alive (1 Corinthians 15:6). That would be enough witnesses to convince any jury. The miraculous nature of the Bible demonstrates the involvement of God. But to believe the miracles, we must take the Bible at its word. So to further validate its authenticity we must take another step and consider its incredible ability to predict the future.
Prophecy
There is no way to explain the Bible’s ability to predict the future unless we see God as its Author. For example, the Old Testament contains more than three hundred references to the Messiah of Israel that were preciselyfulfilled by JesusChrist (Christ isthe Greek translation of the Hebrew word Messiah).
Peter Stoner, a scientist in the area of mathematical probabilities, said in his book Science Speaks that if we take just eight of the Old Testament prophecies Christ fulfilled, we find that the probability of their coming to pass is one in 1017. He illustrates that staggering amount this way:
We take 1017 silver dollars and lay them on the face of Texas . They will cover all of the state two feet deep. Now mark one of these silver dollars and stir the whole mass thoroughly. . . . Blindfold a man and tell him he must pick up one silver dollar. . . . What chance would he have of getting the right one? Just the same chance that the prophets would have had of writing these eight prophecies and having them come true in any one man. ([ Chicago : Moody, 1963], 100-107)
And Jesus fulfilled hundreds more than just eight prophecies!
The Bible includes many other prophecies as well. For example, the Bible predicted that a man named Cyrus would be born, would rise to power in the Middle East, and would release the Jewish people from captivity (Isaiah 44:28—45:7). Approximately 150 years later, Cyrus the Great became king of Persia and released the Jews. No man could have known that would happen; only God could.
In Ezekiel 26 God says through the prophet that the Phoenician city of Tyre would be destroyed, specifying that a conqueror would come in and wipe out the city. He said that the city would be scraped clean and that the rubble left on the city’s surface would be thrown into the ocean. The prophecy ended by saying that men would dry their fishnets there and that the city would never be rebuilt.
Nebuchadnezzar of Babylon laid siege to Tyre three years after the prophecy was given. When he broke down the gates, he found the city almost empty. The Phoenicians were navigators and colonizers of the ancient world; they had taken their boats and sailed to an island a half mile offshore. They had reestablished their city on the island during the years of siege. Nebuchadnezzar destroyed the city on the mainland, but since he didn’t have a navy, he was unable to do anything about the island city of Tyre . This left the prophecy partially unfulfilled.
About 250 years later Alexander the Great came into the area of Tyre needing supplies for his eastern campaign. He sent word to the residents of the island city, but they refused his request. They believed they were safe from attack on the island. Alexander was so infuriated at their response that he and his army picked up the rubble that was left from Nebuchadnezzar’s devastation of the mainland city and threw it into the sea. They used it to build a causeway, which allowed them to march to the island and destroy the city. That exactly fulfilled what Ezekiel had predicted hundreds of years previously.
If you travel to the site of Tyre today, you’ll see fishermen there drying their nets. The city was never rebuilt. Peter Stoner said that the probability of all the details of that prophecy happening by chance is one in 75million.
The Assyrian city of Nineveh is another example. It was one of the most formidable ancient cities, which reached its apex during the seventh century b.c. Yet the prophet Nahum predicted that it would soon be wiped out. He said an overflowing river would crush the gates and that the city would be destroyed (Nahum 1:8; 2:6).
In those days when people walled in their cities, they tended to build gates down into the rivers nearby. The water could flow through the bars of the gates and keep out intruders. In the case of Nineveh , a great storm came and flooded the river, carrying away a vital part of the city walls. That permitted besieging Medes and Babylonians to enter the city and destroy it, just as the prophet predicted.
The Life of Christ
Additional evidence for the authenticity of the Bible is Christ Himself. As we have already seen, He fulfilled many detailed prophecies and did many miracles. It is important to note that He also believed in the authority of the Bible. In Matthew 5:18 He says, “Until heaven and earth pass away, not the smallest letter or stroke shall pass away from the Law, until all is accomplished.”
If you would like to read more about the life of Christ and other evidences for the Bible’s reliability, try Evidence That Demands a Verdict, by Josh McDowell (Here’s Life Publishers).
The Power of the Bible
The Bible is an amazing book. It’s amazing in that it stands up to many tests of authenticity. But beyond that, it’s particularly amazing when looked at from a spiritual and moral perspective.
The Bible claims to be alive and powerful. That’s a tremendous statement. I have never read any other living book. There are some books that change your thinking, but this is the only book that can change your nature. This is the only book that can totally transform you from the inside out.
There’s a section in Psalm 19 that is Scripture’s own testimony to itself. This is what it says:
The law of the Lord is perfect, restoring the soul;
The testimony of the Lord is sure, making wise the simple.
The precepts of the Lord are right, rejoicing the heart;
The commandment of the Lord is pure, enlightening the eyes.
The fear of the Lord is clean, enduring forever;
The judgments of the Lord are true; they are righteous altogether. (vv. 7-9)
Let’s look at each aspect separately.
The Bible Is “Perfect”
First, “the law of the Lord” is a Hebrew term used to define Scripture. Psalm 19 specifies that it is “perfect”—a comprehensive treatment of truth that is able to transform the soul. The Hebrew word translated “soul”(nepesh) refers to the total person. It meansthe real you—not your body but what is inside. So the truths in Scripture can totally transform a person.
You may say, “I’m not interested in being transformed.” Then you probably aren’t interested in the Bible. The Bible is for people who have some sense of desperation about where they are. It is for people who don’t have the purpose in their lives they wish they had. They’re not sure where they are, where they came from, or where they’re going. There are things in their lives they wish they could change. They wish they weren’t driven by passions they can’t control; that they weren’t victims of circumstance; that they didn’t have so much pain in life; that their relationships were all they ought to be; that they could think more clearly about things that matter in their lives. That’s who this book is for: people who don’t have all the answers and who want something better.
The Bible says that the key to this transformation is the Lord Jesus Christ. God came into the world in the form of Christ. He died on a cross to pay the penalty for your sins and mine, and rose again to conquer death. He now lives and comes into the lives of those who acknowledge Him as their Lord and Savior, transforming them into the people God means for them to be. If you’re content with the way you are, you’re not going to look to the Word of God for a way to change. But if you’re aware of your guilt, if you want to get rid of your anxiety and the patterns of life that desperately need to be changed, if you have some emptiness in your heart, if there’s some longing that has never been satisfied, and if there are some answers you just can’t seem to find, then you’re just the person who needs to look into the Word of God to determine if it can do what it says it can. It can transform you completely through the power of Christ, the One who died and rose again for you.
The Bible Is “Sure”
Second, Psalm 19 says that the Scripture is “sure”—absolute, trustworthy, reliable—”making wise the simple.” The Hebrew word translated “simple” comes from a root that speaks of an open door. Ancient Jewish people described a person with a simple mind as someone with a head like an open door: everything comes in; everything goes out. He doesn’t know what to keep out and what to keep in. He’s indiscriminate, totally naive, and unable to evaluate truth. He doesn’t have any standards by which to make a judgment.
The Bible says it is able to make such a person wise. Wisdom to the Jew was the skill of daily living. To the Greek it was sheer sophistry—an abstraction. So when the Hebrew text says it can make a simple person wise, it means it can take the uninitiated, naive, uninstructed, undiscerning person and make him skilled in every aspect of daily living.
The Bible touches every area of life, including relationships, marriage, the work ethic, and factors of the human mind and motivation. It tells you about attitudes, reactions, responses, how to treat people, how you’re to be treated by people, how to cultivate virtue in your life—every aspect of living is covered in the pages of the Bible.
How does the Bible transform one’s life? It does so when you read it and Commit your life to Jesus Christ, the Teacher and the Author of Scripture. He comes to live in you and applies the truth of the Word to your life.
The Bible Is “Right”
Third, the Word of God—called “the precepts of the Lord—is right. In Hebrew, that means it sets out a right path or lays out a right track. And the result is joy to the heart.
I look back at times in my own life when I didn’t know what direction to go, what my future was, or what my career ought to be. Then I began to study God’s Word and submit myself to His Spirit. Then God laid out the path for me. As I’ve walked in that path, I’ve experienced joy, happiness, and blessing. In fact, I find so much satisfaction in life that people sometimes believe something’s wrong with me. Even difficulty brings satisfaction, because it creates a way in which God can show Himself faithful. Even unhappiness is a source of happiness. In John 16, Jesus compares the disciples’ sorrow at His leaving to the pain of a woman having a baby. There’s joy through any circumstance. I know you want a happy life. I know you want peace, joy, meaning, and purpose. I know you want the fullness of life that everybody seeks. The Bible says, “[Happy] are those who hear the word of God and observe it” (Luke 11:28). Why? Because God blesses their faithfulness and obedience. You can have a happy life without sin, without sex outside of marriage, without drugs, and without alcohol. God is not a cosmic killjoy. He made you. He knows how you operate best. And He knows what makes you happy. The happiness He gives doesn’t stop when the party’s over. It lasts because it comes from deep within.
The Bible Is “Pure”
Fourth, the psalmist says the Word of God is pure, enlightening the eyes. The simplest Christian knows a lot of things that many scholarly people don’t know. Because I know the Bible, some things are clear to me that aren’t clear to others.
The autobiography of English philosopher Bertrand Russell, written near the end of his life, implies that philosophy was something of a washout to him. That’s shocking. He spent his life musing on reality, but was not able to define it. I don’t believe I’m Russell’s equal intellectually, but I do know the Word of God. Scripture enlightens the eyes, particularly concerning the dark things of life, such as death, disease, tragic events, and the devastation of the world. Scripture deals with the tough issues of life.
I can go to a Christian who is facing death and see joy in his heart. My grandmother died when she was ninety-three years old. She was lying in bed, and the nurse told her it was time to get up. My grandmother said, “No, I’m not getting up today.” When the nurse asked why, my grandmother said, “I love Jesus, and I’m going to heaven today, so don’t bother me.” Then she smiled and went to heaven.
Do you have that kind of hope?
When I was a boy I used to go to Christ Church in Philadelphia and read epitaphs written about Americans who have had a great impact on our country. Benjamin Franklin wrote his own epitaph:
The body of
Benjamin Franklin, printer,
(Like the cover of an old book,
Its contents worn out
And stript of its lettering and gilding)
Lies here, food for worms!
Yet the work itself shall not be lost,
For it will, as he believed, appear once more
In a new
And more beautiful edition,
Corrected and amended
By its Author!
Can you look death in the eye and say, “This is not the end; it is but the beginning for me”? What can you say to someone who loses a child? What can you say to someone who loses a spouse to cancer or heart disease? Are you roaming around in the confusion in which many people find themselves? Where do you go for the dark things to be made clear? I go to the Word of God, and I find clarity there.
The Bible Is “Clean”
Further, Psalm 19:1 says that the Word of God is “clean, enduring forever.” The only things that last forever are things untouched by the devastation of evil—another word for sin. The word of God is clean. It describes and uncovers sin, but it is untouched by evil. And even though it is an ancient document, every person in every situation in every society can find timeless truth in this book. Here’s a book that never needs another edition because it’s never out of date or obsolete. It speaks to us as pointedly and directly as it ever has to anyone in history. It’s so pure that it lasts forever.
When I was in college I studied philosophy. Almost every philosophy I studied was long dead. I also studied psychology. Almost every form of psychotherapy I read about is now obsolete or has been replaced by more progressive thinking.
But there’s one thing that never changes, and that is the eternal Word of God. It is always relevant.
The Bible Is “True”
Finally, and most pointedly, Psalm 19:9 says that the Word of God is true. Today it seems there’s no longer a premium on truth. But that was true even in Jesus’ day. Pilate, when he sent Jesus to the cross, said, “What is truth?” (John 18:38). The context makes clear that he was being cynical.
I remember meeting a young man on drugs who was living in an overturned refrigerator box by a stream in the mountains of northern California . I was hiking through the area and asked if I could introduce myself. We talked a little while. It turned out he was a graduate of Boston University . He said, “I’ve escaped.” I asked, “Have you found the answers?” “No,” he said, “but at least I’ve gotten myself into a situation where I don’t ask the questions.” That’s the despair of not knowing the truth.
Scripture describes some people as “always learning and never able to come to the knowledge of the truth” (2 Timothy 3:7). That’s not referring to intellectual truth; it’s referring to the truth of life, death, God, man, sin, right, wrong, heaven, hell, hope, joy, and peace. People can’t find it on their own.
What Is Truth?
To look at things philosophically, we live in a time-space box we can’t get out of. We cannot go into a phone booth and come out Superman—we cannot transcend the natural world. We are locked into a time-space continuum.
And we bounce around in our little box trying to figure out God. We invent religions, but they’re self-contained. The only way we’ll ever know what is beyond us is if what is on the outside comes in. And that’s exactly what the Bible claims. It’s a supernatural revelation from God, who has invaded our box. And He invaded it not only through the written word, but also in the Person of Jesus Christ.
Jean-Paul Sartre’s novel Nausea lays out an existential view of life. Its main character, Antoine Roquentin, is horrified by his own existence. He tries to find meaning in life through sex, humanitarianism, and other avenues but is left with a nauseating feeling of meaninglessness, never really finding genuine answers.
Where do you find truth that eluded Roquentin? I believe it is in the Word of God, the Bible. Consider its attributes.
The Attributes of the Bible
The Bible Is Infallible and Inerrant
The Bible, in its entirety, has no mistakes. It is flawless because God wrote it—and He is flawless. It is not only infallible in total, but also inerrant in its parts. Proverbs 30:5-6 says, “Every word of God is tested. . . . Do not add to His words or He will reprove you, and you will be proved a liar.” Every word of God is pure and true. The Bible is the only book that never makes a mistake—everything it says is the truth.
The Bible Is Complete
Nothing needs to be added to the Bible. It is complete. Some today say the Bible is incomplete and simply a product of its time—a comment on man’s spiritual experience in history—and that we now need something else. Some believe that preachers who say, “The Lord told me this or that,” are equally inspired, like Isaiah, Jeremiah, or any of the other prophets. That is essentially to say that the Bible is not complete. However, the last book of the Bible, Revelation, warns, “If anyone adds to [the words of this book], God shall add to him the plagues which are written in this book; and if anyone takes away from the words of the book of this prophecy, God will take away his part from the tree of life and from the holy city, which are written in this book” (22: 18-19).
The Bible Is Authoritative
Since the Bible is perfect and complete, it is the last Word—the final authority. Isaiah 1:2 says, “Listen, Oh heavens, and hear, Oh earth; for the Lord speaks.” When God speaks, we should listen, because He is the final authority. The Bible demands obedience.
John 8:30-31 reports that many of the people Jesus preached to came to believe in Him. Jesus said to them, “If you continue in My word, then are you are truly disciples of Mine.” In other words, He demanded a response to His word. It is authoritative. Galatians 3:10 says, “Cursed is everyone who does not abide by all things written in the book of the law, to perform them.” That’s a tremendous claim to absolute authority. In James 2:10 we read, “Whoever keeps the whole law and yet stumbles in one point, he has become guilty of all.” To violate the Bible at one point is to break God’s entire law. That’s because the Bible is authoritative in every part.
The Bible Is Sufficient
The Bible is sufficient for a number of essentials:
Salvation . Jesus said, “What will it profit a man if he gains the whole world, and forfeits his soul?” (Matthew 16:26). Salvation is the greatest reality in the universe—and the Bible reveals the source of that salvation. Acts 4:12 says regarding Jesus, “There is salvation in no one else; for there is no other name under heaven that has been given among men by which we must be saved.”
Instruction . Second Timothy 3:16 says, “All Scripture is inspired by God and profitable for teaching, for reproof, for correction, for training in righteousness.” The Bible can take those who don’t know God and introduce them to Him. Then it will teach them, reprove them when they do wrong, point them to what is right, and show them how to walk in that right path.
Hope . Romans 15:4 says “Whatever was written in earlier times [a reference to the Old Testament] was written for our instruction, so that through perseverance and the encouragement of the Scriptures we might have hope.” The Bible is a source of encouragement, giving us hope now and forever.
Happiness . James 1:25 reveals the key to happiness: “One who looks intently at [Scripture], and abides by it . . . this man will be [happy] in what he does.” Psalm 119, the longest psalm in the Bible, devotes all 176 verses to describing the Word of God. It begins, “How [happy] are those who walk in the law of the Lord.”
How Will You Respond?
Your response to the Bible determines the course of your life and your eternal destiny. First Corinthians 2:9 says, “No eye has seen, no ear has heard, no mind has conceived what God has prepared for those who love him” (NIV). Man could never conceive of all that God has to offer on his own!
Every time we pick up the Bible, we pick up the truth. Jesus said, “If you continue in My word . . . you will know the truth, and the truth will make you free” (John 8:31-32). What did He mean by that? Think of the person who is working diligently on a math problem. As soon as he finds the answer—he’s free. Or consider the scientist in the lab pouring different solutions into test tubes. He stays with it until he says, “Eureka, I found it!”—then he’s free. Man will search and struggle and grapple and grope for the truth until he finds it. Only then is he free. The Bible is our source of truth—about God, man, life, death, men, women, children, husbands, wives, fathers, mothers, friends, and enemies. It shows us how to live. The Bible is the source of everything you need to know about life on earth and the life to come. You can trust the Bible. It is God’s living Word.
I have gone back and forth and back and forth with many liberals on the Arkansas Times Blog on many issues such as abortion, human rights, welfare, poverty, gun control and issues dealing with popular culture. Here is another exchange I had with them a while back. My username at the Ark Times Blog is Saline […]
I have posted many of the sermons by John MacArthur. He is a great bible teacher and this sermon below is another great message. His series on the Book of Proverbs was outstanding too. I also have posted several of the visits MacArthur made to Larry King’s Show. One of two most popular posts I […]
I have posted many of the sermons by John MacArthur. He is a great bible teacher and this sermon below is another great message. His series on the Book of Proverbs was outstanding too. I also have posted several of the visits MacArthur made to Larry King’s Show. One of two most popular posts I […]
Prophecy–The Biblical Prophesy About Tyre.mp4 Uploaded by TruthIsLife7 on Dec 5, 2010 A short summary of the prophecy about Tyre and it’s precise fulfillment. Go to this link and watch the whole series for the amazing fulfillment from secular sources. http://www.youtube.com/watch?v=qvt4mDZUefo ________________ John MacArthur on the amazing fulfilled prophecy on Tyre and how it was fulfilled […]
John MacArthur on the Bible and Science (Part 2) I have posted many of the sermons by John MacArthur. He is a great bible teacher and this sermon below is another great message. His series on the Book of Proverbs was outstanding too. I also have posted several of the visits MacArthur made to Larry […]
John MacArthur on the Bible and Science (Part 1) I have posted many of the sermons by John MacArthur. He is a great bible teacher and this sermon below is another great message. His series on the Book of Proverbs was outstanding too. I also have posted several of the visits MacArthur made to Larry […]
Adrian Rogers – How you can be certain the Bible is the word of God Great article by Adrian Rogers. What evidence is there that the Bible is in fact God’s Word? I want to give you five reasons to affirm the Bible is the Word of God. First, I believe the Bible is the […]
Is there any evidence the Bible is true? Articles By PleaseConvinceMe Apologetics Radio The Old Testament is Filled with Fulfilled Prophecy Jim Wallace A Simple Litmus Test There are many ways to verify the reliability of scripture from both internal evidences of transmission and agreement, to external confirmation through archeology and science. But perhaps the […]
I have gone back and forth and back and forth with many liberals on the Arkansas Times Blog on many issues such as abortion, human rights, welfare, poverty, gun control and issues dealing with popular culture. Here is another exchange I had with them a while back. My username at the Ark Times Blog is […]
Here is some very convincing evidence that points to the view that the Bible is historically accurate. Archaeological and External Evidence for the Bible Archeology consistently confirms the Bible! Archaeology and the Old Testament Ebla tablets—discovered in 1970s in Northern Syria. Documents written on clay tablets from around 2300 B.C. demonstrate that personal and place […]
The John Lennon and the Beatles really were on a long search for meaning and fulfillment in their lives just like King Solomon did in the Book of Ecclesiastes. Solomon looked into learning (1:12-18, 2:12-17), laughter, ladies, luxuries, and liquor (2:1-2, 8, 10, 11), and labor (2:4-6, 18-20). He fount that without God in the picture all […]
______________ George Harrison Swears & Insults Paul and Yoko Lucy in the Sky with Diamonds- The Beatles The Beatles: I have dedicated several posts to this series on the Beatles and I don’t know when this series will end because Francis Schaeffer spent a lot of time listening to the Beatles and talking […]
The Beatles in a press conference after their Return from the USA Uploaded on Nov 29, 2010 The Beatles in a press conference after their Return from the USA. The Beatles: I have dedicated several posts to this series on the Beatles and I don’t know when this series will end because Francis […]
__________________ Beatles 1966 Last interview I have dedicated several posts to this series on the Beatles and I don’t know when this series will end because Francis Schaeffer spent a lot of time listening to the Beatles and talking and writing about them and their impact on the culture of the 1960’s. In this […]
_______________ The Beatles documentary || A Long and Winding Road || Episode 5 (This video discusses Stg. Pepper’s creation I have dedicated several posts to this series on the Beatles and I don’t know when this series will end because Francis Schaeffer spent a lot of time listening to the Beatles and talking and writing about […]
_______________ Francis Schaeffer pictured below: _____________________ I have included the 27 minute episode THE AGE OF NONREASON by Francis Schaeffer. In that video Schaeffer noted, ” Sergeant Pepper’s Lonely Hearts Club Band…for a time it became the rallying cry for young people throughout the world. It expressed the essence of their lives, thoughts and their feelings.” How Should […]
Crimes and Misdemeanors: A Discussion: Part 1 ___________________________________ Today I will answer the simple question: IS IT POSSIBLE TO BE AN OPTIMISTIC SECULAR HUMANIST THAT DOES NOT BELIEVE IN GOD OR AN AFTERLIFE? This question has been around for a long time and you can go back to the 19th century and read this same […]
____________________________________ Francis Schaeffer pictured below: __________ Francis Schaeffer has written extensively on art and culture spanning the last 2000years and here are some posts I have done on this subject before : Francis Schaeffer’s “How should we then live?” Video and outline of episode 10 “Final Choices” , episode 9 “The Age of Personal Peace and Affluence”, episode 8 […]
People don’t like being overtaxed and thus move from high-tax states to low-tax states.according to the latest state GDP data for the second quarter of 2020, released by the Commerce Department on Friday. Of the 20 states with the smallest decrease in state GDP, 13 were run by Republican governors, while the bottom 25 states with the highest decrease in state GDP were predominantly Democratic-run states. …Republican-controlled Utah had the second-lowest unemployment rate in the country in August at 4.1%, and the second-lowest GDP drop, at just over 18% in the second quarter. Nevada, run by Democrats, had the highest unemployment rate, at 13.2%. It was closely followed by Democratic-run Rhode Island, 12.8%, and New York, 12.5%.
I wrote about some multi-year data last year (before coronavirus was a problem) and found that low-tax states were creating jobs at a significantly faster rate than high-tax states.
California politicians were more profligate in 2021 when politicians in Washington were sending lots of money to states because of the pandemic.The average biennial budget growth rate in the former period was 12% compared with the rate of population growth plus inflation of 7.4%. In the latter period, the average biennial growth rate of the budget was cut by more than half to 5.2%, which was well below the estimated rate of population growth plus inflation of 9.4%. This improved budget picture must be maintained to correct for the excessive budget growth in the earlier period. …there could be a $27 billion GR surplus at the end of the current 2022–23 biennium. …the priority should be to effectively limit or, even better, freeze the state budget. Texas should use most, if not all, of the resulting surplus to reduce…property tax collections…these taxes could be cut substantially by restraining spending and using the surplus to reduce school district M&O property taxes to ultimately eliminate them over time.
California has all sorts of natural advantages over Texas, especially endless sunshine and beautiful topography.California now suffers the highest cost-adjusted poverty rate in the country, and the widest gap between middle and upper-middle income earners. …the state has slowly morphed into a low wage economy. Over the past decade, 80% of the state’s jobs have paid under the median wage — half of which are paid less than $40,000…minorities do better today outside of California, enjoying far higher adjusted incomes and rates of homeownership in places like Atlanta and Dallas than in San Francisco and Los Angeles. Almost one-third of Hispanics, the state’s largest ethnic group, subsist below the poverty line, compared with 21% outside the state. …progressive…policies have not brought about greater racial harmony, enhanced upward mobility and widely based economic growth.
Bay Area Council President Jim Wunderman said… “From consulting companies to tax lawyers to bankers and commercial real estate firms, every person I talk with who provides services to big Bay Area corporations are telling me that their clients are strategizing about leaving…” Charles Schwab, McKesson and Hewlett Packard Enterprise have all exited the high-cost, high-tax, high-regulation Bay Area for a less-expensive, less-regulated and business-friendlier political climate. All of them rode off to Texas. …the pace of the departures appears to be increasing. …A recent online survey of 2,325 California residents, taken between Nov. 4 and Nov. 23 by the Public Policy Institute of California, found 26% of residents have seriously considered moving out of state and that 58% say that the American Dream is harder to achieve in California than elsewhere.
The annual tax would be on current net worth and therefore would include wealth earned, inherited or obtained through gifts or estates long before and long after leaving the state. …The authors of the bill estimate the wealth tax will provide Sacramento $7.5 billion in additional revenue every year. Another proposal—to increase the top state income-tax rate to 16.8%—would annually raise another $6.8 billion. Today, California’s wealthiest 1% pay approximately 46% of total state income taxes. …the Legislature looks to the wealthiest Californians to fill funding gaps without considering the constitutionality of the proposals and the ability of people and companies to pick up and leave the state, which news reports suggest they are doing in large numbers. …As of this moment, there are no police roadblocks on the freeways trying to keep moving trucks from leaving California. If A.B. 2088 becomes law, the state may need to consider placing some.
People used to want to move there, start businesses, raise families, live their American dream. These days, not so much. Between July 2019 and July 2020, more people — 135,400 to be precise — left the state than moved in… No. 1 destination: Texas, followed by Arizona, Nevada and Washington. Three of those states have no state income tax.
when you factor in housing costs, and vies for the top spot in income inequality, too. …but there’s a reason 130,000 more people leave than enter each year. California is dominated by Democrats, but many of the people Democrats claim to care about most can’t afford to live there. …California, as the biggest state in the nation, and one where Democrats hold total control of the government, carries a special burden. If progressivism cannot work here, why should the country believe it can work anywhere else?
…California progressives have progressive policies and progressive power, and they like it that way. That is the substance of their conservatism. …Klein and others of his ilk like to present themselves as dispassionate pragmatists, enlightened empiricists who only want to do “what works.” …Klein mocks San Francisco for renaming schools (Begone, Abraham Lincoln!) while it has no plan to reopen them, but he cannot quite see that these are two aspects of a single phenomenon. …Klein…must eventually understand that the troubles he identifies in California are baked into the progressive cake. …That has real-world consequences, currently on display in California to such a spectacular degree that even Ezra Klein is able dimly to perceive them. Maybe he’ll learn something.
We live in a world that, for the most part, has no absolute standard for life and behavior. We are under a system of morality by majority vote—in other words, whatever feels right sets the standard for behavior.
The Daily Hatch 