Re: Postpone taxcuts.

["Mike Rush" <mike.rush@cableaz.com>]

Ever heard of the Laffer Curve??  Read on....

For us to gain a rudimentary understanding of the ideas incorporated into
the Laffer Curve, we must understand a tiny bit about economics. Economics
is really just basic human psychology as applied to money and business
affairs. We assume that people will react to the realities of the world of
money and business more or less like they react to any other set of stimuli.
They tend to act in their own and their family and friends' best interests,
as they see them. The Laffer Curve results from our assumptions about how
people will react to varying rates of income taxation.

Now we must put our understanding of human nature to work. We must ask
ourselves two questions, the answer to the first being obvious, and the
answer to the second being not so obvious, but just as certain. The first
question is, "If the income tax rate is zero %, how much income tax revenue
will be raised?" The answer is, of course, "None."

Now, here is where it gets a bit tougher. The second question is, "If the
income tax rate is 100%, how much income tax revenue will be raised?" To
answer this question, we must place ourselves in the position of an income
earner who faces a tax rate of 100% on every extra dollar he earns. Will he
have any reason whatsoever to earn any more money? The answer is, "No, he
won't." He will refrain from any activities likely to result in taxable
income. So the income tax revenue from a 100% income tax will be zero, or
nearly zero. There will always be a few suckers who go ahead and earn some
money, only to have it taxed away. But the number of people willing to do so
must be exceedingly small. For all practical purposes, the number is zero.

Okay, now we get to the nub of the "infamous" Laffer Curve. We must take the
ideas discussed above and reach some conclusions. The reasoning goes like
this: If a zero % income tax rate brings in zero revenue, and if a 100%
income tax rate brings in zero revenue, the tax rate which will bring in the
most revenue must be somewhere between zero % and 100%. It necessarily
follows that in a given economy, there is some optimal income tax rate which
will bring in the most revenue possible. In that economy, a lower than
optimal rate will bring less revenue, and a higher than optimal rate also
will bring in less revenue. Are we all still together here? Did you get
that? If not, go back and do it again. Keep doing it until you get it.

Okay, that is all the Laffer Curve claims. Let's all say this together, "In
any given economy, it is possible that the income tax rates are already too
high, and if the authorities wish to bring in more income tax revenue, they
must lower the tax rates." Do we all understand that? Even the Democrats
amongst us?

The Laffer Curve does not claim that lowering income tax rates will always
bring in more revenue. It only claims that a lower income tax rate may bring
in more revenue. If the tax rates are already very low, lowering the rates
may not bring in more revenue. But if the rates are too high, lowering the
rates will bring in more revenue.

The problem people tend to have regarding the Laffer Curve is that they
confuse economics with their political considerations. Many people have
political reasons to desire high income tax rates on the earnings of the
rich. They wish to prevent the rich from earning more money, even if the
resulting tax revenue is smaller than it would otherwise be, and the economy
less productive than it would otherwise be. These people do not believe that
the income tax on the rich can ever be "too high." They are willing to
deprive the government of revenue and deprive the economy of the
productivity of the rich, all for the sake of their politics. There really
is no arguing this point, as it is merely the outward manifestation of envy.

The Laffer Curve does not address questions of envy and redistributionist
politics. It only addresses the question of how to have the healthiest
economy producing the highest income tax revenue.

The Laffer Curve does not claim to know exactly what tax rate is the "right"
tax rate. In fact, the only way to know if the current tax rates are too
high is to lower them, and see whether revenues increase or not. If the
revenues increase, the rates were too high. If the revenues decrease, the
rates were too low. Of course, it would be equally valid to run the
experiment the other way around: raise the tax rates and observe the
results. The choice is the politicians' to make, based upon whether the
current rates "seem" to be high or low. In 1981, the rates seemed rather
high. The Laffer Curve experiment showed that the rates were, indeed, too
high.

Now, let us consider whether the Laffer Curve "failed" to deliver on its
promises during the Reagan administration. Remember, the Laffer Curve does
not promise to balance the budget. The Laffer Curve does not promise to
solve social problems. The Laffer Curve does not promise to force elected
representatives to propose and enact lower spending programs. The Laffer
Curve only promises that, if the tax rates are too high and they get
lowered, revenues will increase. Income taxes were lowered (and "flattened")
during the Reagan administration. Income tax revenues increased. In fact,
they increased a great deal. Unfortunately, neither the Republican Reagan
administration nor the Democrat-controlled Congress were interested in
lowering the rate of growth in federal spending. While the income tax
revenues increased substantially, federal spending increased even more. The
result was that the federal government ran up a staggering national debt.
But please, let's not blame it on the Laffer Curve!

by By Robert Sturgeon

With my apologies to Robert for stealing his words...

Mike Rush


----- Original Message -----
From: <mushroom@moscow.com>
To: <vision2020@moscow.com>
Sent: Thursday, January 31, 2002 11:06 PM
Subject: Re: Postpone taxcuts.


> > Concerning postponing the State tax cut.
> >
> > Why don't you people who do not want the tax cut, give it
> > back to the State when you get it. This way you are giving
> > the people of Idaho the choice of receiving the tax cut or
> > the choice of giving it back to the State.
>   Kirk Koefod
>
>
> That argument is as logical as objecting to someone
> supporting more spending on defense (or anything else)
> unless that person has personally contributed additional,
> unrequired, funds to that cause.
>
> There's nothing wrong with proposing and supporting the idea
> that the public should pay for some public service, although
> in Idaho sometimes, one wonders.
>
> And only with George W. as president would we hear that not
> cutting taxes is the same as increasing taxes.
>
> Don Coombs
>
>