Laffer Press Roundup

Here's an interesting test case for the press. It seems that at yesterday's GOP debate, Rudy Giuliani derided the idea that higher taxes raise revenues as a "Democratic, liberal" assumption and put forward his alternative view that you generate revenue by lowering tax rates. This is a stunning confession of total ignorance of tax policy and economics by the GOP front runner. So how did the press cover it? Chris Cilizza at the Fix lives down to my expectations by totally ignoring the fact that Giuliani is incorrect:

"There is a liberal Democratic assumption that if you raise taxes, you raise more money," said Giuliani to huge applause from the crowd assembled at Drake University.

Michael Shear in The Washington Post's page A1 story also doesn't care about the merits of the issue:

Former New York mayor Rudolph W. Giuliani sparked loud applause when he declared that "the knee-jerk liberal Democratic reaction -- raise taxes to get money -- very often is a very big mistake." And Rep. Duncan Hunter (R-Calif.) declared his disappointment in the Democratic push to end the war in Iraq.

Nor does Stephen Braun of The Los Angeles Times care at all whether or not GOP tax policy makes sense:

Referring to last week's devastating bridge collapse in Minneapolis, the GOP rivals found common ground in insisting that increased private investment from cutting taxes would provide more money to repair the nation's failing infrastructure. And they teamed up in turning their aim at the Democratic Party's presidential field.

Mike Glover at the AP doesn't seem to mention the issue at all.

Adam Nagourney at The New York Times, by contrast, doesn't go nearly as far as I'd like, but does way better than his colleagues at the major papers. Here he is on the NYT political blog:

Mr. Giuliani proceeded to explain that when he was mayor of New York he had cut taxes, and that those tax cuts had produced revenues that allowed him to finance bridge reconstruction. (Actually, there’s a good argument that it was the stock market boom in New York that brought all that money into the city’s coffers, but we’ll let that pass for now).

And here he is teamed up with Michael Cooper in the print edition:

Mr. Giuliani said that as mayor of New York, he had increased revenues to pay for bridge and road repair by cutting taxes, thereby jolting the economy, and that he would do the same thing as president. The city’s treasury in that period was flush largely with revenues produced by the stock-market boom of the late 1990s.

It'd be nice to see reporters go further than Nagourney does here, but improvements at the margin deserve recognition and the Times is doing a much better job than the Post here.

Comments

i once asked a right-wing acquaintance who was chattering on along these lines why, if tax cuts were such a great revenue producer, he didn't support cutting taxes to .001% (the flat tax at last!). to his credit, he admitted that he'd never thought about that.

just once, i'd like to see a reporter ask one of these clowns that same question.

Posted by howard | August 6, 2007 11:41 AM

Reaganomics may be "stunning" but it's nothing new.

Posted by Don Bacon | August 6, 2007 11:47 AM

That's one of the Major GOP Talking Points so, of course, Journalists will only report what they say, while chuckling among themselves on how we rubes will buy that line.

If Journalists were to spend time fleshing-out or, God forbid, debunking any of the GOP Talking Points, they'd be labeled Liberal and would lose all of their Republican sources.

So much safer to transcribe and dress for that night's cocktail party.

Posted by Frank | August 6, 2007 11:50 AM

If you really want to put Laffer Curve idiots on the spot then we, as liberals, need to be more realistic in our understanding of tax policy.

If the current rate on gas is $.18 and we sell 100 gallons then we will raise $18 in taxes for each 100 gallons we sell.

However, if you double the tax you will not get double the revenue.

Does anyone disagree?

The problem is that no one really knows how much revenue you will raise.

It is theoretically possible that the government will raise less revenue at $.36 a gallon than at $.18 cents a gallon. Obviously, this is not true since the relative tax is so small.

So, why can't a liberal say that we understand the economic inefficiency of raising taxes and that is why we need to target taxes more efficiently. However, there is also an economic cost to not fixing our infrastructure and there is an economic cost to running deficits to fund the war in Iraq. Raising taxes has a good side and a bad side. We need to make sure that we remember that.

Am I totally nuts?

Posted by neil wilson | August 6, 2007 11:59 AM

...you generate revenue by lowering tax rates.

Laffer's curve has become one of those Zombie narratives that can no longer be killed.

It possesses all kinds of narrative excellences:

a.) It's counter-intuitive, which is cool. This is why the 'eat cheesecake, lose 20 lbs.' diet is a staple of checkout-line magazines.

b.) It makes the easy choice the correct choice.

c.) It has an iconography -- the genial old man Reagan, the paper napkin.

Up against this, the mere application of arithmetic is powerless.

From a journalistic perspective, the alternative to repeating the narrative looks like work, will make you enemies, and pushes the house in the Hamptons further off towards the distant horizon.

On the tombstone of the Republic will be the epitaph "Killed By A Story Arc".

Posted by Davis X. Machina | August 6, 2007 12:02 PM

Raising taxes has a good side and a bad side. We need to make sure that we remember that. Am I totally nuts?

Yes.

It's akin to saying, "just because we oppose warrantless wiretapping of US citizens doesn't mean that we should favor disbanding the US government."

It's nuts not because it's false, but because it's too obvious to bother flipping out about. Or mentioning.

Today's Democratic Party is not talking about doubling gas taxes, or raising the highest income tax bracket to 1970s-era levels.

Bruce Bartlett and a TPM blogger are debating this sort of thing next door at Andrew's blog.

Posted by Elvis Elvisberg | August 6, 2007 12:17 PM

My favorite conservative fiscal contradiction is where the Laffer curve meets "starve the beast". If lower taxes really mean higher revenues, then those interested in intentionally manufacturing deficits to constrain the size of government should support... higher taxes!

Posted by rutherdan | August 6, 2007 12:22 PM

What are you talking about? I LOVE raisin' taxes, YE HAW! Gonna get me some of that sweet, sweet tax money, oh yeah, gonna get me some...

Posted by Gordon Lightfoot | August 6, 2007 12:24 PM

neil, you're not totally nuts, but you're not exactly on the mark, either.

the laffer curve has two intelligent postulates: that if taxes are 0% or 100% they will raise the same amount of revenue, namely nothing.

the question is what happens in between those two points, and the staunch adherents of the "tax utting uber alles" crowd have now tied themselves (as davis x. machina implies) into knots by assuming what happens is nice and simple, just like the slogans and the napkins.

and to further the point, using your example, what giuliani is saying is that if we cut the gas tax, that will raise more revenue than if we raise the gas tax.

so let's try it out with some more modest numbers, shall we? what giuliani is saying is that a 3 cent cut in your tax (from 18 to 15) will lead to a more than 20% increase in gas consumption. that's the only way for it to raise revenues. meanwhile, he's also saying that if we raise your tax from 18 to 19 cents, that won't raise revenue because the roughly 6% increase in costs will lead to a corresponding drop in driving.

this is taking a not useless premise (that people react to tax changes by altering behavior) and fetishizing it to the point where it stops making sense.

Posted by howard | August 6, 2007 12:29 PM

The whole question is just a bit more complex than it's being made out to be here. There's the static issue of which tax rate will maximize revenue right now, (Assuming you WANT to maximize revenue, which I'd rather not.) but there's also the dynamic issue of which tax rate will maximize future revenue... The static revenue optimizing tax rate might suppress future growth, after all.

None of which changes the fact that Rudy Guliani is an idiot, of course.

Posted by Brett Bellmore | August 6, 2007 1:20 PM

I think debate about government, spending and taxes would be massively improved if we used numbers. Forget about higher and lower. Just use numbers. Reduce it down to two numbers:

1) % of GDP in spending
2) % of GDP in taxes

Don't forget, in the long run, taxes will equal spending.

Realistically, the entire liberal project could be paid for with about 2% of gdp. So going from 26% of gdp to 30% is not a big deal. It wouldn't turn us into a socialist country. We wouldn't be Cuba or even Germany or the UK. We would be Switzerland or Australia.

When Republicans talk about smaller government, as we know, they are full of crap. They never say how small. 25%? 15%?

As we know, they just want to run deficits in order to shift taxes from the rich in the present to, well, anyone else in the future.

Posted by chris | August 6, 2007 3:19 PM

"Realistically, the entire liberal project could be paid for with about 2% of gdp."

If that's the case, "the entire liberal project" is enormously more modest in scope than I've ever been led to believe. Somehow I doubt it. Perhaps you regard huge portions of what's conventionally regarded as part of that 'project' as being somehow so uncontroversial that they don't count against the total?

Posted by Brett Bellmore | August 6, 2007 5:16 PM

This Laffer curve nonsense is one of the most pernicious false GOP talking points there is. I suppose its tenacity must be a function of what neil discusses—that is, everyone pretty much agrees that it must be true when tax rates approach 100%.

However, there is zero historical evidence that it's true in the US anywhere in these middle-ranges of taxation we have. Zero. Yet the belief lives on.

My parents were (well, are) socially liberal Republicans and back in 1982 during the Reagan era when I graduated from high school, I wasn't yet politically independent enough to have started moving leftward. So I can dimly recall what it's like to be a conservative on this issue back when the Laffer Curve was taken much more seriously than it is today. And the bottom line, really, is the very firm belief by both conservatives and centrists that taxes are too high. I'd say that both the upper and middle classes in the US believe pretty strongly that they pay too much in taxes. That's the single reason the GOP has held onto power. That cultural conservatism portion now does them more harm than good. It's only this tax issue that makes a large portion of Americans more sympathetic to the GOP than the Democratic Party.

I don't know a way around this, honestly.

The problem is that the tax issue weighs so heavily that while in periods like the one we're in now—where the GOP's positions on almost every other issue is against the American majority opinion—there still is a fundamental distrust of Democrats and a trust in Republicans simply on the basis of this tax issue.

Most of us here are probably far enough to the left to have opened our eyes and realized that almost any standard that matters, the tax rates in the US are, if anything, too low. But that's sort of the problem, isn't it? It's sort of like losing your religion and forgetting how unquestionable one's religious faith really is. We leftists have a limited understanding of how strongly the "we're taxed too much" meme resonates with most Americans. And, in the other direction, people like us who say, "no, no, no, we're taxed too little" are just verifying the conservatives fears about leftists.

The only way out of this is for conservatives to agree with reality on the basic facts. But, you know, as an atheist, I can say that waiting around for a majority of people to agree with reality on some basic facts is not a very rewarding wait. It's probably not going to happen until peoples' underlying need to believe that taxes are too high is somehow removed. And in America, where materialism reigns supreme and amassing wealth is considered a virtue, it's not too likely that people will get over their need to see taxation as an obstacle.

Posted by Keith M Ellis | August 6, 2007 8:32 PM

I think it's always just easier to make a case for tax breaks than it is to try to explain how the government programs taxes fund actually improve quality of life, and in some instances help maximize the utility of an individual's entire income. When a person is filling out his tax forms, he's got a pretty tangible set of facts in his hands-over 1/3rd of his income going to the government. He takes for granted a lot of the services those taxes go to, and what sticks in his mind the most are things like the pot holes outside his house that never get fixed. If you tell him that he can have some of that money back, but it will result in a reduction in those less tangible services, nine times out of ten he'll take the money. If you tell him that a significant reduction in taxes paid by all members of society will result in a depreciation of the utility of his income, so he should actually be glad to pay taxes, he will just look at you funny.

Posted by Gordon Lightfoot | August 6, 2007 8:59 PM

The problem with all of this is that the GOP screams so loud on tax increases you can't even get your point across. Just raising the top marginal rate to 40%, with no other increases being discussed, would have the right and their media howling with indignation. Even if this were combined with a tax cut on the lowest marginal rate (the only tax cut that everyone who pays taxes gets, i.e. the fairest tax cut), they would lie and obfuscate to tell a different story.

How has our education system so failed us that the average American doesn't understand our marginal tax rates? How has it failed to explain the history of taxation in this country up to the present? When painting with a broader historic brush on our tax policy the class war that the wealthy are waging against the rest of the country comes into focus.

Posted by Ricky | August 6, 2007 10:19 PM

The entire liberal project can be paid for with 2% of GDP?

This is the same liberal project that wants universal health care? Switching the 16% of GDP that is the medical system from the private sector to the governmental?

(Or, to be more accurate, that 50% of the 16% which is not already gubmint.)

Posted by Tim Worstall | August 7, 2007 5:58 AM

"It's only this tax issue that makes a large portion of Americans more sympathetic to the GOP than the Democratic Party.

I don't know a way around this, honestly.

The problem is that the tax issue weighs so heavily that while in periods like the one we're in now—where the GOP's positions on almost every other issue is against the American majority opinion—there still is a fundamental distrust of Democrats and a trust in Republicans simply on the basis of this tax issue."

Wow. Simply "wow". I really do not know what to say to somebody who thinks that the only subject where the Republicans have any public support is taxes. Nobody supports them on abortion, gun control, illegal immigration, or anything else...

Let alone the level of innumeracy necessary to think that the Laffer curve might not be valid at ANY tax rate at all.

Posted by Brett Bellmore | August 7, 2007 6:54 AM

There is no Laffer curve. It's true that if your tax rate is zero that you get no taxable income. It's reasonable to suppose that if you taxed income 100 percent, no one would work (although, this looks like a recipe for something like communism, where the state provides all the services-it's actually really weird to talk about taxing, say, income, 100 percent, because presumably that tax money gets spent...providing someone with a salary. What does the government do then? Take the money it just spent back? What's the point of money, exactly, in this scenario?) The mistake is in actually believing that there is a unity across which these two data points must connect. If a person's tax rate is 99 percent, for some god awful reason, well, if he's gotta make money to live, then you've really just given him an incentive to work his ass to death to pay the bills, which would be great for the state coffers! The reason governments don't typically tax their constituents far above the 50 percent mark is because it would just be unfair. The underlying mistake here is the assumption that tax rates must have a dampening effect on people's willingness to work. While it's true that everyone would like more money, and less taxes technically means more money, the reasons they are after that money-to feed the kids, pay the bills, and so forth-the underlying motivations that drive most of society-don't just go away because taxes are high. People trying to raise families on something close to the minimum wage understand this fact fairly well-they may be wallowing in progressively larger amounts of debt, but they know that a little money, even if it's not enough to take care of all their needs, still has more utility than no money at all.

Posted by Gordon Lightfoot | August 7, 2007 8:33 AM

"If a person's tax rate is 99 percent, for some god awful reason, well, if he's gotta make money to live, then you've really just given him an incentive to work his ass to death to pay the bills, which would be great for the state coffers!"

Because, you know, we have this East Berlin style wall of death along the border, with machine gun nests facing in, to keep people from fleeing to lower tax countries...

As I say, it's innumeracy; If a zero tax rate collects no revenue, and a 100% tax rate causes people to stop working or flee the country, then somewhere between there HAS to be a tax rate where raising the rate lowers the revenue. That's a fundamental theorem of mathematics!

And probably a substantial plateau where raising tax rates does squat to increase revenues, too, although that's not mathematically inevitable.

The only real question relating to the Laffer curve is where we are presently located relative to that point where the slope of the curve goes essentially to zero. And that, I must say, is an empirical question.

Posted by Brett Bellmore | August 7, 2007 9:59 AM

While Giuliani is half wrong, he's also half right. Raising taxes does not always produce more revenue, and it almost always produces less revenue than projected.

And before anyone mentions the Clinton 1993 economic plan, that plan involved $1 in spending cuts for every $1 in tax increases, which was a sign of fiscal responsibility to the bond market and the Fed.

Just raising taxes to cover higher spending never works out as planned.

Posted by Adam Herman | August 7, 2007 2:14 PM

"Let alone the level of innumeracy necessary to think that the Laffer curve might not be valid at ANY tax rate at all."

Considering that I explicitly stated that the Laffer Curve is certainly true as it approaches 100%, I think you should be more concerned with your illiteracy than my supposed innumeracy.

As for your other points, the GOP has strong minority support on the topics you mention. It doesn't have majority support. The only topic the GOP currently has majority support on, and has long had majority support on, is taxation. It also traditionally has held an edge on war and foreign policy, but the Iraq War has, at least temporarily, ended that.

Posted by Keith M Ellis | August 7, 2007 10:32 PM