Romney's Lafferism

I'd been under the impression that Mitt Romney had thus far resisted the urge to claim falsely that reducing tax rates is likely to increase federal revenue. Brendan Nyhan shows me that it's not true. Romney's explained that " you lower taxes enough, you create more growth" and "if you create growth, you get more jobs" and thus "You get more jobs, more people are paying taxes. You get more taxes paid, the government has more money by charging lower tax rates."

This is not only bad economics, but seems to indicate a failure to grasp some of the basic principles of logical inference.

Comments

" . . . seems to indicate a failure to grasp some of the basic principles of logical inference."

Uh, no. With Romney, the null hypothesis is that he is lying.

Posted by Joel | December 26, 2007 8:59 AM

I cut my finger slicing an apple, ergo the fruit and blade were out to get me. Makes perfect sense.

Posted by steve duncan | December 26, 2007 9:11 AM

Let's not pretend this is an economic dispute. Republicans are predisposed to lower and flatter tax rates, and Democrats are predisposed to higher and more steeply progressive tax rates -- both for ideological reasons. Lower tax rates can result in higher federal tax revenues, as has been the case after the recent Bush tax cuts, and as was the case after the Reagan tax cuts, and the JFK tax cuts. Higher tax rates can result in higher federal tax revenues as well, as was the case after the Clinton tax increases (although Clinton did lower the capital gains tax, and capital gains tax revenues went up afterwards).

Tax rates aren't the sole determinant of tax revenues. All things being equal, higher income growth leads to higher income tax revenues; similarly, bull markets lead to higher capital gains tax revenues.

If the issue were simply to determine what tax rates would simultaneously maximize federal tax revenues and economic growth, optimum tax rates could be estimated based on empirical study, but neither Democrats nor Republicans would want to be bound by that. Republicans (big government ones like Bush excepted) would rather see federal spending curtailed to allow taxes to be lowered further. Democrats would rather see higher taxes to fund more social spending, and reduce the take-home pay of the working rich (still a mostly Republican constituency; the super-rich are mostly Democrats and are virtually unaffected by the income tax).

Posted by Fred | December 26, 2007 9:17 AM

This reminds me very much of Romney's comments on the Islamofascist menace:

Because after we get him, there’s going to be another and another. This is about Shi’a and Sunni. This is about Hezbollah and Hamas and al Qaeda and the Muslim Brotherhood. This is the worldwide jihadist effort to try and cause the collapse of all moderate Islamic governments and replace them with a caliphate.

Romney learns lots of words and facts, then repeats them in a rich baritone, tied to the most ludicrous ideas imaginable.

Unlike, say, Giuliani, who simply expresses Republican id with his attacks of "Islamic terrorists" and his assertions about tax cuts, Romney attempts to explain these idiotic ideas through the facts and narratives. What he ends up with is a morally reprehensible puddle of goop, but the press never challenges him - in fact, they find him quite smart. It's an impressive little trick.

Posted by DivGuy | December 26, 2007 9:18 AM

Let's not pretend this is an economic dispute.

Every major Republican candidate has signed on to a positive statement about the result of tax cuts that is simply false. This is a positive dispute, not a normative one.

I also disagree with Republicans about how they want to distribute money, but that's simply not what's being discussed. Mitt Romney has embraced a theory of tax revenues that is utterly false, that has no backing even in the conservative academy. Whether me and Mitt agree about what should be done with tax revenues is a wholly separate debate.

Posted by DivGuy | December 26, 2007 9:22 AM

Look, Romney's got to be about the most totally pathological liar to ever run for the Presidency...which is really saying something!

Maybe the reason is that he actually doesn't speak English and his aides just give him speeches written in phonetic syllables for him to read, thereby not "confusing" him with the contradictory meaning of his statements...

Posted by RKU | December 26, 2007 9:31 AM

And so, Romney once again raises the age-old supply-side question: Just how much more do we have to lower taxes to eliminate the deficit?

Posted by McKingford | December 26, 2007 9:39 AM

I second Fred's observation, and note that both Romney and Yglesias are oversimplifying the issue by continuing to conceive of the Laffer curve as, well, a curve. It's not -- it's more like a messy, mussed-up scribble that changes form depending on the particular tax cut at issue and the state of the economy.

For instance, you can have a tax decrease that is far below the commonly-identified maximum rate at which most everyone agrees that Laffer's prediction holds under all circumstances (a 60%-80% marginal rate) that, under particular conditions, generates a net tax revenue increase within a short-term (2-3) years. Kennedy's tax cut, IIRC, hit that window. I believe that Reagan's came close, although substantial growth in government spending created other difficulties.

Posted by von | December 26, 2007 9:42 AM

[Raises hand from back of room] So... if you want to make government smaller you should raise taxes, because that would decrease revenues, thereby forcing government programs to shrink... No?

Posted by MattF | December 26, 2007 9:42 AM

Lower tax rates can result in higher federal tax revenues, as has been the case after the recent Bush tax cuts. . . .

Haha, no.

Posted by phil | December 26, 2007 9:55 AM

[the Laffer curve is] more like a messy, mussed-up scribble that changes form depending on the particular tax cut at issue and the state of the economy.

Whee! My theory is true, you see, but it's so "messy" and "mussed-up" that I simply can't be held accountable for its complete uselessness as a predictive tool.

Posted by James Gary | December 26, 2007 9:57 AM

"Haha, no."

'Laff' away at this chart.

Posted by Fred | December 26, 2007 10:07 AM

Interesting chart, fred.

Interesting that it doesn't reference the first set of Bush tax cuts.

I can only wonder why that is...

Posted by McKingford | December 26, 2007 10:23 AM

Now I know you don't read your comments, since I pointed out a couple weeks ago that Brendan had already pointed this out two weeks before that. To quote Terry Tate, "That ain't new, baby!"

And Fred, I take from that graph that the invasion of Iraq spurred economic growth. Or perhaps it was the Tampa Bay Buccaneers winning the Super Bowl. "Result" is what we laugh at, not "lower tax rates" or "higher federal tax revenues." Sometimes when things happen at about the same time, one doesn't cause the other. For instance, I woke up today at my parents' house and they were here, but soon after I woke they drove away. That graph doesn't show tax cuts causing revenue growth anymore than my waking up caused them to leave. And are those revenues in real dollars? The graph certainly doesn't indicate as much, and it seems a pretty good bet that a graph trafficking in misleading labels would also traffic in misleading axes.

Posted by jhupp | December 26, 2007 10:29 AM

I love Fred's line that "All things being equal, higher income growth leads to higher income tax revenues". Sure enough, if you declare all the other variables to be fixed and then turn up the economic growth, revenue goes up. Although I suspect Fred would be less pleased if in the same phrase I replaced "income growth" with "tax rates", and not just because "leads" would then be improperly conjugated. Isn't it the point that the Lafferites claim that all else isn't equal?

P.S. I notice that in the chart Fred linked Dubya signed the law precisely on the inflection point - revenues zoomed upon the signing, before the laws even came into effect! It's a good thing Dubya didn't sign other, earlier tax cut bills, or I'd have to think the chart was deliberately attempting to confuse correlation and causation. Why is this sort of easily-demolished nonsense in a Treasury press release, anyhow?

Posted by Warren Terra | December 26, 2007 10:33 AM

"Interesting that it doesn't reference the first set of Bush tax cuts.

I can only wonder why that is..."

Probably because the first tax cut bill (EGTRRA) stipulated tax cuts that were to be gradually phased in over a period of years and the second tax cut bill (JAGTRRA) accelerated most of the cuts in the first bill, making them effective immediately.

Jhupp,

Even liberal economists acknowledge that tax cuts can provide economic stimulus (though they usually call for a different mix of cuts). See, for example, Larry Summers's recent call for $75 billion in tax cuts as a prophylactic measure against a possible recession.

Posted by Fred | December 26, 2007 10:40 AM

"Isn't it the point that the Lafferites claim that all else isn't equal?"

Warren Terra,

Seek first to understand, and then to mock. Lafferites (and many others, e.g., those who agree with Keynes) claim that, all else being equal, tax revenues do increase as tax rates go up -- up to a certain point -- but beyond that point, tax revenues trend back down. Lafferites do not believe that the same holds true with income growth, i.e., that there is a point beyond which income growth leads to lower income tax revenues, all else being equal.

"It's a good thing Dubya didn't sign other, earlier tax cut bills, or I'd have to think the chart was deliberately attempting to confuse correlation and causation."

In the earlier tax cut bill, EGTRRA, most of the cuts were to be phased in by 2006; JAGTRRA made most of those cuts effective immediately in 2003.

Posted by Fred | December 26, 2007 10:55 AM

Whee! My theory is true, you see, but it's so "messy" and "mussed-up" that I simply can't be held accountable for its complete uselessness as a predictive tool.

James, it's not useless as a predictive tool; indeed, I do not regard the Laffer curve as a predictive tool at all. It's a way of illustrating a counterintuitive economic truth, i.e., sometimes a tax decrease leads to higher tax yields. (And sometimes, of coutse, it does not -- but that's hardly counterintuitive.)

Warren Terra, you're right that Fred's chart cannot establish anything more than correlation.

Fred, your chart doesn't appear to account for inflation.

Posted by von | December 26, 2007 11:27 AM

Lower tax rates can result in higher federal tax revenues, as has been the case after the recent Bush tax cuts, and as was the case after the Reagan tax cuts, and the JFK tax cuts.

Wow, even Bruce Bartlett doesn't claim that the JFK tax cuts recouped more than a third of the lost revenue. How the heck does Fred justify claims like this?

Posted by Steve | December 26, 2007 11:27 AM

That's priceless. Of course they can provide economic stimulus, which is not at all what you were attempting to say earlier and it's not at all what any of us were attempting to argue against. Nice bait and switch. Real piece of work there.

A tax cut that creates economic growth means the government would lose less money than it would if the tax cuts came with zero change in the growth of the economy. But the government comes out behind one way or the other, as even conservative economists not named Larry Kudlow agree. Whether tax cuts can contribute to economic growth or stem a recession isn't and wasn't the issue in this particular post; it was about the revenue stream.

Posted by jhupp | December 26, 2007 11:30 AM

Showing a graph that revenues increased after the Bush tax cuts to prove that the Bush tax cuts increased revenue is priceless. Yeah, there are plenty of people who would fall for that, but pretty much none of them read this blog. Revenues tend to increase over time (even in real terms) because the economy grows year to year. If it didn't we'd be in a recession or a depression. As bad as Bush's policies have been, they didn't immediately provoke a recession, though the costs for this war in Iraq sure aren't helping down the road. The last studies I read suggested that the extra economic activity encouraged by the Bush cuts recouped an estimated 10% of their costs. I believe the saying goes: "better trolls, please!"

Posted by mpowell | December 26, 2007 1:16 PM

Fred, higher federal returns are caused by increases in population.

More people => more wage earners => more money.

Posted by Tyro | December 26, 2007 3:26 PM

"That's priceless. Of course they can provide economic stimulus, which is not at all what you were attempting to say earlier and it's not at all what any of us were attempting to argue against. Nice bait and switch."

It's not a bait and switch at all, I just assumed that you would be able to connect the dots on your own. Since weren't able to do so, let me help you out: Bush's 2003 tax cuts stimulated the economy, helping it grow. That economic growth led to higher incomes which led to higher income tax revenues, even at lower income tax rates. It also helped fuel a bull market in stocks, which led to higher capital gains revenues, even at lower capital gains rates.

"Fred, higher federal returns are caused by increases in population.

More people => more wage earners => more money."

Tyro, to have higher tax revenues at steady or lower income tax rates, you need higher aggregate income; more wage earners won't necessarily bring you this, if you gain more in income from low wage earners than you lose in income from higher wage earners. For example, if a CPA dies, loses his job, or leaves the country, and you replace him with five dishwashers, you'd have more wage earners but not necessarily more income tax revenue.

Posted by Fred | December 26, 2007 6:09 PM

Bush's 2003 tax cuts stimulated the economy, helping it grow. That economic growth led to higher incomes which led to higher income tax revenues, even at lower income tax rates.

To what are you comparing these revenues? The revenues that would have been obtained if there had been no economic growth whatsoever? Are you attributing the entire economic recovery to Bush's tax cuts?

When you cut taxes by $1, obviously you lose $1 in revenue in the short term. The question is, how much of that $1 do you make back in the long term by means of the economic growth you've hopefully stimulated?

You can look at it like Bruce Bartlett, one of the authors of Reagan's tax cut:

We believed that our tax plan would stimulate the economy to such a degree that the federal government would not lose $1 of revenue for every $1 of tax cut. Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results.

Or you could live in a fantasy world like Fred where tax cuts consistently make revenues go UP, over and over again.

Lower tax rates can result in higher federal tax revenues, as has been the case after the recent Bush tax cuts, and as was the case after the Reagan tax cuts, and the JFK tax cuts.

Who should we believe, conservative economist and supply-side guru Bruce Bartlett, or random blog commentor Fred? Only the most ardent kool-aid drinker believes that tax cuts actually cause revenues to go UP, but alas, this is what's become of economic thinking on the Republican side.

Posted by Steve | December 26, 2007 6:21 PM

, to have higher tax revenues at steady or lower income tax rates, you need higher aggregate income; more wage earners won't necessarily bring you this

No, not necessarily, but usually it will.

We have a bunch of innumerate idiots saying things like "tax revenues were higher after 10 years after a tax cut!" Well, tax revenues were higher after 10 years after a tax rise. Tax revenues will be higher after 10 years of taxes remaining the same. Tax revenues will be higher after 10 years, period, just as population will be higher after 10 years, unless there is some kind of massive economic or political disaster.

Your original reasoning was specious, so you should stop using it and trying to weasel your way out of it by saying, "well, under certain circumstances which rarely occur, it might not be true" isn't an argument-- it's an evasion bornje of the dishonesty you adhere to given your constant immoral need to defend the execrable Bush administration at all costs. Don't ever pull that bullshit sophistry around here. Save it for you retarded relatives at the dinner table who think you "follow politics."

Posted by Tyro | December 26, 2007 7:11 PM

Actually, it's strange, but consider this really simple model:

Start with $10 trillion GDP.
Suppose:
- baseline growth is 3%.
- growth after reduced taxes is 3.5%.
- baseline tax rate is 25%.
- reduced tax rate is 20%.

Now for simplicity suppose that the government's tax receipts are just the tax rate times GDP (obviously not true but not so ludicrous).

Just type these figures into Excel. After ~49 years you start pulling in more tax receipts with the lower (20%) tax rate. The key, of course, is the different rate of GDP growth.

Now, there are a lot of good questions to ask about this toy model, but maybe it suggests we should not pooh-pooh the logic of the growth rate out of hand.

Maybe this is a question for Tyler or some economist: why doesn't the logic of the growth rate rule here?

Posted by mk | December 26, 2007 11:29 PM

The most obvious question to me about this toy model is "how are you going to pay for social programs if you slash taxes?"

If the answer is "by borrowing money" then the question is whether the government's impact on the money-lending market is less or more distortionary than its effect on the labor market via income taxation.

i.e., by sucking up some capital that might have gone to start up a new business, doesn't that screw with economic growth too?

If borrowing money is a viable strategy, then maybe it's better than taxing? (I know borrowing is just future taxation, but still...)

Can an actual economist offer assistance here?

Posted by mk | December 26, 2007 11:35 PM

Just type these figures into Excel. After ~49 years you start pulling in more tax receipts with the lower (20%) tax rate. The key, of course, is the different rate of GDP growth.

Sure, but does anyone seriously believe that a single tax cut, no matter how awesome, could be the sole cause of a 50-year period of sustained growth? God, if only.

The best historical example we can look to is the Kennedy-Johnson tax cut, which lowered the top marginal rate from a stunning 91%. If any tax cut were on the far side of the Laffer curve, it would have to be that one. Yet 20 years later, Bruce Bartlett and the other gurus of Reaganomics found they could argue, at best, that 1/3 of the lost revenue had been recouped through economic growth.

But here we have Fred, not only arguing that tax cuts might be able to increase revenue under some theoretical set of circumstances, but that the Kennedy-Johnson tax cut demonstrably DID increase federal revenues, as did the Reagan tax cut, and the Bush tax cut too. I mean, this isn't economic theorizing, it's just a bunch of lies.

Posted by Steve | December 27, 2007 1:38 AM

MK,

See my first comment where I wrote:

"If the issue were simply to determine what tax rates would simultaneously maximize federal tax revenues and economic growth, optimum tax rates could be estimated based on empirical study, but neither Democrats nor Republicans would want to be bound by that."

Steve,

"To what are you comparing these revenues?"

To the previous actual revenues.

"Or you could live in a fantasy world like Fred where tax cuts consistently make revenues go UP, over and over again."

A straw man, since I never wrote this. Obviously, beyond a certain point, lower tax rates would result in lower tax revenues. The Laffer Curve itself says this.

"Sure, but does anyone seriously believe that a single tax cut, no matter how awesome, could be the sole cause of a 50-year period of sustained growth?"

Another straw man. When you finish admiring it, you might want to consider the huge effect tax policies -- not just tax rates but the mix of taxes -- can have on economic growth. There is resistance to the objective study of this among Republicans and Democrats, for ideological reasons, as I mentioned above, but this is unfortunate. It's also dangerous considering the confidence some here on the Left seem to have that America's relatively high trend growth rate will continue at that level regardless of what tax and other policies you throw at it.

Posted by Fred | December 27, 2007 2:34 AM

Well, comparing revenues after a tax cut to the "previous actual revenues," as opposed to comparing them to what revenues would have been in the absence of a tax cut, is such an obviously bullshit approach I'm not sure there's any need for further comment.

A tax cut could stimulate no new growth whatsoever and yet, by Fred's logic, revenues would still go "up" at some point and he could brag about the power of tax cuts.

Posted by Steve | December 27, 2007 12:22 PM