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Six great economic crossroads of the 20th and 21st centuries examined by Michael Reagan

I found this article very interesting.

The Kennedy-Reagan Truth vs. the Obama Delusion

by Jim Denney

In his book The New Reagan Revolution, Michael Reagan examined six great economic crossroads of the 20th and 21st centuries. These six critical junctures in the history of the United States serve as economic laboratories to test two contrasting economic theories. One theory consistently produced economic expansion and sustained growth. The other theory invariably produced failure and misery. Here are Michael Reagan findings:

1. The “Forgotten Depression” of January 1920. During the last year of Woodrow Wilson’s presidency, the economy nosedived. GNP fell 17 percent; unemployment soared from 4 to almost 12 percent. This was the “Forgotten Depression” of 1920. Wilson’s successor, Warren G. Harding, came into office and immediately cut tax rates for all income brackets, slashed federal spending, and balanced the budget. Long before the world ever heard of Ronald Reagan, Harding practiced “Reaganomics.”

“President Harding applied the principles of Reaganomics,” Michael Reagan observed, “even though Ronald Reagan was at that time a nine-year-old boy living in Dixon, Illinois. Harding was not following an economic theory. He was following common sense. He treated the federal budget as you would treat the family budget: When times are tough, cut spending and stay out of debt. Harding also treated his fellow citizens with commonsense compassion: If folks are going through tough times, government should ease their burden and cut their taxes.”

The Harding recovery was astonishingly rapid, beginning just half a year into his presidency. Unemployment fell to 6.7 percent by 1922, and to 2.4 percent by 1923. Harding’s successor, Calvin Coolidge, maintained Harding’s program of low tax rates, balanced budgets, and limited government. The Harding-Coolidge era of prosperity became known as “the Roaring Twenties”—a time of soaring prosperity, stable prices, and boundless optimism.

Obvious conclusion based on the evidence: Reaganomics works.

2. The Great Depression. Coolidge was succeeded by Herbert Hoover. In the eighth month of Hoover’s presidency, the stock market crashed—the infamous Crash of 1929. Many factors led to the Great Depression, but the Crash was the precipitating event. Hoover had failed to learn the lessons of the Harding-Coolidge years, so he responded by raising taxes (hiking the top marginal rate from 25 to 63 percent), imposing protectionism (the Smoot-Hawley Tariff Act), and boosting government spending by 47 percent, driving America deep into debt. Hoover’s actions worsened the Depression. A defeated Herbert Hoover bequeathed a ruined economy to Franklin Delano Roosevelt

FDR took office at a time when 25 percent of the nation’s workforce was unemployed. He, too, ignored the lessons of the “Forgotten Depression,” and doubled down on Hoover’s failed tax-and-spend policies, applying the economic theory known as Keynesianism (after British economist John Maynard Keynes). The Keynes-FDR approach involved deficit spending, soak-the-rich tax policies, and big-government make-work programs (the New Deal). FDR and a compliant Congress hiked personal and corporate income tax rates, estate taxes, and excise taxes.

Michael Reagan wrote, “From 1937 to 1939, the stock market lost almost half its value, car sales fell by one-third, and business failures increased by one-half. From 1932 to 1939, the U.S. racked up more debt than in all the preceding 150 years of America’s existence. By early 1939, as the Great Depression was in its tenth year, unemployment again climbed past the 20 percent mark.”

Many Americans credit FDR with “getting America through the Depression.” In reality, FDR’s policies prolonged the Depression. In a time of catastrophic unemployment, Roosevelt made it prohibitively expensive to hire people, making a terrible human tragedy even worse. While thousands of U.S banks failed under FDR’s policies, across the border in Canada, not one bank failed—because Canadian banks were not hamstrung by FDR’s foolish over-regulation. In FDR’s Folly, historian Jim Powell questions the disturbing FDR legacy:

Why did New Dealers make it more expensive for employers to hire people? Why did FDR’s Justice Department file some 150 lawsuits threatening big employers? Why did New Deal policies discourage private investment without which private employment was unlikely to revive? Why so many policies to push up the cost of living? Why did New Dealers destroy food while people went hungry? To what extent did New Deal labor laws penalize blacks? Why did New Dealers break up the strongest banks? . . . Why didn’t New Deal public works projects bring about a recovery? Why was so much New Deal relief spending channeled away from the poorest people?

In May 1939, a demoralized and defeated Henry Morgenthau, FDR’s treasury secretary, told the House Ways and Means Committee, “We are spending more than we have ever spent before and it does not work. . . . I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. . . . After eight years of this administration we have just as much unemployment as when we started. . . . And an enormous debt to boot!”

Many people mistakenly believe that World War II lifted America out of the Great Depression. Not true. What WWII did was take 12 million men out of the workforce and send them into war, which ended unemployment. But all the other signs of a damaged economy remained during the war: low stock prices, depressed private investment, and depressed consumer demand.

Roosevelt and his successor, Harry Truman, had a post-war plan to impose an even bigger Second New Deal after the war. Fortunately, Congress refused, and chose instead to cut taxes and cut spending—the same commonsense “Reaganomics” approach that had produced prosperity during the 1920s. The result: a post-war economic boom from the late 1940s through the 1950s. Had FDR and Truman gotten their way, the country would have slipped right back into recession if not a second Great Depression.

Obvious conclusion based on the evidence: Keynesianomics fails, prolonging economic hardship and misery, while Reaganomics works again.

3. The Recession of 1960 and 1961. When John F. Kennedy came into office, he faced a jobless figure of 7.1 percent. Wanting the economy to keep up with the growing workforce, JFK addressed the Economic Club of New York in December 1962 and proposed a bold notion: “It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. . . . The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.”

Those are the words of John F. Kennedy—and he was preaching Reaganomics. Kennedy was assassinated less than a year later, but his successor, Lyndon Johnson, lobbied hard for the JFK tax cuts, and he signed them into law in 1964. As a result of JFK’s Reaganesque economic plan, the economy experienced a dramatic 5 percent expansion and personal income increased by 7 percent. Gross national product grew from $628 billion to $672 billion, corporate profits by an explosive 21 percent, auto production rose by 22 percent, steel production grew by 6 percent, and unemployment plummeted to 4.2 percent—an eight-year low. The Kennedy-Johnson tax rate cuts produced a sustained economic expansion for nearly a decade.

Obvious conclusion based on the evidence: Reaganomics works again.

4. The Recession of the 1970s. This recession began in November 1973 under Nixon and ended (technically) in March 1975 under Gerald Ford—a 16-month recession. According to the graphs and charts of the economists, real GDP was on the rise by the spring of 1975, yet unemployment and inflation remained painfully high throughout rest of the 1970s. Americans continue to suffer joblessness amid spiraling prices after the recession officially ended.

In 1976, Ronald Reagan narrowly lost the primary race against Gerald Ford. Reagan was convinced that he knew how to solve the long and painful recession of the 1970s, but he was forced to watch from the sidelines as Gerald Ford and Jimmy Carter—two befuddled, clueless Keynesians!—battled each other for the White House. On October 8, 1976, at the height of the presidential race between Carter and Ford, Reagan outlined the principles of Reaganomics in a syndicated newspaper column entitled “Tax Cuts and Increased Revenue.” He wrote:

Warren Harding did it. John Kennedy did it. But Jimmy Carter and President Ford aren’t talking about it. The ‘it’ that Harding and Kennedy had in common was to cut the income tax. In both cases, federal revenues went up instead of down. . . . Since the idea worked under both Democratic and Republican administrations before, who’s to say it couldn’t work again?”

Reagan had majored in economics at Eureka College and had spent years studying the great free market economists such as Adam Smith (The Wealth of Nations), Friedrich Hayek (The Road to Serfdom), and Milton Friedman (Capitalism and Freedom). While Reagan’s opponents ignorantly wrote him off as an “amiable dunce,” it is clear that Reagan correctly and insightfully diagnosed the ailing economy of the 1970s. Unfortunately, Reagan would have to wait more than four years for the opportunity to put his prescription into practice.

Obvious conclusion based on the evidence: Keynesianism fails again.

5. The Jimmy Carter Stagflation Recession of 1980. After Jimmy Carter was inaugurated in January 1977, he inflicted the failed FDR-style Keynesian approach on the country—an approach which says the federal government can spend its way to prosperity. The result of Carter’s policies was an economic disaster called “stagflation”—slow economic growth coupled with the misery of rampant inflation and high unemployment.

By the 1980 election, America under Carter was in a full-blown recession. The American people had suffered years of double-digit interest rates, double-digit inflation, and double-digit unemployment, plus blocks-long lines at the gas station. Ronald Reagan defeated Carter in a landslide. Newsweek observed: “When Ronald Reagan steps into the White House . . . he will inherit the most dangerous economic crisis since Franklin Roosevelt took office 48 years ago.”

Reagan moved confidently and quickly to slash tax rates and domestic spending. Under his leadership, the top marginal tax rate dropped from 70 percent to 28 percent. Michael Reagan described the results:

Tax cuts generated 4 million jobs in 1983 alone and 16 million jobs over the course of Ronald Reagan’s presidency. Unemployment among African-Americans dropped dramatically, from 19.5 percent in 1983 to 11.4 percent in 1989. . . .

The inflation rate fell from 13.5 percent in 1980 . . . to 3.2 percent in 1983. . . .

The Reagan tax cuts nearly doubled federal revenue. After his 25 percent across-the-board tax rate cuts went into effect, receipts from both individual and corporate income taxes rose dramatically. According to the White House Office of Management and Budget, revenue from individual income taxes went from $244.1 billion in 1980 to $445.7 billion in 1989, an increase of over 82 percent. Revenue from corporate income taxes went from $64.6 billion to $103.3 billion, a 60 percent jump.

This was the fulfillment of the “paradoxical truth” that John F. Kennedy spoke of in his 1962 speech: “Cutting taxes now . . . can bring a budget surplus.” Both JFK and Ronald Reagan predicted that lower tax rates would generate more revenue. This “paradoxical truth” worked exactly as predicted.

At a White House press conference in 1981, President Reagan took reporters to school, explaining that the principles of Reaganomics have been known for centuries. Lower tax rates invariably bring more money into the treasury, he explained, “because of the almost instant stimulant to the economy.” This principle, Reagan added, “goes back at least, I know, as far as the fourteenth century, when a Moslem philosopher named Ibn Khaldun said, ‘In the beginning of the dynasty, great tax revenues were gained from small assessments. At the end of the dynasty, small tax revenues were gained from large assessments.’”

The principles of Reaganomics have been proved true—and Keynesian theory has been exposed as a fraud once more.

6. The Obama Recession. To be fair, what I call “The Obama Recession” actually began under George W. Bush, triggered by the collapse of the housing bubble. I think it’s fair to call it The Obama Recession because, when Barack Obama took office, he threw $814 billion of stimulus money at the recession (plus billions more in corporate bailouts, “Cash for Clunkers,” Solyndra-style green energy boondoggles, and other prime-the-pump schemes). He promised to jump-start the economy and hold unemployment below 8 percent. This was weapons-grade Keynesianism, practiced on a scale never before witnessed in human history. After spending so much money on the “cure,” Obama now owned that recession.

If Keynesian theory works at all, the Obama stimulus plan should have completely turned the economy around. But the stimulus plan—officially known as the American Recovery and Reinvestment Act of 2009—not only failed to make a splash, it didn’t make a ripple. Even after the government pumped nearly a trillion dollars of borrowed money into the economy, unemployment nudged up toward the 10 percent mark. Today, unemployment is officially below 9 percent—but the actual jobless rate is much higher.

In 2010, the Population Reference Bureau calculated the workforce to be at just over 157 million people. The Bureau of Labor Statistics reports that there are 131 million jobs in America. That would leave 26 million people jobless—or about 16 percent of the total workforce. But it gets worse: Many of those jobs are just part-time jobs, and many people hold two or more of those jobs, so the actual jobless number is certainly far higher than 16 percent—maybe 20 percent or higher.

Obvious conclusion based on the evidence: Keynesianomics fails catastrophically.

Unfortunately, the high priests of the Keynesian religion refuse to see the light. President Obama clings to his delusional Keynesian faith, insisting that all we have to do is throw more money at the economy with another stimulus bill! That is economic insanity. Former Reagan aide Peter Ferrara wrote in the Wall Street Journal:

The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies. Ronald Reagan’s decision to dump Keynesianism in favor of supply-side policies—which emphasize incentives for investment — produced a 25-year economic boom. That boom ended as the Bush administration abandoned every component of Reaganomics one by one, culminating in Treasury Secretary Henry Paulson’s throwback Keynesian stimulus in early 2008.

Mr. Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and suddenly national economic policy was back in the 1930s. Instead of the change voters thought they were getting, Mr. Obama quintupled down on Mr. Bush’s 2008 Keynesianism.

Keynesian theory is every bit as superstitious as believing in astrology or a flat Earth or the good-luck powers of a rabbit’s foot. The facts of history are beyond dispute. The old Keynesian superstition has failed every time it was tried. But Keynesian fundamentalists like Barack Obama continue to live in a state of denial.

We know what works. Nearly a century of economic history proves it. Now we need a president and a Congress with the common sense to apply the lessons of history to the economic crisis of today.

______

The Laffer Curve, Part III: Dynamic Scoring

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Dan Mitchell: “Romney is Right that You Can Lower Tax Rates and Reduce Tax Preferences without Hurting the Middle Class”

The Laffer Curve, Part I: Understanding the Theory

Uploaded by 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 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

________

We got to reduce taxes to grow our economy!!!

Even though I’m not a Romney fan, I sometimes feel compelled to defend him against leftist demagoguery.

But instead of writing about tax havens, as I’ve done in the past, today we’re going to look at incremental tax reform.

The left has been loudly asserting that the middle class would lose under Mitt Romney’s plan to cut tax rates by 20 percent and finance those reductions by closing loopholes.

That class-warfare accusation struck me as a bit sketchy because when I looked at the data a couple of years ago, I put together this chart showing that rich people, on average, enjoyed deductions that were seven times as large as the deductions of middle-income taxpayers.

And the chart includes only the big itemized deductions. There are dozens of other special tax preferences, as shown in this depressing image, and you can be sure that rich people are far more likely to have the lawyers, lobbyists, and accountants needed to exploit those provisions.

But that’s not a surprise since the internal revenue code has morphed into a 72,000-page monstrosity (this is why I sometimes try to convince honest leftists that a flat tax is a great way of reducing political corruption).

But this chart doesn’t disprove the leftist talking point, so I’m glad that Martin Feldstein addressed the issue in today’s Wall Street Journal. Here’s some of what he wrote.

The IRS data show that taxpayers with adjusted gross incomes over $100,000 (the top 21% of all taxpayers) made itemized deductions totaling $636 billion in 2009. Those high-income taxpayers paid marginal tax rates of 25% to 35%, with most $200,000-plus earners paying marginal rates of 33% or 35%. And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney. …Additional revenue could be raised from high-income taxpayers by limiting the use of the “preferences” identified for the Alternative Minimum Tax (such as excess oil depletion allowances) or the broader list of all official individual “tax expenditures” (such as tax credits for energy efficiency improvements in homes), among other credits and exclusions. None of this base-broadening would require taxing capital gains or making other changes that would reduce the incentives for saving and investment. …Since broadening the tax base would produce enough revenue to pay for cutting everyone’s tax rates, it is clear that the proposed Romney cuts wouldn’t require any middle-class tax increase, nor would they produce a net windfall for high-income taxpayers. The Tax Policy Center and others are wrong to claim otherwise.

In other words, even with a very modest assumption about the Laffer Curve, it would be quite possible to implement something akin to what Romney’s proposing and not “lose” tax revenue.

This doesn’t mean, of course, that Romney seriously intends to push for good policy. I’m much more concerned, for instance, that he’ll wander in the wrong direction and propose something very bad such as a value-added tax.

But Romney certainly can do the right thing if he wins. Assuming that’s what he wants to do.

Just like he can fulfill his promise the reduce the burden of government spending by implementing Paul Ryan’s entitlement reforms. But don’t hold your breath waiting for that to happen.

______

The Laffer Curve, Part II: Reviewing the Evidence

This video is second installment of a three-part series. Part I reviews theoretical relationship between tax rates, taxable income, and tax revenue. 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.

The Laffer Curve, Part III: Dynamic Scoring

Brantley agrees with Obama that the rich should pay more

The Laffer Curve, Part I: Understanding the Theory

Max Brantley is fond of accusing Republicans of coddling the rich and here comes Warren Buffett and validates both what President Obama and Brantley have been saying. However, will the increase in taxes have the desired result that they are wanting?

Higher Tax Rates on Rich Won’t Increase Revenues

by Alan Reynolds

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

Added to cato.org on September 13, 2011

This article appeared on Investor’s Business Daily on September 12, 2011.

In last week’s campaign speech disguised as an address to Congress, President Obama said, “Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix.”

Writing recently in The New York Times, the famed chairman of Berkshire Hathaway complained that his federal income tax last year was “only 17.4% of my taxable income” — less than $7 million on a taxable income of about $40 million.

Buffett claimed that, like himself, other “mega-rich pay income taxes at a rate of 15% on most of their earnings,” but that is not at all common. The average income-tax rate of those earning between $1 million and $10 million was 29.5% in 2009.

Obama used Buffett’s uniquely low 17.4% tax as proof that “a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets.” That is not true.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous.

Anyone whose income is almost entirely composed of realized capital gains or dividends would “pay income taxes at a rate of 15% on most of their earning.” Investors with modest incomes also pay a tax rate of 15% on dividends and capital gains, although that rate is scheduled to rise to 18.8% under the Obama health law (and much higher if Congress enacted the “reforms” Obama will propose next Monday).

Before 2003, when the tax on dividends was made the same as the tax on capital gains, Berkshire Hathaway was a handy tax dodge — a way to own dividend-paying stocks without paying taxes on the dividends. Buffett is famous for collecting stocks with a generous dividend yield without Berkshire itself paying any dividend.

The dividends Berkshire receives are reinvested in buying more stocks, so the holding company ends up with more assets per share which results in capital gains that would be taxable only if the shares are sold.

Warren Buffett is the second wealthiest person in America, but he reports surprisingly little taxable income for someone who owns more than $50 billion of Berkshire shares. Increasing the tax rate on salaries and interest income would barely affect him.

He pays himself a salary of just $100,000, which explains how he pays less than his employees do in payroll taxes. He dodged the estate tax by donating his wealth to the Bill and Melinda Gates Foundation. He doubtless reduces his taxable income with other donations to charity, which explains why he repeatedly refers to taxable income rather than adjusted gross income.

Mr. Buffett ends by appointing himself tax czar and declares he “would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more … (he) would suggest an additional increase in rate.”

Since he only reports $100,000 of salary, he has nothing to lose by advocating a higher tax rate on salaries. Nearly all of his income in 2010 consisted of capital gains on sales of Berkshire shares, because those shares pay no dividends. But Buffett could just as easily hang onto appreciated shares rather than selling them, or he could donate them to charity.

Raising tax rates on dividends and capital gains sounds easier than it is. Nobody with substantial wealth can be forced to realize taxable gains by selling appreciated assets. A realized gain is no more valuable than an unrealized gain. On the contrary, it is less valuable by the amount of the tax.

Nobody can be forced to hold dividend-paying stocks either. They can instead buy Berkshire Hathaway shares if the tax on dividends goes up, as Buffett understands.

Despite his personal and professional dependence on capital gains, Buffett nevertheless feigns total ignorance of who pays the capital gains tax and why. He says, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9% in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Well, the Dow Jones industrial average was 831 at the end of 1977 — down from 969 at the end of 1965 — so somebody was having trouble finding investments that would still look sensible after paying a 39.9% tax.

In any case, for Buffett to focus on the act of buying stocks or property is all wrong. The capital gains tax is not a tax on buying assets. It is a tax on selling assets. If you don’t sell, there is no tax. And when the capital gains tax is high, very few people are willing to sell.

In 1977, when the capital gains tax was 39.9%, realized gains amounted to less than 1.57% of GDP. From 1987 to 1996, when the capital gains tax was 28%, realized gains rose to 2.3% of GDP. Since 28% of 2.3 is larger than 39.9% of 1.57, the lower tax rate clearly raised more tax revenue.

From 2004 to 2007, when the capital gains tax was 15%, realized gains amounted to 5.2% of GDP. Since 15% of 5.2 is larger than 28% of 2.3, the lower tax rate again raised more tax revenue. The government cannot afford to raise this tax, particularly on those most likely to pay it.

Buffett focuses on the 400 tax returns with the highest reported incomes, which are often one-time capital gains from the sale of a business or real estate.

“In 1992,” he writes, “the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2% on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5%.”

In 1992 only 39% of reported income of the top 400 came from capital gains and dividends because those tax rates were so high. With most reported income coming from salaries, the average tax rate was high.

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

 

More by Alan Reynolds

By 2008, 67% of reported income of the top 400 came from capital gains and dividends because both were taxed at 15%. That diluted the average tax rate, yet nevertheless resulted in much more taxes paid because the amount of reported income was so much larger.

The big change was not in actual income, but merely in what the IRS counts as income. People were hiding more of their wealth in 1992 than they did in 2006-2008, and they were hiding even more in 1977.

It is easy to advocate a higher tax rate on capital gains, but it is even easier to avoid paying that higher tax rate. Simply hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses.

The evidence is undeniable that affluent investors and property owners report far fewer gains whenever the capital gains tax goes up. Choosing to pay tax on capital gains and dividends is usually voluntary, and when the rate gets too high we run short of volunteers.

With the super-high 1977 tax rates of 39.9% on capital gains and 70% on dividends and salaries, federal revenues were 18% of GDP. In 1992, revenues were only 17.5% of GDP. In 2007, thanks in large part to a 15% tax rate on capital gains and dividends, revenues were 18.5% of GDP.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous. It didn’t work then, and it wouldn’t work now.

The Laffer Curve, Part III: Dynamic Scoring

Uploaded by on May 28, 2008

A video by CF&P Foundation that builds on the discussion of theory in Part I and evidence in Part II, this concluding video in the series on the Laffer Curve explains how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that “static scoring” should be replaced with “dynamic scoring” so that lawmakers will have more accurate information when making decisions about tax policy. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org.

Brantley agrees with Obama that the rich should pay more

The Laffer Curve, Part I: Understanding the Theory

Max Brantley is fond of accusing Republicans of coddling the rich and here comes Warren Buffett and validates both what President Obama and Brantley have been saying. However, will the increase in taxes have the desired result that they are wanting?

Higher Tax Rates on Rich Won’t Increase Revenues

by Alan Reynolds

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

Added to cato.org on September 13, 2011

This article appeared on Investor’s Business Daily on September 12, 2011.

In last week’s campaign speech disguised as an address to Congress, President Obama said, “Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix.”

Writing recently in The New York Times, the famed chairman of Berkshire Hathaway complained that his federal income tax last year was “only 17.4% of my taxable income” — less than $7 million on a taxable income of about $40 million.

Buffett claimed that, like himself, other “mega-rich pay income taxes at a rate of 15% on most of their earnings,” but that is not at all common. The average income-tax rate of those earning between $1 million and $10 million was 29.5% in 2009.

Obama used Buffett’s uniquely low 17.4% tax as proof that “a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets.” That is not true.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous.

Anyone whose income is almost entirely composed of realized capital gains or dividends would “pay income taxes at a rate of 15% on most of their earning.” Investors with modest incomes also pay a tax rate of 15% on dividends and capital gains, although that rate is scheduled to rise to 18.8% under the Obama health law (and much higher if Congress enacted the “reforms” Obama will propose next Monday).

Before 2003, when the tax on dividends was made the same as the tax on capital gains, Berkshire Hathaway was a handy tax dodge — a way to own dividend-paying stocks without paying taxes on the dividends. Buffett is famous for collecting stocks with a generous dividend yield without Berkshire itself paying any dividend.

The dividends Berkshire receives are reinvested in buying more stocks, so the holding company ends up with more assets per share which results in capital gains that would be taxable only if the shares are sold.

Warren Buffett is the second wealthiest person in America, but he reports surprisingly little taxable income for someone who owns more than $50 billion of Berkshire shares. Increasing the tax rate on salaries and interest income would barely affect him.

He pays himself a salary of just $100,000, which explains how he pays less than his employees do in payroll taxes. He dodged the estate tax by donating his wealth to the Bill and Melinda Gates Foundation. He doubtless reduces his taxable income with other donations to charity, which explains why he repeatedly refers to taxable income rather than adjusted gross income.

Mr. Buffett ends by appointing himself tax czar and declares he “would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more … (he) would suggest an additional increase in rate.”

Since he only reports $100,000 of salary, he has nothing to lose by advocating a higher tax rate on salaries. Nearly all of his income in 2010 consisted of capital gains on sales of Berkshire shares, because those shares pay no dividends. But Buffett could just as easily hang onto appreciated shares rather than selling them, or he could donate them to charity.

Raising tax rates on dividends and capital gains sounds easier than it is. Nobody with substantial wealth can be forced to realize taxable gains by selling appreciated assets. A realized gain is no more valuable than an unrealized gain. On the contrary, it is less valuable by the amount of the tax.

Nobody can be forced to hold dividend-paying stocks either. They can instead buy Berkshire Hathaway shares if the tax on dividends goes up, as Buffett understands.

Despite his personal and professional dependence on capital gains, Buffett nevertheless feigns total ignorance of who pays the capital gains tax and why. He says, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9% in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Well, the Dow Jones industrial average was 831 at the end of 1977 — down from 969 at the end of 1965 — so somebody was having trouble finding investments that would still look sensible after paying a 39.9% tax.

In any case, for Buffett to focus on the act of buying stocks or property is all wrong. The capital gains tax is not a tax on buying assets. It is a tax on selling assets. If you don’t sell, there is no tax. And when the capital gains tax is high, very few people are willing to sell.

In 1977, when the capital gains tax was 39.9%, realized gains amounted to less than 1.57% of GDP. From 1987 to 1996, when the capital gains tax was 28%, realized gains rose to 2.3% of GDP. Since 28% of 2.3 is larger than 39.9% of 1.57, the lower tax rate clearly raised more tax revenue.

From 2004 to 2007, when the capital gains tax was 15%, realized gains amounted to 5.2% of GDP. Since 15% of 5.2 is larger than 28% of 2.3, the lower tax rate again raised more tax revenue. The government cannot afford to raise this tax, particularly on those most likely to pay it.

Buffett focuses on the 400 tax returns with the highest reported incomes, which are often one-time capital gains from the sale of a business or real estate.

“In 1992,” he writes, “the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2% on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5%.”

In 1992 only 39% of reported income of the top 400 came from capital gains and dividends because those tax rates were so high. With most reported income coming from salaries, the average tax rate was high.

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

 

More by Alan Reynolds

By 2008, 67% of reported income of the top 400 came from capital gains and dividends because both were taxed at 15%. That diluted the average tax rate, yet nevertheless resulted in much more taxes paid because the amount of reported income was so much larger.

The big change was not in actual income, but merely in what the IRS counts as income. People were hiding more of their wealth in 1992 than they did in 2006-2008, and they were hiding even more in 1977.

It is easy to advocate a higher tax rate on capital gains, but it is even easier to avoid paying that higher tax rate. Simply hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses.

The evidence is undeniable that affluent investors and property owners report far fewer gains whenever the capital gains tax goes up. Choosing to pay tax on capital gains and dividends is usually voluntary, and when the rate gets too high we run short of volunteers.

With the super-high 1977 tax rates of 39.9% on capital gains and 70% on dividends and salaries, federal revenues were 18% of GDP. In 1992, revenues were only 17.5% of GDP. In 2007, thanks in large part to a 15% tax rate on capital gains and dividends, revenues were 18.5% of GDP.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous. It didn’t work then, and it wouldn’t work now.

The Laffer Curve, Part III: Dynamic Scoring

Uploaded by on May 28, 2008

A video by CF&P Foundation that builds on the discussion of theory in Part I and evidence in Part II, this concluding video in the series on the Laffer Curve explains how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that “static scoring” should be replaced with “dynamic scoring” so that lawmakers will have more accurate information when making decisions about tax policy. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org.

Government spending should be less than 15% of GDP

Government spending should be less than 15% of GDP

Very interesting video.

“Rahn Curve” Video Shows Government Is Far Too Big

Posted by Daniel J. Mitchell

There is considerable academic research on the growth-maximizing level of government spending. Based on a good bit of research, I’m fairly confident that Cato’s Richard Rahn was the first to popularize this concept, so we are going to make him famous (sort of like Art Laffer) in this new video explaining that there is a spending version of the Laffer Curve and that it shows how government is far too large and that this means less prosperity.

Daniel J. Mitchell • June 29, 2010 @ 10:35 am

Brantley, Buffett and Obama: “Stop coddling the rich”

Brantley, Buffett and Obama: “Stop coddling the rich”

The Laffer Curve, Part I: Understanding the Theory

Max Brantley is fond of accusing Republicans of coddling the rich and here comes Warren Buffett and validates both what President Obama and Brantley have been saying. However, will the increase in taxes have the desired result that they are wanting?

Higher Tax Rates on Rich Won’t Increase Revenues

by Alan Reynolds

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

Added to cato.org on September 13, 2011

This article appeared on Investor’s Business Daily on September 12, 2011.

In last week’s campaign speech disguised as an address to Congress, President Obama said, “Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix.”

Writing recently in The New York Times, the famed chairman of Berkshire Hathaway complained that his federal income tax last year was “only 17.4% of my taxable income” — less than $7 million on a taxable income of about $40 million.

Buffett claimed that, like himself, other “mega-rich pay income taxes at a rate of 15% on most of their earnings,” but that is not at all common. The average income-tax rate of those earning between $1 million and $10 million was 29.5% in 2009.

Obama used Buffett’s uniquely low 17.4% tax as proof that “a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets.” That is not true.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous.

Anyone whose income is almost entirely composed of realized capital gains or dividends would “pay income taxes at a rate of 15% on most of their earning.” Investors with modest incomes also pay a tax rate of 15% on dividends and capital gains, although that rate is scheduled to rise to 18.8% under the Obama health law (and much higher if Congress enacted the “reforms” Obama will propose next Monday).

Before 2003, when the tax on dividends was made the same as the tax on capital gains, Berkshire Hathaway was a handy tax dodge — a way to own dividend-paying stocks without paying taxes on the dividends. Buffett is famous for collecting stocks with a generous dividend yield without Berkshire itself paying any dividend.

The dividends Berkshire receives are reinvested in buying more stocks, so the holding company ends up with more assets per share which results in capital gains that would be taxable only if the shares are sold.

Warren Buffett is the second wealthiest person in America, but he reports surprisingly little taxable income for someone who owns more than $50 billion of Berkshire shares. Increasing the tax rate on salaries and interest income would barely affect him.

He pays himself a salary of just $100,000, which explains how he pays less than his employees do in payroll taxes. He dodged the estate tax by donating his wealth to the Bill and Melinda Gates Foundation. He doubtless reduces his taxable income with other donations to charity, which explains why he repeatedly refers to taxable income rather than adjusted gross income.

Mr. Buffett ends by appointing himself tax czar and declares he “would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more … (he) would suggest an additional increase in rate.”

Since he only reports $100,000 of salary, he has nothing to lose by advocating a higher tax rate on salaries. Nearly all of his income in 2010 consisted of capital gains on sales of Berkshire shares, because those shares pay no dividends. But Buffett could just as easily hang onto appreciated shares rather than selling them, or he could donate them to charity.

Raising tax rates on dividends and capital gains sounds easier than it is. Nobody with substantial wealth can be forced to realize taxable gains by selling appreciated assets. A realized gain is no more valuable than an unrealized gain. On the contrary, it is less valuable by the amount of the tax.

Nobody can be forced to hold dividend-paying stocks either. They can instead buy Berkshire Hathaway shares if the tax on dividends goes up, as Buffett understands.

Despite his personal and professional dependence on capital gains, Buffett nevertheless feigns total ignorance of who pays the capital gains tax and why. He says, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9% in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Well, the Dow Jones industrial average was 831 at the end of 1977 — down from 969 at the end of 1965 — so somebody was having trouble finding investments that would still look sensible after paying a 39.9% tax.

In any case, for Buffett to focus on the act of buying stocks or property is all wrong. The capital gains tax is not a tax on buying assets. It is a tax on selling assets. If you don’t sell, there is no tax. And when the capital gains tax is high, very few people are willing to sell.

In 1977, when the capital gains tax was 39.9%, realized gains amounted to less than 1.57% of GDP. From 1987 to 1996, when the capital gains tax was 28%, realized gains rose to 2.3% of GDP. Since 28% of 2.3 is larger than 39.9% of 1.57, the lower tax rate clearly raised more tax revenue.

From 2004 to 2007, when the capital gains tax was 15%, realized gains amounted to 5.2% of GDP. Since 15% of 5.2 is larger than 28% of 2.3, the lower tax rate again raised more tax revenue. The government cannot afford to raise this tax, particularly on those most likely to pay it.

Buffett focuses on the 400 tax returns with the highest reported incomes, which are often one-time capital gains from the sale of a business or real estate.

“In 1992,” he writes, “the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2% on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5%.”

In 1992 only 39% of reported income of the top 400 came from capital gains and dividends because those tax rates were so high. With most reported income coming from salaries, the average tax rate was high.

Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).

 

More by Alan Reynolds

By 2008, 67% of reported income of the top 400 came from capital gains and dividends because both were taxed at 15%. That diluted the average tax rate, yet nevertheless resulted in much more taxes paid because the amount of reported income was so much larger.

The big change was not in actual income, but merely in what the IRS counts as income. People were hiding more of their wealth in 1992 than they did in 2006-2008, and they were hiding even more in 1977.

It is easy to advocate a higher tax rate on capital gains, but it is even easier to avoid paying that higher tax rate. Simply hold onto assets that went up and sell those that went down, and never realize gains until you have offsetting losses.

The evidence is undeniable that affluent investors and property owners report far fewer gains whenever the capital gains tax goes up. Choosing to pay tax on capital gains and dividends is usually voluntary, and when the rate gets too high we run short of volunteers.

With the super-high 1977 tax rates of 39.9% on capital gains and 70% on dividends and salaries, federal revenues were 18% of GDP. In 1992, revenues were only 17.5% of GDP. In 2007, thanks in large part to a 15% tax rate on capital gains and dividends, revenues were 18.5% of GDP.

To hold out the tax policies of 1977 or 1992 as examples of effective ways to raise more revenue is ludicrous. It didn’t work then, and it wouldn’t work now.

The Laffer Curve, Part III: Dynamic Scoring

Uploaded by on May 28, 2008

A video by CF&P Foundation that builds on the discussion of theory in Part I and evidence in Part II, this concluding video in the series on the Laffer Curve explains how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the Laffer Curve does not exist. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts. The video explains that “static scoring” should be replaced with “dynamic scoring” so that lawmakers will have more accurate information when making decisions about tax policy. For more information please visit the Center for Freedom and Prosperity’s web site: http://www.freedomandprosperity.org.