An interesting post on the subject of tax cuts and revenues: http://content.ksg.harvard.edu/blog...27/does-mccain-believe-the-laffer-hypothesis/ Does McCain subscribe to the Laffer Hypothesis? So Arthur Laffer – still arguing the improbable “supply side” proposition that cutting income tax rates generally raises total tax revenue – is apparently now a special adviser to John McCain. And McCain has taken on a big consignment of the snake oil, to Greg Mankiw’s dismay. The political temptation for a Republican candidate to promise both lower tax rates and higher revenues is irresistible. The policy-makers who cut taxes when Ronald Reagan and George W. Bush, respectively, came to power subscribed to this claim. Remarkably, at the same time, the economists who were the chief economic advisers to Reagan and Bush during these tax cuts disavow the proposition that they increase revenue (Murray Weidenbaum, Martin Feldstein, Glenn Hubbard, Mankiw…) . Almost all serious economists – let us say Ph.D. economists – disagree with this proposition, with only a microscopic handful of exceptions like Laffer. Indeed some of the advisers who defend the Reagan and Bush economic policies claim that this formulation of supply side economics is a caricature, and was not the true rationale of the tax cuts. This wishful thinking is directly at odds with quotes from the presidents themselves and their Treasury secretaries and other economic officials, to the effect that tax cuts stimulate income so much as to produce more tax revenue. Laffer is not a straw man. (See my next post.) Even more interesting, the academic defenders of the Republican tax cuts often offer a proposition that is diametrically opposed to the defense offered by their political masters. This is the famous “starve the beast” hypothesis: the claim that if you deprive the government of tax revenue, it will reduce government spending, which is of course viewed as a worthy objective. If this proposition were true, and the supply side hypothesis were also true, it would lead to the nonsensical proposition that Republican presidents should raise tax rates in order to reduce tax revenue (Laffer) and thereby reduce government spending (Starve the Beast). I challenge some candidate to run on that platform ! As it happens, there is abundant empirical evidence against both the Lafferite hypothesis and the Starve the Beast hypothesis. In other words, just because two propositions are diametrically opposed doesn’t mean they are not both wrong. I hope that in this election campaign, the media do something they have failed to do in the past. If McCain proposes extending the Bush tax cuts, he should at least be forced to choose between the Lafferite defense, which tends to be driven more by political expediency, and the “Starve the Beast” defense, which has more support among at least some reputable Republican economists. Only then can the rest of us know which of the two propositions to refute. -------------------- Greg Mankiw's take: http://gregmankiw.blogspot.com/2007/03/mccain-on-laffer-curve.html McCain on the Laffer Curve Senator McCain tells the National Review: Tax cuts, starting with Kennedy, as we all know, increase revenues. The interviewer, however, did not ask the natural follow-up questions: 1. If you think the 2001 and 2003 tax cuts increased revenue, why did you vote against them? 2. If you think tax cuts increase revenue, why advocate spending restraint? Can't we pay for new spending programs with more tax cuts? I doubt that, in fact, Senator McCain believes we are on the wrong side of the Laffer curve. But unfortunately, fealty to the most extreme supply-side views is de rigeur in some segments of the Republican party.
With the way things are now, you could very well buy an American brand only to discover that it was made in China, sent to the US for some "finishing touches", and then sent back to China for their market. I rather not take that ridiculous risk. The US has to take charge somehow or risk their offshore manufacturing partners become onshore competitors.
Or you can go the other direction, have your cake and eat it too. If we cut tax rates either 1) the tax revenues will increase (relative to what they would have been without tax rate cuts), lower tax rates and more revenue will get no complaints from anyone; 2) the tax revenues will be unaffected, similar benefits to 1; or 3) the tax revenues will decrease, at which point you go the starve the beast route. It is a win-win situation.
Companies are acquiring, merging, and monopolizing, due in part to the repressive corporate tax rate. (The other major part is excessive regulation, but that's another thread.) Again, the average corporate tax rate is the 2nd highest among relatively free economies in the world. Companies that have to compete globally are put behind the eight-ball. Even if we "leave money on the table" by cutting corporate tax rates, it is absolutely necessary to stem the tide of quality jobs heading overseas.
Do you believe reducing tax rate for corporations will stop the follow of jobs to other countries? I highly doubt it. They will just take the tax cut and cut more jobs, that's how business works, they are in it to maximize profit.
Just to be clear, our unemployment rate in the US is a very healthy 5% right now. This isn't a problem.
I wasn't talking about unemployment rate here. Just that business will do what it believes to be in its best interest.
I'm not talking about job cuts. I'm talking about job relocation, and yes, I do believe that. Mostly because jobs are moving to more favorable tax locations. It shouldn't be surprising to anyone that the most free economies have the most growth. Economic liberty rankings: http://www.heritage.org/research/features/index/countries.cfm Is it surprising that as a country moves up or down this list, investment follows, with exceptions only for those who find natural resourses?
What exactly do you mean by job relocation? Does closing a plant in the US and moving it to China, India or Mexico considered job relocation or job cut?
Job relocation. All three of the countries that you mentioned have significantly lower corporate and income taxes than the US now. Regulation is more repressive there, and there is the threat of nationalization in Mexico and China, or we'd have even more job relocation.
I am pretty sure lower tax rates for corporations would not signicantly impact the job relcation to countries like China, India and Mexico in the foreseeable future. Tax rate is one of the reasons jobs are relocating but not the most signicant one.
Great point. The same thing happens with states. Why do you think Texas just overtook NY as the state with the most Fortune 500 HQ?
More like the fact taht the "beast" is rarely if ever starved, largely because of the fact that the right wing version of the "beast" consists of beastly things like highways, schools, roads, and police, etc. Not included in the right wing version of the beast is the massive chunk of expenditures going to the defense budget, such as the trillion dollars that conservatives (such as yourself) happily endorse pouring into shiite militia pockets in Iraq....oh but let me guess, you read "Atlas Shrugged", so never mind.
Care to respond to my post at the top of the page, the one that argues that both the Laffer hypothesis and "Starve the Beast" have no basis in reality?
Has as been pointed out, tax receipts have gone up regardless of tax cuts or tax increases. They have gone up less under Bush's tax cuts than in recent times.
I don't know how many more times this needs to be said before a certain select group of people actually realize how ridiculous they sound.
