Life on the Downside of the Laffer Curve
Rep. McClintock gave the following floor speech on March 3, 2009.
M. Speaker:
The Laffer Curve is a simple but elegant method of demonstrating how increasing taxes reduces economic productivity until a point of equilibrium is reached when further tax hikes actually reduce revenue.
If the tax rate is zero, tax revenues are zero. But if the tax rate is 100 percent, tax revenues also reach zero, because there’s no point in working.
Thus, every increase in a tax rate produces a progressively smaller return of tax revenues as people adjust their behavior to reflect the reduced value of their work. When taxes exceed an economic tipping point, revenues begin to fall.
California vividly demonstrated this effect in 1991 when Gov. Pete Wilson imposed the biggest state tax increase in American history.
The $7 billion tax hike – a staggering combination of increases in sales, income and car taxes – broke the back of California’s economy.
While the rest of the nation’s economy expanded, California entered into a nose-dive, including the biggest plunge in retail sales in 30 years.
Those taxes brought in barely half of the new revenue predicted and then produced two consecutive years of billion-dollar-a-year declines in state revenues.
California is about to get another very expensive lesson in the Laffer curve, courtesy of a $13 billion tax increase that will sock an average family with more than $1,200 of new taxes.
We should watch California’s experience carefully in the days ahead, because it will be a harbinger of the impact we can expect under President Obama’s proposed tax increases.
Although California already has the highest sales tax in the nation, and it is about to rise by another 13 percent (or a penny per dollar).
Although California already has the highest income tax in the nation, it is about to have an additional quarter percent increase.
Although California’s sales tax is the second biggest generator of revenue for the state and automobile sales comprise a fifth of all sales taxes, the state has also doubled the car tax and is lobbying for new regulations that will increase the price of a new car by as much as $5,000.
Benjamin Franklin said that “Experience keeps a dear school, but fools will learn in no other.”
Appropriately, the California tax increases will take effect on April Fool’s Day, illustrating that some people won’t even learn from experience.
But perhaps there is hope. If California’s experience with the Wilson tax increases is any indication, the impact of the Scharzenegger tax hike is likely to be immediate and devastating.
Perhaps it may serve as an invaluable lesson for the Obama administration, which last week announced a whopping tax increase of $1.4 trillion over the next ten years – averaging about $1,800 per family per year.
I know, the President promises that these taxes will fall only on the very wealthy (individuals earning $125,000 and couples earning $250,000). But the fact is that 65 percent of these folks aren’t folks at all – they’re small businesses that are the very foundation of our economy, many of which are barely holding on as it is.
The other tax will directly hammer families with higher energy and consumer prices through a $656 billion carbon tax.
It’s not that another example should be necessary. Herbert Hoover’s response to the recession of 1929 was to increase the marginal tax rate from 25 percent to 65 percent and to burden international trade with steep tariffs.
Obama’s tax increase has yet to be enacted, and if passed this year it will not take effect until 2010. By then, California will have become a poster child for governments gone wild, a vivid warning of life on the downside of the Laffer Curve.
It’s a lesson that may yet save our nation from an economically devastating mistake.
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We are on the left side of
We are on the left side of the curve right now
Nope, sorry. If that was the
Nope, sorry. If that was the case the Bush tax cuts would have increased revenue by more than we lost from the rate cuts. You're entitled to your own opinion, not your own facts.
http://economics.harvard.edu/faculty/mankiw/files/dynamicscoring_05-1212...
Bush's own Council of Economic Advisers acknowledges that the capital gains tax cuts gain half of the revenue lost from the cuts in tax rates, and the payroll tax cuts make up 17%.
The Congressional Budget Office came to the same finding http://www.cbo.gov/doc.cfm?index=7731
http://cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf
Ditto with the Joint Committee on Taxation http://www.house.gov/jct/x-51-01.pdf http://www.house.gov/jct/x-55-03.pdf
Even Alan Viard of the American Enterprise Institue, hardly a bastion of liberalism, acknowledges the Bush tax cuts didn't gain revenue http://www.washingtonpost.com/wp-dyn/content/article/2006/10/16/AR200610...
http://img165.imageshack.us/i
http://img165.imageshack.us/img165/1615/image001.png
way to the far right end of the laffer curve.
Remember, it was the simple
Remember, it was the simple American with a dream of FREEDOM that froze at Valley Forge and had rags for shoes that gave us this Great County. We also held a Tea Party in Boston Harbor when the King imposed unreasonable taxes on us. How much longer will it be until the modern American feels the same stirrings of our Great Forefathers? Show your opposition to what the government is doing now. Join the protest: Tape a Tea Bag to the back window of your car or truck.
The problem is that only
The problem is that only great leaders with great wisdom (show me one lately) know where we are precisely in relation to the curve. In addition, for the most part, we won't know untill the tax rates are actually changed and we see the effect to know what was the correct policy.
The really successful societies in history "got it correct" the first time and flourished.
Its a safe bet today however, any increase in taxes will be beyond the tipping point, and tax revenue will decline.
Congressman McClintock: I am
Congressman McClintock:
I am very glad you are one of the few sane voices in Congress. Hang in there and tell it like it is. Hopefully, new leaders, like you, will take us out of the morass we are in.
I am not an economist, but
I am not an economist, but foresaw the banking collapse 4 years ago. I told as many friends as I could and all thought I was nuts. Having sold properties before the downturn, I invested in very conservative annuities. They are now at half the principal value. The questions: If I saw through the foolishness of splitting debt equities for repackaging and resale, why didn't the economists sound the alarm? Was this planned? Is this a manufactured crisis? Who stands to gain from the results of this crisis? Politicians and their cronies?
The captain of the team has
The captain of the team has obviously thrown us a curve ball. It will take considerable skill and patience before we'll be able to get out of the dugout in one piece.
Will we learn from history or
Will we learn from history or will we repeat it? Please continue to carry the message Mr. McClintock - eventually they have to hear you.
Folks reading this - some suggested reading that will provide more information of the Laffer Curve - The End of Prosperity. Should be required reading for our Govt. officials at this critical time.
I'm glad we can take the hit
I'm glad we can take the hit for the rest of the country (sarcasm). All of my family is in California, so we're not leaving anytime soon, but I will cut back on all of my spending. I want the government in this state to implode, it's disgusting.
I'm going down with the ship. I hope our example does save the rest of the nation.
Tom, You got it right,
Tom,
You got it right, again.
It's an oft asked question: "Why hasn't the media mentioned any of this?"
No one seems to be listening.
No one seems to know what "Cap and Trade" is all about.
About the "Chicago Climate Exchange."
Tell the world, Tom.
Monty
Rep Mc Clintock I don't
Rep Mc Clintock
I don't understand why members cannot see this situation as a potential disaster. Hope that you have contact with Rep Thompson and he could be convinced of the danger this path takes our children.
As a small business owner in
As a small business owner in California employing 11 families, I totally agree with Tom's assessment. Every time I turn around the state and local government sticks their hand out asking for more. Many of these requests for fees and additional permits don't apply to my location or situation and have no relevance to my business but are charged any way. Instead of encouraging me to expand they punish me for trying.
John
Time to take the blue
Time to take the blue background off the flag and make it white stars over red.
God help us all! What can we
God help us all! What can we do - Have another Boston Tea Party! My only saving grace is that I'm 70 years old and I wil not see the total result is this insanity but unfortunately my children and grandchildren will.
Tom, You have always
Tom,
You have always been right! We would not be in this mess in this state if you were elected governor instead of Arnold. As a physician and small business owner I'm appalled at the lack of understanding by both the Fed and State when it comes to economics. California is increasing driving business from the State. I know that if I could I would leave today. We are becoming the Peoples Republic of California. The Republican Party of small government, low taxes and strong defense is DOA in Washington.
The economy has such a huge
The economy has such a huge affect on the decision.
Cadillac Government,
Cadillac Government, Volkswagen Economy
Let us Work
In every economic crisis eventually small business people must be freed to produce, to build their business, expand and hire people. These people are the primary producers of the taxes society depends on to function.
America hasn’t been a true capitalist country since the bailouts and government guarantees of the 1930s, Over the years America has adopted some very statest policies for common citizens and business.. The level of regulation taxes fees and permitting processes currently on the books is some of the most intense in the world. Don’t get me wrong here, I like clean regulated planned communities but you have to be reasonable so people can afford to live and work there.
Even the staunchest European Socialists from countries like Sweden Germany and France realize you have to deregulate and allow some capitalism to exist at the bottom of the middle class, otherwise nothing in society works.
America has handicapped it’s most productive citizens with some of the most intense regulation on the planet, the bailouts and free money can lessen the depth of a depression, But real recovery comes from government at all levels just stepping out of the way of productive working people. Remember the LA freeway rebuilding after the earthquake?
The problem is in politics cutting taxes and regulation is synonymous with cutting the size scope and expense of government and government jobs.
Politicians play word games so as to not scare the millions of government employees that probably will be laid off after the fantasy bail out dollars run there course through our economy. But I don’t see much choice here.
Small business has returned to the economy of 1990 over the last 18 months yet government regulation taxes and spending continues at record levels, every day this takes us further away from the goal of fiscal responsibility and a sound economy.
This is the path to hyperinflation, the cruelest tax; it impoverishes the young the weak and those living on fixed incomes by destroying the purchasing power of their dollars.
It’s not to late to deregulate get back to basics and save America.
Taxed to the max in Truckee