from An Anti-Growth Tax Cut by Kevin Williamson in The National Review

In economic terms, there are two things going on with those revenue and deficit numbers. One is the structural issue, i.e., tax policy, spending, etc. The other is the cyclical issue, i.e., the ups and down in the economy. Both structural and cyclical factors have an effect on growth, revenue, and deficits — and they both have an effect on each other, too. Disaggregating those is a complicated business, one that does not necessarily provide any clear answers. But if you want to stick with the naïve supply-siders’ story, then you have to credit essentially all of the economic growth following their favorite tax cuts (Reagan’s in the 1980s, Kennedy’s in the 1960s) to tax policy in order to arrive at the conclusion that these tax cuts not only paid for themselves but actually added to federal revenue. Given the fact that the economy is growing right now, that is not a very plausible story.

The Kennedy tax cuts saw the top individual income-tax rate reduced from 91 percent to 70 percent, and the Reagan cuts saw it reduced from 70 percent to 50 percent. The current top rate is 39.6 percent, which kicks in at $470,700 for a married couple. President Trump’s preferred policy would reduce the top rate to 35 percent, while congressional Republicans have aimed at 33 percent, along with modest reductions in other brackets and, possibly, a large reduction in the corporate tax rate. Our corporate tax rate is one of the world’s highest on paper, but the effective rate — what corporations actually pay — is on average unexceptional, though it varies significantly from industry to industry and firm to firm.

HKO

A good idea can not be held responsible for the people who espouse it. The Laffer Curve is a sound statement of the theory that under certain circumstances a cut in the statutory rate can yield an increase in revenues. This is really nothing more than the fundamental principle that price affects demand: the more you charge for work and risk the less of it you will likely generate.

But the application of the theory is subject to several variables. There is an apex on the curve where lower rates will yield lower revenues. Kevin appropriately states that there is a big difference from starting at a rate of 90% and a rate of 38%. There are several factors that affect economic growth and taxes are only one. It is hard to distinguish the source of growth when so many other factors, cyclical and other, influence growth.

The Laffer Curve will apply more to taxes that are easily avoidable that those that are not. Capital gains taxes can be avoided or at least controlled by when you sell you asset. A payroll tax can only be avoided by not working.

The Laffer Theory does not claim that all tax cuts pay for themselves or that spending cuts and debt control are irrelevant.

Kevin is also correct to distinguish the statutory rate from the effective rate. The amount you pay after deductions and credits is the effective rate. The greater the difference between the statutory and the effective rate the more the government is using the tax code for social engineering and economic meddling.

True tax reform is much more than the mere lowering of rates. True tax reform is a lowering and a broadening of the tax. We can collect the same or more by lowering the statutory rate but eliminating the special deductions that favor one investment over another, one industry over another, and one crop over another. This would eliminate much of the incentive for lobbying that so pollutes our politics. It eliminates much of the power of the elected to control the economy and to leverage that control for political donations. Only half of the problem of money in politics is bribery, the other half is extortion.

True tax reform would drastically simplify the tax code and the compliance costs which may be as high as 25% of the revenues. This may adversely affect the accounting and tax planning industry, but this would eliminate massive unproductive work. It would stimulate new business creation and expansion and could have as much of a positive effect as targeted tax cuts, with much less effect on tax revenues.

True tax reform would stop villainizing the wealthy. High estate taxes incentivize conspicuous consumption and divert resources into nonproductive schemes to avoid the death tax. High corporate taxes make tax strategies an unwelcome partner with productivity to achieve financial success. Both should be much lower. All corporate taxes are ultimately paid by consumers.

True tax reform would be consistent. Hillary Clinton complained of the short term thinking of American business, but the greater problem is the short term thinking of American tax policy. Every Congress votes for tax reform of some matter. Few business people believe that any meaningful tax reform will remain in place long enough to consider in their long term planning. Immediately after every tax increase some political fool will find a microphone to shout that the rich are not paying their fair share and that “you didn’t build that.”

True Tax reform respects the words as much as the numbers. Wealth is needed to support our government and the welfare state. Wealth goes where it is welcomed. Anti wealth rhetoric also impairs wealth creation and its tax revenues.

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