The Laffer Curve, Part II: Reviewing the Evidence

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The Laffer Curve, Part II: Reviewing the Evidence

Uploaded by: afq2007
Video Description:
This video reviews real-world evidence showing that changes in marginal tax rates can have a significant impact on taxable income, thus leading to substantial amounts of revenue feedback. In a few cases, tax-rate reductions even "pay for themselves,'' though the key lesson is the more modest point that pro-growth changes in tax policy will have a positive impact on economic performance and that good tax cuts therefore do not "cost" the government much in terms of foregone tax revenue.
This video is second installment of a three-part series. Part I reviews theoretical relationship between tax rates, taxable income, and tax revenue. Part III discusses how the revenue-estimating process in Washington can be improved. For more information please visit the Center for Freedom and Prosperity's web site: www.freedomandprosperity.org.

Tags for this video: competition curve harmonization laffer mitchell oecd quinlan reagan tax taxes

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I agree. The main ... ( 8 months ago by patwayne2000)

I agree. The main question is what's the shape of the curve? Did you see the comment of "prestable"?

I saw 'prestable'. ... ( 8 months ago by davidcarvin)

I saw 'prestable'. At the peak of that curve, there's a big "plateau" where you're merely trading dollars. So the political issue should not be a 71% peak, beyond which tax cuts entirely pay for themselves. Even moreso, the CBO projections need to incorporate such dynamics in their forecasting in the interest of clothing the Emperor. Can I get an AMEN?

THANK YOU. Wish ... ( 8 months ago by soccer4ever)

THANK YOU. Wish everyone in Congress would watch this video.

Dan Mitchell went ... ( 7 months ago by BDizzle66)

Dan Mitchell went to Georgia about 50 years ago. Hope the Laffer Curve has better luck than his horrible football and basketball teams since he left. Boy did they ever lay an egg in the 2008 NCAA Tournament in the first round.

Mr. prestable: ... ( 7 months ago by SupplySideRules)

Mr. prestable: Those studies are flawed. Labor supply is very elastic, the elasticity is around 3. Edward C. Prescott, who won 2004 nobel in economics analyzed the actual hours worked in the formal sector and he found an elasticity of about 3. Why? Because when taxes are raised people would get unemployed or would go to work in the informal sector, making hours worked fall enormously. That is the correct analysis.
If you into account people that starts working in the informal sector and

Prescott paper also ... ( 7 months ago by SupplySideRules)

Prescott paper also finds that europeans when they were less taxed than americans, worked much more. A footonote: The higher productivity of the french is just an illusion, in France the less productive people cannot find a job.
Mitchell has shown that Value Added Tax was essential in transforming Europe into the stagnated "fiscal hell" that much of it now is.

Just google "Why do ... ( 7 months ago by SupplySideRules)

Just google "Why do americans work so much more than europeans" and you can read the paper by yourself.

If the elasticity ... ( 7 months ago by prestable)

If the elasticity it around 3, then the revenue maximizing tax rate would be roughly 25%. That doesn't play with the fact that the Reagan tax hike, the G HW Bush tax hike, and the Clinton tax hike all raised revenues above projected despite increasing marginal tax rates well above 25% (and that all the tax cuts in between have decreased projected revenue below projected).

Further, could you ... ( 7 months ago by prestable)

Further, could you explain how all studies of labor supply are flawed (It would be a trick, considering you haven't looked at the studies)? Except for Mr. Prescott's study of course. He can't be wrong. You're right--It's much more likely that everyone else is. I'm searching for the truth, and blind devotion to an ideology simply gets in the way.

However, even if ... ( 7 months ago by prestable)

However, even if the reason you state is true (that hours worked fell because people moved to the informal sector) then it means that tax hikes are less harmful than we thought--it's better on the margin.for someone to avoid taxes and continue working in the informal sector than for them to quit working entirely. At least in that case they're still being productive.

Mr prestable, you ... ( 7 months ago by SupplySideRules)

Mr prestable, you are reading carelessly. I said that the elasticity of the supply of labor is 3, I said nothing about the revenue maximizing point. What is flawed is ignoring people that goes out of the formal sector when analyzing labor supply. And that elasticity is for some level of taxation, not for every level but I am talking from memory. You are assuming an ideolgy in me. Taxes are asphyxiating the industrial world but there is a enormous bunch of professional hypocrites

trying to mask that ... ( 7 months ago by SupplySideRules)

trying to mask that simple truth. If people goes out of labor market that does not mean they stop working, if you tax labor at 71% then companies will probably outsource even secretarial services and every employee would be an entrepreneur. But it is obvious from Prescott study that labor supply was reduced by taxes in Europe. Just tell me the flaw in Prescott Study. And adjust your studies and compute as Prescott does and you may find the same result.

Mr patwayne2000: ... ( 7 months ago by SupplySideRules)

Mr patwayne2000: Asking us to read "what Bill Easterly says" is just a rethorical maneuver. What does Bill Easterly says? Can you explain a little or must we read every book and paper that Easterly wrote?

patwayne2000, the ... ( 7 months ago by SupplySideRules)

patwayne2000, the statistical evidence is overwhelming, progressive taxes are asphyxiating the industrial wolrd, whether you examine several countries or what happens over time in a country like the USA. Ireland and Russia are only two examples. Google "The size and functions of government and economic growth" by Gwartney and you will see clearly how as industriel countries increased government spending they fell into economic stagnation and the countries that reduced government

1) I didn't say his ... ( 7 months ago by prestable)

1) I didn't say his study was flawed. I haven't read it yet. And of course taxes discourage labor supply. The question is how much. An elasticity of 3 has got to be considered a little extreme to the point of being a red flag. Other studies have found an elasticity of 0, but that does not prove that the truth is zero.

2) The revenue ... ( 7 months ago by prestable)

2) The revenue maximizing tax rate for a flat tax is equal to 1/(1+elasticity), (derived from simple calculus, which I will supply if you don't believe me) which means an elasticity of 3 would imply a rev. maximizing rate of 25%.
3) I'm sorry I didn't mean ideology. I misspoke (mistyped rather). I meant that blind dedication to any theory, including supply side theory, is not helpful to the discovery of truth.

4) If people go out ... ( 7 months ago by prestable)

4) If people go out of the formal sector, the deadweight loss associated with that choice is negligible because they are simply switching to the next best use of their time (by the envelope theorem)

Yes, please give ... ( 7 months ago by SupplySideRules)

Yes, please give the Calculus because I suppose you are assuming a constant elasticity all over the curve.

Part2 patwayne2000: ... ( 7 months ago by SupplySideRules)

Part2 patwayne2000:as Ireland, New Zealand and UK got better economic growth. Higher government spending means higher taxes. Google "Fiscal Policy, Profits and Investment" and you will see how often government contractions are related to higher growth like what happened with Ireland, US, UK, New Zealand, Spain, Sweden, Finland, Estonia, Slovaquia, Russia and others that I do not remember when they reduced taxes. And EVERY OECD country sloweb their growth in 1960-1996 when they increased taxes

Part3 patwayne2000. ... ( 7 months ago by SupplySideRules)

Part3 patwayne2000. Japan, Germany and Spain, for instance, were "growth miracles" turned into nightmares of stagnation when government spending increased. Oil was 20% of GDP in 2005, it is unlikely that oil alone explains a 19% increase in tax collections. And how do yiu explain Ireland? Does Ireland has oil too? How do you explain Hong Kong that has no natural ressources but got the highest growth in the last 50 years? Why are so many countries adopting a flat tax if it is so bad?

I've said it before ... ( 6 months ago by 20000miles)

I've said it before, the laffer curve is a sham based on no empirical evidence of research carried out by Art Laffer.
Here, Mr. Mitchell is trying to convince us that all birds are black by showing us a few ravens.

"Voodoo economics?" ... ( 6 months ago by RHJunior)

"Voodoo economics?" Tell me, just how many different examples do you need that the Laffer Curve is a proven economic law?

actually the Irish ... ( 5 months ago by mossretard)

actually the Irish example kind of proves this, until 1990 or so Ireland was one of hte poorest countries in western europe despite an educated population they then cut corporate taxes and created incentive for high tech companies to come, Ireland now has the same GDP per capita as the United States after being a border line second world country until 1990

Array ( 2 weeks ago by agent59717802)

Dude,
Didn't you look at the initial explanation. The other factors are:
1. 7% population size
2. 44% cumulative inflation from 1980 to 1988
3. Revenue increased 5 times (400%)
Obviously the Laffer curve had a non trivial effect.

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