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Posts Tagged ‘Tax revolt

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else”*…

 

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President Trump [recently] announced that economist Arthur Laffer will receive the Presidential Medal of Freedom. Laffer is most famous for his “Laffer curve,” a graph that suggested that lowering tax rates might increase tax revenue. This graph had major political consequences, but made him more notorious than celebrated in the field of economics…

Economists tend to roll their eyes when the Laffer curve is mentioned. A panel of elite academic economists across the political spectrum found in 2012 that none of its respondents agreed that the United States was on the wrong side of the curve. Even George Stigler, a leader of the Chicago School of Economics who disliked taxes at least as much as Laffer, described the Laffer curve as “more or less a tautology.”

Yet the idea has been influential for more than 40 years. The Laffer curve did not begin as a formal economic theory, but as a simple depiction of the relationship between tax rates and government revenue. Legendarily, perhaps apocryphally, it was scribbled onto a napkin after dinner. [A recreation of the legendary napkin, created by Laffer for Donald Rumsfeld, who was at the dinner (with Dick Cheney) where it was supposed first sketched.]

The concept is simple enough. As tax rates increase, people’s incentives to work and make investments decrease because they make less money from them. Above some rate, taxes become so onerous that total revenue goes down because people aren’t as economically active as they would be in a world with lower taxes. The big question is what that rate — the tipping point on the Laffer curve — actually is.

Laffer may have named the curve, but the idea was not original to him. As proponents in the late 1970s liked to point out, the general idea dates to the Arab social theorist Ibn Khaldun, who wrote in the 14th century, “At the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”

In less remote history, Andrew Mellon, Republican treasury secretary to three presidents, articulated a similar idea in 1924. And when Democrats advocated for the Revenue Act of 1964, which cut the top marginal rate from 91 to 70 percent, their bill made exactly the same arguments. Even Wilbur Mills, the fiscally conservative Democratic chair of the Ways and Means Committee, found himself claiming that the tax cut would “eventually lead to higher levels of economic activity and thereby increase, rather than decrease, revenue.”

Yet it was Laffer’s variant that caught the ear of Republicans in the late 1970s, just as they were shifting from a position as the party of balanced budgets to the party of tax cuts. Indeed, the Laffer curve was a way to say, “Why not both?” One influential ear Laffer caught was that of Wall Street Journal associate editor Jude Wanniski, who made the curve a centerpiece of his 1978 book, “The Way the World Works.”

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Laffer and Wanniski had a champion in Congress as well, in former Buffalo Bills quarterback Jack Kemp. In April 1977, Kemp introduced a bill to cut income tax rates by 30 percent across the board. He started talking about the Laffer curve in October and over the next year mentioned it several more times in Congress.

But it was only with the June 1978 passage of California’s Proposition 13, which slashed property taxes, that the Laffer curve argument exploded into the mainstream. In this new atmosphere of “tax revolt,” the Laffer curve came up 128 times in the Congressional Record in less than four months…

The man who gave (what Will Rogers first called) trickle-down economics its own “curve,” who gave supply-side economics its graphic icon: “Trump is giving Arthur Laffer the Presidential Medal of Freedom. Economists aren’t smiling.”

For more on the “tyranny of curves,” see “Phillips, Laffer and Gatsby: on economists obsessing about curves.” And for more on the out-sized political, economic, and social impact of Laffer’s ideas, see “Starving the Beast- Ronald Reagan and the Tax Cut Revolution.”

* “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”          -John Maynard Keynes

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As we grapple with graphs, we might spare a thought for a different kind of economist (and one whose impact was much more indisputably positive), Elizabeth Josephine Craig; she died on this date in 1980.  A home economist and journalist, she published dozens of books, mostly cookbooks and volumes of home management advice.  Craig started to cook when she was 6 and began collecting recipes at 12; she began publishing cookbooks after World War I and continued to publish until her death.  Her contribution to English culinary literature comprises a very large collection of traditional British recipes, but also included a considerable number of dishes from other countries, which she gathered during visits abroad (often with her war correspondent husband).

220px-Craig,_E_Cakes_and_Candies_cover source

 

Written by LW

June 7, 2019 at 1:01 am

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