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  • Laffering All the Way to the Treasury

    The New York Sun pokes fun at the Treasury Department, which this week released two reports assessing the impact of the 2003 tax cuts:

    We confess we stumbled a few times in making our way through the language, which seems at times to buy into left-wing assumptions. “Capital gains income, which is not captured in GDP, more than quadrupled between 1994 and 2000,” says one of the papers. “Tax receipts from capital gains realizations more than tripled during this period, even though the tax rate on capital gains was reduced beginning in 1997.”
    Charlie Gibson, call your office. “Even though”? The tax receipts from capital gains didn’t rise “even though” the capital gains tax was reduced, they rose because the capital gains tax was reduced. As the Laffer Curve graphically depicts, there is a point at which if you tax something less, you get more of it, and if you tax something more, you get less of it.
    The paper makes the same rhetorical error later on, saying, “After 2004, tax revenues again grew faster than the economy. Despite the tax relief enacted earlier in the decade, the ratio of receipts to GDP was 18.8 percent in 2007, above the 40 year average.”
    “Despite” is the wrong word. Tax revenues did not rise “despite” the rate cuts; they rose because of the tax cuts.

    Well said, and here is some other important data from that report, as identified by the Sun:

    In 2005, most recent year for which data are available, the top 5 percent of taxpayers earned 35.7 percent of the income, but paid 59.7 percent of the income taxes. The top 1 percent of taxpayers earned 21.2 percent of the income, but paid 39.4 percent of the income taxes. … If the persons paying for the government start to be a substantially different body than the overall population, a country begins to run the risk of serious political strains.

    We think “begins” is the wrong word, but otherwise, a good point.

    Cross-posted at InsiderOnline.

    Posted in Economics [slideshow_deploy]

    One Response to Laffering All the Way to the Treasury

    1. Liberty Straney, Ore says:

      You are confusing correlation with causality. Yes capital gains revenues respond to a tax cut but it's only effective if the cut is for a limited time. If you look at capital gains tax revenues and income tax revenues plotted together over time, they move together even though the tax rates for each changed at different times – which suggests that they are actually more sensitive to some 3rd factor.

      And don't forget when you're talking about tax revenues, you have to adjust for population growth as well as inflation. After the reagan tax cuts revenues only increased 19% when properly adjusted, compared to 41% between 1992-2000.

      All i'm sayin' is this laffer curve thing is questionable.

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