Laffer's Napkin
December 28, 2014 6:53 AM   Subscribe

In December 1974, Arthur Laffer scribbled a supply-side economic model on a cloth napkin at the Two Continents restaurant in Washington. His dining companions, Donald Rumsfeld and Dick Cheney, took the idea to their boss, President Gerald Ford. And by the time Ronald Reagan was elected president, the first major challenge to Keynesian economics had gained a foothold in the White House.

An op-ed by Heritage Foundation chief economist (and longtime Laffer mentee) Stephen Moore.
posted by BaffledWaffle (101 comments total) 28 users marked this as a favorite
 
Let me just say if a time machine is ever invented, "Kill Hitler" should be #2 on the list.
posted by tommasz at 6:59 AM on December 28, 2014 [70 favorites]


Rumsfeld and Cheney had their fingers in this bullshit too? Shoulda known.
posted by mwhybark at 7:01 AM on December 28, 2014 [12 favorites]


POOR PEOPLE =======> MONEY ========> RICH PEOPLE
posted by The Card Cheat at 7:01 AM on December 28, 2014 [4 favorites]


Weird editorial, which seems to say "well, we now all concede that Laffer was wrong that raising taxes would lower revenue because people would stop working, but Laffer was still right, because raising taxes slows growth which reduces revenue in the long run." The latter claim is perfectly respectable Republican economics but it's not what the Laffer curve is about. For a math take on this, here's my (qualified defense!) of the Laffer Curve in Salon.
posted by escabeche at 7:04 AM on December 28, 2014 [21 favorites]


Also, Laffer has repeatedly denied he would be so disrespectful of private property as to deface a cloth napkin.
posted by escabeche at 7:05 AM on December 28, 2014 [17 favorites]


It's amazing that are we still talking about this like it's a real theory and not the cynical and laughable hoax that it is. It should have been forgotten about except as a trivia question decades ago but somehow they still manage pass it off as serious policy.
posted by octothorpe at 7:05 AM on December 28, 2014 [31 favorites]


Man whenever the absolute worst is appending in American politics Dick Cheney just pops right up like some evil Forest Gump.
posted by The Whelk at 7:10 AM on December 28, 2014 [125 favorites]


Laffer's curve can also be used to show that we need to raise taxes. Yes there is a point of diminishing revenues with increased taxes, but there is also a point where reduced taxes also results in decreased taxes. One coukd argue that the Bush tax cuts were that point, or that Sam Brownbacks cuts in Kansas are evidence of going to far. A gap in Laffer's research was creating tools to determine where one is on the curve,or if the relationship was a curve.
posted by humanfont at 7:12 AM on December 28, 2014 [13 favorites]


> A gap in Laffer's research was creating tools to determine where one is on the curve,or if the relationship was a curve.

And how would that additional effort that serve the agenda?
posted by at by at 7:18 AM on December 28, 2014 [6 favorites]


The biggest problem with the Laffer Curve is that it singularly focused people's attention on taxes as a way to raise revenue. It completely diverted people away from the concept of taxes to shape the economy.

The top tax rate in 1960 was 92%. No sane person would pay 92 cents of a dollar earned to the government. Instead of the 92% rate raising revenue, it served to channel income in the economy away from the wealthiest individuals and toward workers. It served as a way to take the harsh, ruthless edge off of capitalism.

The result was more employment - if you had to choose between taking $1 in profit but paying 92 cents to the government, or hiring a window washer for your home office, you would take clean windows over the 8 cents in your pocket. Or maybe you would hire a guy to do research and development. Or maybe you would have a groundskeeper picking up trash.

And maybe, just maybe, when the opportunity arose to close your factory and send the work to Mexico to earn another $1 million per year, you would say "but I would actually only pocket $80,000 of that money, so it is not worth it".

Laffer caused us to forget about that. Sure, it is common sense that you can raise more revenue with a 22% tax than a 92% tax - but taxes aren't only about raising revenue.
posted by RalphSlate at 7:21 AM on December 28, 2014 [171 favorites]


The Laffer Curve is an indisputably true economic proposition in qualitative terms: no activity-based taxes* are collected at a rate of either 0% or 100%, and revenue collection in between those two rates is describable as a curve (or perhaps a series of curves joined by inflection points).

The function of the curve(s) between 0% and 100% is not solved and perhaps not solveable due to the intrustion of additional variables, and, of course, fiscal conservatives don't want to set tax rates to the apex (maximum tax collection) but instead somewhere to the left of that.

*Non-activity-based taxes, such as property taxes are clearly collectible, albeit one time only, at a 100% rate.
posted by MattD at 7:24 AM on December 28, 2014 [13 favorites]


What MattD said, and also: Even if Laffer's right about the shape of the curve, he never bothered to even attempt to show where on the curve we are or work out what the actual scale of the X and Y axes is.
posted by Pope Guilty at 7:26 AM on December 28, 2014 [5 favorites]




The interesting Laffer Curve from a policy perspective would have about five axes -- X for rate, Y for revenue (as is presently), and another input (call it X-sub-1) for redistributional intensity of revenue utilization (zero if everything were spent on art galleries, 100% if everything spent on means-tested transfers), and then two more output axes (call them Y-sub-1 and Y-sub-2) for GDP per capita, and Zinni co-efficient. If solveable this robustly allows us to understand private sector and public welfare implications of the policy choices.
posted by MattD at 7:34 AM on December 28, 2014 [1 favorite]


In my time travel scenario, I show up this moment, grab the napkin and blow my nose.
posted by dances_with_sneetches at 7:34 AM on December 28, 2014 [2 favorites]


A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Let's smash the can open with a rock." The chemist says, "Let's build a fire and heat the can first." The economist says, "Assume a can-opener..."
posted by Trochanter at 7:38 AM on December 28, 2014 [11 favorites]


I see no a priori reason to think that tax revenue falls to zero at a 100% tax rate; it all depends on what the government does with those taxes. In an important sense, Soviet state capitalism was exactly this. Everyone works for the government, so the government collects all the proceeds of their work, and then gives them a subsidy of housing and healthcare and stipend. That the entire Soviet economy was criminally mismanaged and restrictive accounts for a lot of the social and material failings of that system. But it also serves to put lie to the Laffer Curve.
posted by cthuljew at 7:40 AM on December 28, 2014 [5 favorites]


Let me just say if a time machine is ever invented, "Kill Hitler" should be #2 on the list.

Right, because the Adolf fucking Hitler wasn't as evil as a right-wing economist who advocated lower marginal tax rates. I'm in support of generally progressive taxes, but gimme a break.
posted by alidarbac at 7:40 AM on December 28, 2014 [15 favorites]


Rumsfeld really does have a foot in everything evil.
posted by Artw at 7:41 AM on December 28, 2014


Trochanter: Two economists are walking past a Porsche dealership. One of them points to a car in the window and says, "I want one of those." The other replies, "Obviously not."
posted by cthuljew at 7:41 AM on December 28, 2014 [38 favorites]


Laffer's curve is not proven to be a curve. It might be that the relationship is linear for some values and that there are multiple peaks and valleys depending on levels of taxation.
posted by humanfont at 7:42 AM on December 28, 2014 [1 favorite]


I thought it was all Friedman's fault.

/nothamburger
posted by infini at 7:52 AM on December 28, 2014 [1 favorite]


And may he choke on that napkin in hell.
posted by bitter-girl.com at 7:58 AM on December 28, 2014 [1 favorite]


The top tax rate in 1960 was 92%

Also important was that the top corporate rate was 52% and the tax on long term capital gains was half of the top individual rate. That encouraged business owners to keep earnings in the company and extract value at the point of sale rather than as salary or dividend.

The high individual rate did what we wanted it to do because it was paired with drastically lower rates on capital gains and corporate level income.
posted by jpe at 8:07 AM on December 28, 2014 [7 favorites]


A rebuttal (SLNYT) by Paul Krugman on his blog.He examines:
  • Federal receipts in the 8 years prior to Reagan (up 36%*)
  • Federal receipts during Reagan's 8 years (up 26%*)
  • Federal receipts in the 8 years following Reagan (up 28%*)
There was also some standard Krugman snark.*Inflation adjusted
posted by thatnerd at 8:07 AM on December 28, 2014 [3 favorites]


We should not be so quick to talk of murdering people on the basis of their bad ideas.
posted by humanfont at 8:09 AM on December 28, 2014 [5 favorites]


"The Laffer Curve is an indisputably true economic proposition in qualitative terms"

This isn't even wrong. The first thing they teach you when doing formal modeling / game theory is that THERE ARE NO TRUE MODELS.
posted by MisantropicPainforest at 8:10 AM on December 28, 2014 [5 favorites]


I overstated the cap gains rate in 1960. It was 25%, less than a third of the top ordinary rate.
posted by jpe at 8:13 AM on December 28, 2014 [1 favorite]


humanfont: "We should not be so quick to talk of murdering people on the basis of their bad ideas."

Considering the lack of existence of a time machine, I think that Mr. Laffer is pretty safe.
posted by octothorpe at 8:18 AM on December 28, 2014 [6 favorites]


I agree that talk of killing people over their bad ideas is itself a bad idea, but it's really not just about ideas anymore for a lot of people. These ideas have caused and are continuing to cause a lot of real people very real pain. I still think some people aren't fully grasping the scope of the impact of these economic policies at the personal level. There are so many people being squeezed out right now, and in general, the markets are rearranging to focus on only serving the very top and bottom ends of the consumer markets. It's a very disorienting and difficult time economically for huge swaths of the American public. The anger out there is really acute and only barely below the surface, often coming out indirectly as social resentment and unfocused interpersonal friction, or being redirected at other objects. Considering how chaotic the culture is generally right now, it's just a perfect storm of confusion, paranoia, and frustration.
posted by saulgoodman at 8:26 AM on December 28, 2014 [8 favorites]


I thought it was all Friedman's fault.

The next six months will show.
posted by Trochanter at 8:30 AM on December 28, 2014 [8 favorites]


I don't think the words "indisputably true economic proposition" should ever appear together in a meaningful sentence, unless preceded by "there is no such thing as".
posted by Pyrogenesis at 8:36 AM on December 28, 2014 [10 favorites]


Was capitalism any less harsh and ruthless in 1960 than now?

And is it even true that the Latter Curve diverts attention from the concept of shaping an economy? The embrace of Laffer's concept seems a fairly specific means of shaping an economy. Perhaps it diverts attention from shaping the economy the way of your chosen planning committee's direction.

Laffer's idea seems perfectly reasonable. It also is never fleshed out, at least in its presentation for lay folks. Which is well enough... how many people are really interested enough other than to flog the concept in whatever ideological direction they choose. It's mention is mostly only useful as an ideological short hand.
posted by 2N2222 at 8:46 AM on December 28, 2014 [1 favorite]


From escabeche's explanation of the Laffer Curve, and why Reagan understood it so well:
I came into the Big Money making pictures during World War II,” [Reagan] would always say. At that time the wartime income surtax hit 90 percent. “You could only make four pictures and then you were in the top bracket,” he would continue. “So we all quit working after about four pictures and went off to the country.” High tax rates caused less work. Low tax rates caused more. His experience proved it.
But surely demand for films remained? And so Reagan's studio (or another) would simply find someone else to do the job and pay them the big money, too?
posted by notyou at 8:54 AM on December 28, 2014 [27 favorites]


Stephen Moore is the hackiest hack that ever hacked, but the Laffer Curve at least has the benefit of having at least one (possibly two) correct underlying data points, which puts it ahead of a vast majority of Republican ideas that came before or after it.
posted by tonycpsu at 8:57 AM on December 28, 2014 [4 favorites]


“So we all quit working after about four pictures and went off to the country.”

In wartime. The patriotism. I'm tearing up.
posted by Trochanter at 9:08 AM on December 28, 2014 [40 favorites]


One question I have for the Laffer fans is why they want to maximize the revenue collected? Doesn't that just lead to big government? The government should be small and lean and run on next to nothing, amirite?

The Laffer Curve seems like a perfectly reasonable simple model of tax rates and revenue collected. It goes along with frictionless surfaces that you see in your intro classes and then when you take the more advanced class you discover that the real world isn't actually that simple. There might be multiple peaks and valleys and (possibly) discontinuities and there's no guarantee that the curve will maintain the same basic shape from one month to the next or from one state to the next and it might well change with the exact form of the taxation (withheld from your paycheck vs. paid in full on April 15th).

What I've never seen is any attempt to flesh out the model some more. It always seems to start and end with the napkin. If you are going to set policy based on this then there needs to be much more going on.
posted by It's Never Lurgi at 9:24 AM on December 28, 2014 [3 favorites]


Using the Laffer curve as justification for any policy choice that's currently within the realm of possibility is a really good marker for bozo arguments. Take, for example, this WSJ editorial plot, which is just so hilariously and embarrassingly wrong that it still makes me giggle about once a year.

And using it as justification to change marginal tax rates, rather than adjusting overall tax rates, well, yeah, the stupidity and lack of careful thinking should pretty much disqualify that arguer from serious discussions in the future.

Sooooooo much stupid that latches on to the Laffer curve.
posted by Llama-Lime at 9:29 AM on December 28, 2014 [4 favorites]


The Laffer Curve, and all the supply-side voodoo economics that it engendered is such obvious bullshit that it pains me that we're still treating it like an idea worthy of even the most basic respect or consideration. I'll give it this much, in the most abstract, the Laffer Curve makes some sort of sense. You know, the Economics 101 thinking that has fucked us for so long. Assuming that people respond to incentives in an even semi-rational way, we can maybe assume that there is some point of taxation where people will choose to stop working. Of course, even in this most generous reading, that fucking napkin makes no mention of where that point of inflection is, nor how close to that point we were/are.

But we have forty years or so of reality in which we can see how much this idea fails. It turns out that when you reduce the main mechanism of raising revenues you... reduce revenues. Now sure, supply-side economics (like all conservative ideas) can't fail, it can only be failed, so maybe if we just slash taxes a little bit more, inflict a bit more pain upon the lower classes, clap our hands, and believe, things will turn around.

No, fuck that. Economics has never been and will never be economics 101, that's the fairytale thinking we tell and that unfortunately has pervaded our society. The Laffer Curve, and supply-side economics, is like objectivism, the barest underpinnings to justify the greed, selfishness, and outright economic evil of those in power. It's what let's them say "Well, we're the job creators, you see! If you lower our tax burden, I'm sure we'll find it in our hearts (which are better than normal hearts because they are rich hearts), to make more jobs, to pay more people, and so on." And then they laugh and laugh and laugh because they do no such thing, and it turns out that poor people pay more (by proportion) of their income to charities. And rich people lack human empathy.

So fuck Laffer, fuck his acolytes, and fuck this pernicious virus of an idea.
posted by X-Himy at 9:35 AM on December 28, 2014 [32 favorites]


The top tax rate in 1960 was 92%. No sane person would pay 92 cents of a dollar earned to the government. Instead of the 92% rate raising revenue, it served to channel income in the economy away from the wealthiest individuals and toward workers. It served as a way to take the harsh, ruthless edge off of capitalism.

It did? Which income? How so? Surely not "Darn these high income tax rates! Well, nothing for it, Smedley, I've no choice but to channel Acme's corporate income to the workers."

From what I read, it made the wealthy bury the wealth in non-income producing ways. The 1950s was the great age of the tax loop hole. (In any event, a few show biz and sports types got nailed by the top rates, even if Reagan did not. Bob Hope made his best money through LA real estate. Buy and hold....)

The high individual rate did what we wanted it to do because it was paired with drastically lower rates on capital gains and corporate level income.

Not quite clear on this. What did we want it to do? I've never quite understood corporate income tax anyway, save as a political lightning rod. From an accounting POV, it's an expense that is passed on to the consumer, surely? And regressive, at that, as the rich and poor pay the same amount to the Acme Corp for whatever goods they buy. (Indeed, I was about to moot that a zero Corporate Income tax might produce good results - less accounting fooferaw, less special interest corruption in the tax code - when I find that once again others have beat me to that idea. No doubt this is hilariously and embarrassingly wrong, but then I am neither an economist nor a politico.)

But surely demand for films remained? And so Reagan's studio (or another) would simply find someone else to do the job and pay them the big money, too?

This assumes there are enough someone elses who satisfy the consumers with an appetite for a specific big box office draws. The point is, people work for money. With confiscatory tax rates, they are disinclined to work This discourages both production and any tax income that might have come from such production. Hard to see who gains.
posted by IndigoJones at 9:38 AM on December 28, 2014 [1 favorite]


This assumes there are enough someone elses who satisfy the consumers with an appetite for a specific big box office draws.

Supply of capable actors is virtually unrestrained. Bankable stars get all the roles because they're bankable, but they're bankable because they get all the roles. If Leo DiCaprio or Jennifer Lawrence or whoever voluntarily took themselves out of the pool, someone else would rise up to that tier.
posted by tonycpsu at 9:45 AM on December 28, 2014 [2 favorites]


With confiscatory tax rates, they are disinclined to work

i dunno how this works for other people, but when i live in a society that lacks "confiscatory tax rates," I am disinclined to participate politically or economically in that society, because I lack a reasonable expectation that my economic activity will be fairly compensated and that my political activity will be reflected in legislation that serves my interests.
posted by mwhybark at 9:46 AM on December 28, 2014 [9 favorites]


IndigoJones: Let's say Acme Co. makes some product at cost X, which sells Y of them for price Z, producing profit Y(Z - X) = P. Surely this is true regardless of the top marginal and corporate tax rate, unless Acme Co. makes exclusively high-end luxury items. So in any case, P dollars are sitting around. In a world with high taxes, if that money is simply taken in as profit by the owners of the company, they will pay a huge chunk of it as taxes. However, they could instead create "new" costs, such as by increasing salary/benefits for workers, improving job satisfaction and performance, or invest in more efficient production techniques, decreasing cost even more, or do more research and development. However, if there is a low tax rate, they can just pay a bit in taxes and pocket the money and spend it on yachts. That's the point of high taxes. Either the government gets it and uses it to solve collective problems, or private industry uses it to improve the economy in material ways instead of pocketing it as personal wealth.
posted by cthuljew at 9:46 AM on December 28, 2014 [6 favorites]


With confiscatory tax rates, they are disinclined to work

Funny how the only people who seem to worry about the top income bracket being too confiscatory aren't the same people that keep the wheels turning or the lights on.
posted by thsmchnekllsfascists at 9:48 AM on December 28, 2014 [9 favorites]


Sweden has a different system of taxation than the US. For one thing, they have a three-tranche VAT, which, despite being a regressive tax, can have socially-just outcomes.

(An aside: with great respect to escabeche, the observation that "many have historically made this claim," as of the Laffer curve, tells us nothing inherently about its validity. Counter-examples of persistently false beliefs are over-abundant.)

But since the only remotely empirical component of claims to the validity of the Laffer curve involve income taxation, even if it's a good general description of the relationship between income tax rates and revenue, we don't know from it any more about how to structure tax systems than "too much and too little are both bad," which is somewhat common-sensical.

So I wonder: does the Laffer curve make sense, even in the "oh, that sounds right" manner, for taxes that aren't progressive? Maybe more importantly, does it model tax structures well at all, since those entail more than just income tax?
posted by clockzero at 9:49 AM on December 28, 2014 [3 favorites]


Funny how the only people who seem to worry about the top income bracket being too confiscatory aren't the same people that keep the wheels turning or the lights on.

But without those people, who'll tell the working class that the wheels need to keep turning and the lights need to stay on?
posted by cthuljew at 9:50 AM on December 28, 2014 [2 favorites]


The machines, duh.
posted by tonycpsu at 9:56 AM on December 28, 2014 [2 favorites]


I should add one thing that has always struck me as absurdly absent from discussions of supply-side economics: consumers and labor are literally the same people, so any policy that puts downward pressure on wages (such as low taxes reducing incentive to invest in one's workers) reduces demand in the economy. And the less demand you have, the less money anyone makes. Unless, of course, your actual goal is maintaining/increasing the wealth disparity, not growing the economy. Then supply-side economics makes perfect sense.
posted by cthuljew at 10:00 AM on December 28, 2014 [19 favorites]


However, they could instead create "new" costs, such as by increasing salary/benefits for workers, improving job satisfaction and performance, or invest in more efficient production techniques

Without the drastically lower capital gains rates they probably wouldn't have done that, either, since their future return would still be only 8 cents on the dollar.

The low, low capital gains encouraged reinvestment by providing the prospect of a low tax return on investment. When you build value and sell it, that tax rate drops from 92% to 25%. That's a pretty strong imcentive for reinvestment.
posted by jpe at 10:21 AM on December 28, 2014


In what universe do two points define a curve? How do economists know that there's no dependence on history causing hysteresis?
posted by monotreme at 10:22 AM on December 28, 2014 [6 favorites]


"Right, because the Adolf fucking Hitler wasn't as evil as a right-wing economist who advocated lower marginal tax rates. I'm in support of generally progressive taxes, but gimme a break."

In his defense, I don't think he was referring to Laffer.
posted by sutt at 10:28 AM on December 28, 2014 [1 favorite]


With confiscatory tax rates, they are disinclined to work
All tax rates are bracketed. The rate you are taxed under $XXX,000 is never as much as over $XXX,000. So, confiscatory tax rates only discourage the already successful from making MORE money, not the same they did last year. It sounds like a fantastic way to increase competition when demand for products and services remain the same but the established providers decide "it's not worth it, let somebody else do it". And non-lying economists know the Owners and Managers are NOT the 'Job Creators', the Buyers in the Market are.

Also, the one BIG LIE about the Laffer Curve when Reagan used it for justification for tax cuts for the wealthy, was claiming we were beyond the top of the curve, not well below it, which America has always been.
posted by oneswellfoop at 10:30 AM on December 28, 2014 [13 favorites]


Can we stop using the term "confiscatory" as if it has any non-subjective meaning?
posted by tonycpsu at 10:32 AM on December 28, 2014 [15 favorites]


Oh, hey, this is totally just a spitball idea but let me put real numbers on this napkin curve that support my idea with no one around to take me by the hand, cross it out, and put "high"/"low" in their place. Because I'm totally a legit economic scientist.

The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.

Single variable justifications, great science. Makes for even better policy!

President Ronald Reagan adopted the Laffer Curve message, telling Americans that when 70 to 80 cents of an extra dollar earned goes to the government, it’s understandable that people wonder: Why keep working? He recalled that as an actor in Hollywood, he would stop making movies in a given year once he hit Uncle Sam’s confiscatory tax rates.

The author may have confused the end of Reagan's acting career with the end of Reagan's acting. A common mistake shared with welfare-drug-test crowd, who also failed to ask for evidence of Reagan's claims.

the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation).

We can trust this guy to have corrected for all changes in the economic baseline and to have informed us about any other significant differences between the economy of 1980 and 1988: he told us that tax revenues only increased by 25% in a totally-not-editor-enforced aside! What a great thing the Laffer Curve was for the US treasury.

Critics such as economist Paul Krugman object that rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by reductions in tax rates. Except that 30 years later, President Obama would run deficits as a share of GDP twice as large as Reagan’s through traditional Keynesian spending programs, and the economy grew under Obama’s recovery only half as fast.

I'm noticing a distinct lack of the baseline corrections for Obama that were offered up for the Reagan years. I guess that's just scientific rigor trickling down through the ages.

After-tax incomes of middle-class families rose by roughly 30 percent (when taking into account government benefits and correctly adjusting for inflation) from 1982 to 2005

"Correctly adjusting for inflation?" Slow down there, are you saying that everyone else has been doing it wrong? Because you sort of need to show your work on that bombshell and not just slip it in with nary a "see appendix X" to be found. Because without trust in your "correct" inflation correction I would wonder where the middle class would be, from a numbers perspective.

I can go no farther. These people are the economic sciences equivalent of Dr. Phil.
posted by Slackermagee at 10:38 AM on December 28, 2014 [10 favorites]


“So we all quit working after about four pictures and went off to the country.”

Oh like making movies is productive work? Who cares if an actor stops working? There is an endless supply of people with "talent" who would act in movies for free if you let them.

Thus acting is not really "work" in the same sense as farming or making stuff people need.

Reagan never had a real, necessary "job" in his life that wasn't paid for by taxes. He was by all accounts a lazy man too.
posted by spitbull at 10:54 AM on December 28, 2014 [6 favorites]


Hey, now, fuck Reagan and all, but let's not get carried away and start casting aspersions on laziness.
posted by Steely-eyed Missile Man at 11:16 AM on December 28, 2014 [8 favorites]


"The top tax rate in 1960 was 92%." According to the Laffer curve, this generation would accomplish virtually nothing. Didn't Tom Brokaw write a book, The Loser Generation?
posted by dances_with_sneetches at 11:23 AM on December 28, 2014 [5 favorites]


I mean, I'm lazy enough as it is. If I made Big Movie Money? Forget it.
posted by Steely-eyed Missile Man at 11:27 AM on December 28, 2014 [1 favorite]


Reagans story about how he stopped working because of high marginal tax rates is a flat out lie and we don't need to treat it as anything else but a lie.
posted by MisantropicPainforest at 11:37 AM on December 28, 2014 [16 favorites]


The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand

Aargh! This sentence trades on two different senses of the word demand and no one called them on it. Economic demand isn't the same thing as material or real demand (as in, the non-economic sense of the term)--economic demand doesn't just mean that people want to eat, it means they want to eat, and have enough money to afford to at some price the markets can support. Poor countries don't have as much demand in the economic sense because there's not enough money there for people to actually afford what they need. It's sloppy thinking, equivocation, and loose association all the way down!
posted by saulgoodman at 11:42 AM on December 28, 2014 [18 favorites]


It isn't cute when men this age still believe in Santa Claus.
posted by clvrmnky at 12:06 PM on December 28, 2014


"Cute" isn't a word that leaps to mind, no.
posted by five fresh fish at 12:10 PM on December 28, 2014 [1 favorite]


Well that's my point, namely that I doubt Ronald Reagan ever in his mediocre acting career quit working because the taxes were too high on the marginal income he'd make, and based on everything we know about the man and his character most likely did so because he had enough money for the year and didn't feel like memorizing yet another stupid B movie script.
posted by spitbull at 12:33 PM on December 28, 2014 [2 favorites]


Or what misantropicpainforest said.
posted by spitbull at 12:33 PM on December 28, 2014 [1 favorite]


mwhybark: “Rumsfeld and Cheney had their fingers in this bullshit too? Shoulda known.”
Almost everything that is wrong with not just America but the entire 21st century world can be traced back to a handful of losers from the Ford administration and their various camp followers. tommasz does not exaggerate: Bush the Elder, Cheney, Rumsfeld, et al. are history's greatest villains.
posted by ob1quixote at 12:41 PM on December 28, 2014 [4 favorites]


It's sloppy thinking, equivocation, and loose association all the way down!

I think that was the unofficial policy statement of the entire Reagan administration.
posted by fifteen schnitzengruben is my limit at 12:53 PM on December 28, 2014 [9 favorites]


I'm dismayed by the Eurocentrism implicit in the Hitler reference. Clearly Mao should be #2. /it's called satire
posted by Lyme Drop at 1:09 PM on December 28, 2014


Reagans story about how he stopped working because of high marginal tax rates is a flat out lie and we don't need to treat it as anything else but a lie.

And if true, of course, proves that Reagan was not exactly the sharpest knife in the drawer.

(Not that those of us who lived through his term really need more proof . . . .)
posted by soundguy99 at 1:26 PM on December 28, 2014


It did? Which income? How so? Surely not "Darn these high income tax rates! Well, nothing for it, Smedley, I've no choice but to channel Acme's corporate income to the workers." From what I read, it made the wealthy bury the wealth in non-income producing ways. The 1950s was the great age of the tax loop hole. (In any event, a few show biz and sports types got nailed by the top rates, even if Reagan did not. Bob Hope made his best money through LA real estate. Buy and hold....)

Individuals who could not control their income, such as actors and musicians, could not escape the 92% very easily, however business owners and CEOs could by generating more expenses, and also by not being so relentless at controlling expenses such as worker salaries and benefits. No CEOs took wildly excessive salaries and they did not focus on trying to make a "quick big score" - they focused on strong stable growth.

The Beatles set up Apple Corps. Here's a quote by John Lennon:

Our accountant came up and said 'We got this amount of money. Do you want to give it to the government or do something with it

From Wikipedia: In addition to providing an umbrella to cover the Beatles' own financial and business affairs, Apple was intended to provide a means of financial support to anyone in the wider world struggling to get 'worthwhile' artistic projects off the ground.

Was Apple records wildly successful? Absolutely not - but that isn't the point either. It created opportunities! Without high tax rates, Apple records wouldn't have existed, and the Beatles would have thrown their money at an investor who would have bought complex derivatives with it, or speculated on oil futures or something.
posted by RalphSlate at 1:29 PM on December 28, 2014 [7 favorites]


consumers and labor are literally the same people, so any policy that puts downward pressure on wages (such as low taxes reducing incentive to invest in one's workers) reduces demand in the economy. And the less demand you have, the less money anyone makes.

This is a very clear and concise explanation of Keynesian economics, as I understand it. However, the empirical fact which most complicates it is that companies based in America have been doing pretty well, over the last 20 or so years, in spite of stagnant real wages that should be reducing the potential for growth through the mechanism of sub-optimal demand.

The reason for this, assuming the preceding factual description is roughly accurate, is that profit and economic growth don't need to come from domestic demand, or even from consumer spending. Lots of American companies make outstanding money from regulatory capture-enabled rentierism, e.g., the health care industry in the US, investment banks, charter schools, etc; they also profit immensely from big and emerging overseas markets, and if they don't have to worry about how consumers (or sources of profit, anyway, governments/other businesses/etc) in other countries can afford their products and services, they are free to keep taxes extremely low in America, reaping all the benefits of being incorporated here while fucking over American workers.
posted by clockzero at 1:31 PM on December 28, 2014 [3 favorites]


revenue collection in between those two rates is describable as a curve (or perhaps a series of curves joined by inflection points)

or it's discontinuous, or multi-valued, or totally weirdly non-linear...I think to graph revenue against rate (only) is disingenuous. The economists can say, "all else being equal", but that takes every nuance out of the visualization.

But supply-siders like a very simple curve that validates their world view.
posted by j_curiouser at 1:46 PM on December 28, 2014 [1 favorite]


The Laffer curve does mark the start of a trend where scientific sounding nonsense came to dominate policy making. Laffer's breakthrough allowed Thomas Friedman, Malcom Gladwell and Freakonomics to follow on afterwards. All these sages with the same schtick: make an untestible judgement, validated with annecdote, social mores and sophestry.
posted by humanfont at 1:49 PM on December 28, 2014 [1 favorite]


The Laffer curve does mark the start of a trend where scientific sounding nonsense came to dominate policy making.

Rational policy planning designed to benefit anyone except those at the top is really an exception more than a rule, historically.
posted by clockzero at 1:54 PM on December 28, 2014 [1 favorite]


Was capitalism any less harsh and ruthless in 1960 than now?

Not Capitalism itself, perhaps, but government restraints on its harsh ruthlessness were very different. Can you picture Reagan, Clinton, either Bush, or Obama doing this?
President Kennedy personally intervened in the question over price hikes for steel. His first step was to obtain concessions from the steel unions. He was successful in winning agreement for a new union contract that would have no effect on steel prices, taking into account both wages and productivity. Kennedy expected management to now do its part. Instead, first U.S. Steel, the nation’s largest steel producer, followed by its competitors, announced a substantial rise in steel prices. This action, if left unchallenged, would clearly have unleashed a damaging bout of inflationary pressures throughout the economy.

JFK was outraged. He decided to take action, and bring his voice on the importance of the issue directly to the American people. He conducted a news conference, and in his opening statement he did not mince words.
. . .
The leadership Kennedy demonstrated back in 1962 shamed the senior executives of the steel industry, leading them to rescind their unwarranted price increase. Afterwards, JFK is said to have remarked, “my father told me businessmen were SOBs. I didn’t believe him, until now.”
posted by Kirth Gerson at 1:56 PM on December 28, 2014 [8 favorites]


I occasionally encounter people who say "if my taxes go up any more, I'll just stop working!" That sentence is to be taken exactly as seriously as the people who threaten to move to Canada if a Republican wins the White House. Which is to say, there's a 99.99% chance they won't follow through, and even if they do, we won't particularly miss them.

My father-in-law, deeply disappointed at Obama's election in 2008, said he would quit working when his taxes inevitably, went up, to which I responded "Really? You would rather have zero income than 2% less income?"

"Yes! I'm being bled dry! I'll just retire!"

"And then someone else will take your place, opening up a position down the line for someone who doesn't have a job. They'll be much better off, and we will have their incomes plus your retirement savings all circulating through the economy, and so we'll all improve on the margins. This sounds like an okay plan. Unless you are the only person in the country who could possibly be trained to do your job."

"Hmmmph."

This is one reason why I am the fourth favorite son-in-law, out of four.
posted by Pater Aletheias at 2:21 PM on December 28, 2014 [19 favorites]


Without high tax rates,

To beat a dead horse, they did it because of the combo of high individual rates and much lower corporate rates.
posted by jpe at 2:26 PM on December 28, 2014


.I think to graph revenue against rate (only) is disingenuous.

There is nothing disingenuous about a parsimonious model.

"Laffer's breakthrough allowed Thomas Friedman, Malcom Gladwell and Freakonomics to follow on afterwards. All these sages with the same schtick: make an untestible judgement, validated with annecdote, social mores and sophestry."

Many of the work in the first Freakenomics book was based not on formal models but on rigorous empirical work, so I don't think that stands.
posted by MisantropicPainforest at 2:32 PM on December 28, 2014




If Leo DiCaprio or Jennifer Lawrence or whoever voluntarily took themselves out of the pool, someone else would rise up to that tier.

Absolutely. Bill Murray was the world's biggest box-office draw. He voluntarily took himself out of the pool at some point in the mid-to-late '80s, and Tom Hanks rose up.
posted by hilker at 4:20 PM on December 28, 2014 [2 favorites]


Good point. When succesful people cling to their positions and power too tenaciously, there's less opportunity for others to contribute to the field. Would it kill some of the gazillionaires to just cash out and retire and live comfortably and get the hell out of everyone else's way once in a while, instead of just relentlessly seeking new fields of play to dominate and control? Nowadays, once they've topped out in whatever industry they rose to the top in, they just seem obsessively determined to take over and dominate in the political world, too. Why not just chill? Ambition for its own sake is a snake eating its own tail.
posted by saulgoodman at 4:43 PM on December 28, 2014 [2 favorites]


If they were capable of being satisfied, they wouldn't have clawed their way to the top in the first place.
posted by Steely-eyed Missile Man at 6:48 PM on December 28, 2014


No discussion of "supply side" or "trickle down" is complete without the original version, "horse and sparrow" economics, circa 1890.
posted by IAmBroom at 6:52 PM on December 28, 2014 [6 favorites]


Trochanter: I thought it was all Friedman's fault.

The next six months will show.
More words, please?
posted by IAmBroom at 7:03 PM on December 28, 2014


notyou:
I came into the Big Money making pictures during World War II,” [Reagan] would always say. At that time the wartime income surtax hit 90 percent. “You could only make four pictures and then you were in the top bracket,” he would continue. “So we all quit working after about four pictures and went off to the country.” High tax rates caused less work. Low tax rates caused more. His experience proved it.
But surely demand for films remained? And so Reagan's studio (or another) would simply find someone else to do the job and pay them the big money, too?
Reagan was never more than a B-list celebrity. The fact that he quit making films has more to do with lack of demand for his "talents" than excessive taxation on his income. Charlton Heston didn't make 4 films and retire; Elizabeth Taylor kept accidentally appearing in films, despite commanding about half a kiloReagan in salary.

The bullshit that anyone - anyone - who can work themselves into the top tax bracket will quit earning because of high tax rates assumes that the only thing that motivates millionaires is % take-home. And that is obvious, utter bullshit. Currency traders hope for 0.1% profits on their trades. And that's before taxes!
posted by IAmBroom at 7:09 PM on December 28, 2014 [5 favorites]


More words, please?

You will have to wait a friedman unit for that explanation.
posted by localroger at 7:16 PM on December 28, 2014 [4 favorites]


Thanks, localroger.
posted by IAmBroom at 8:19 PM on December 28, 2014


Also important was that the top corporate rate was 52% and the tax on long term capital gains was half of the top individual rate. That encouraged business owners to keep earnings in the company and extract value at the point of sale rather than as salary or dividend.

Something this dumb could only be written by someone who has never run a business and has no idea how businesses are taxed.

Reinvestment of earnings in a business has always been 100% tax deductible, no matter the tax rate. In fact, the higher the tax rate, the more incentive a business has to reinvest in growing the company because reinvestment is tax-free. That is the reason that AT&T funded Bell Labs. They could either pay 50% of their earnings to the government or they could keep 100% of it if they simply invested it in a blue-sky research laboratory. It is the lowering of corporate tax rates that led to the end of that type of private research facility on that scale.

Low capital gains taxes don't encourage reinvestment in growth. Low rates encourage a company to engage in entirely non-productive practices such as spending their earnings on repurchasing their own stock as a scheme for avoiding ordinary income tax rates.

The notion that low capital gains taxes encourage companies to reinvest in their business is not just wrong, its a joke that indicates total ignorance of basic business finance. Lower tax rates encourage the stripping the earnings out of a company rather than reinvesting in growth.
posted by JackFlash at 11:15 PM on December 28, 2014 [9 favorites]


The Laffer Curve is an indisputably true economic proposition in qualitative terms:

Only a Republican could look upon a scribbling of Rolle's Theorem, a principal that goes back at least a thousand years and is covered in the first quarter of a high school calculus class, as if it were some new found profundity that their eyes have been opened to. Talk about banality.
posted by JackFlash at 11:28 PM on December 28, 2014 [2 favorites]


The high rate on dividends and salary is what discouraged pulling equity out prior to sale.

And you're exactly right that low cap gains would lead people to do buybacks, which is exactly why the tax law permits the IRS recharacterize buybacks as disguised dividends.

What led to more profit being shifted out of the corp is the drop in the individual rate, not the corporate rate. A high individual rate and a lower corporate rate leads to profits being kept in the business rather than dividended out.
posted by jpe at 4:49 AM on December 29, 2014 [1 favorite]


In addition to the disguised dividend rules, we also developed anti-abuse rules like the accumulated earnings tax and the personal holding company tax. Here's the ABA on the latter (doc):

The personal holding company tax was directed at the tax savings that could be achieved under a rate structure in which individual tax rates substantially exceeded corporate tax rates.

Similarly, here's a contemporaneous law review article on the former:

Because of the disparity existing between the individual income tax, rate (presently the maximum is 70 percent2 7) and the corporate tax rate (the maximum is now only 48 percent,2 8 and dividends received from domestic corporations are generally taxable at rates much less than this29), individuals have often been tempted to utilize the corporation to escape the higher individual income tax rates, especially if they are in the upper income brackets.
posted by jpe at 5:23 AM on December 29, 2014


The fact that he quit making films has more to do with lack of demand for his "talents" than excessive taxation on his income. Charlton Heston didn't make 4 films and retire

Not sure quite how this affects the bigger-picture questions, but it seems that some of the comments here are missing that the Reagan quote is necessarily referring to stopping after making four films per year, since after January 1st the marginal rate on his first however many dollars earned on the next movie would be back to the lowest tax bracket rate.

So it's an even sillier quote than some are taking it as. Four Ronald Reagan movies each year wasn't enough to satisfy the country's supposedly endless desire for more Reagan?
posted by nobody at 5:41 AM on December 29, 2014 [3 favorites]


The leadership Kennedy demonstrated back in 1962 shamed the senior executives of the steel industry, leading them to rescind their unwarranted price increase. Afterwards, JFK is said to have remarked, “my father told me businessmen were SOBs. I didn’t believe him, until now.”

Jesus, no wonder he got assassinated.
posted by clockzero at 8:00 AM on December 29, 2014 [1 favorite]


What led to more profit being shifted out of the corp is the drop in the individual rate, not the corporate rate. A high individual rate and a lower corporate rate leads to profits being kept in the business rather than dividended out.

What you are talking about, lower corporate taxes, has nothing to do with encouraging reinvestment. In fact, it is exactly the opposite. It encourages stripping profits and discourages reinvestment.

"Keeping money in the business" is not a reinvestment strategy. It is a personal income tax avoidance strategy. Stock buybacks are not reinvestment. They are tax avoidance. Every dollar that goes into a stock buyback is a dollar that is not spent on research and development.

As for you examples of recharacterized buybacks, those typically apply only to small, closely held corporations, a tiny percentage of the corporate world back when everyone and their uncle tried to claim they were a corporation to avoid income tax. In 2013, the 30 companies in the DOW spent over $200 million on stock buybacks. That is three times as much as they spent on R&D. None of them were considered "abusive." It allowed corporations to avoid paying dividends even though both dividends and capital gains are at the lowest rates in history. None of that money went into reinvestment.

Your premise that low capital gains rates encourage reinvestment is false. It encourages cash hoarding and stock buybacks, not reinvestment. Reinvestment in a business is encouraged by high tax rates because all cash reinvested is absolutely tax free. The higher the tax rate, the greater the tax savings.
posted by JackFlash at 9:06 AM on December 29, 2014 [3 favorites]


what's the opposite of the laffer curve?
-Nordic nations show that big safety net can allow for leap in employment rate
-Do Higher Taxes Make Us Work Less?
-A proof of the need for fiscal policy to escape the liquidity trap

the question in my mind -- and possibly a way to productively reframe the debate -- isn't to ask whether gov't is too big/small or if taxes are too high/low, it's whether gov't is effective or not and then ask, for a given level of gov't responsiveness, whether people feel like they're over/under-taxed. a corollary question also worth asking, perhaps more importantly at this juncture, is whether gov't is being deliberately degraded for political purposes to keep the masses in line for the plutocracy.

i'm reading time to start thinking now (by edward luce; @noah's behest ;) [which sounds like a companion to george packer's unwinding? (which i haven't read)] and luce wrote in 2012 about the now familiar refrain of 'two americas':
On the one, there were the educated, urban, white, brown, black, Jewish, and Asian Americans, amid a swelling army of volunteer students. It looked like tomorrow's America. On the other side were the angry, almost always Caucasian, blue- and white-collar middle class who, as William F. Buckley had once urged, were standing athwart history yelling "Stop!" (pg. 192)
whether the US' cultural divisions are at the root of our self-inflicted institutional wounds -- and whether and how they're being exploited -- highlights maybe a deeper question about who/what is gov't for (that robert reich asked in that 'deliberately degraded' link above) anyway, the answers to that would give some clues as to how to bridge the divide, proceed from the impasse, etc.

like you could just wait until all the baby boomers retire/die and millennials become politically ascendent, hoping they're more ideologically 'like you'; take the 'federalization' route in the meantime and move to cities/states more in line with your political leanings under the implicit assumption that they'll prove to be more economically (and environmentally?) better off in the long run... and then wait for texas, for example, to implode or for the demographic wave to hit, whichever comes first.

or you could undertake the hard and thankless task of trying to convince those across the aisle and border that current gridlock is senseless and counterproductive and that there is a better way... which would be?

here are a few angles i think worth exploring:
-the gov't budget constraint is not the same as a household's
-Capitalism Redefined
-Governments should ditch paper currency in favor of electronic

and if all else fails there's comparative (and historical) political economy as in country x did this (at this time) under these circumstances and look at their results and how they got thru that mess; look at china now, or japan then (or now) or scandinavia or 1890s US...
posted by kliuless at 11:19 AM on December 29, 2014 [4 favorites]




Laffer has the last laugh, as Congress declares war on math.
posted by tonycpsu at 11:48 AM on January 7, 2015 [1 favorite]


tonycpsu: “Laffer has the last laugh, as Congress declares war on math.”
My already low expectations are shattered on the first day. Vandals. That's all they are.
posted by ob1quixote at 12:15 PM on January 7, 2015


I wish "Dare to be Stupid" was a real Devo title.
posted by Trochanter at 1:22 PM on January 7, 2015


CBO scoring has always been pretty terrible. Revenue from taxes or spending changes were not well predicted by their models. Gaming the CBO model added a lot of complexity to legislation like the ACA.
posted by humanfont at 2:11 PM on January 7, 2015






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