Mythical Beast: The Deficit Hawk
The Deficit Hawk (Genus Uwantus Upayus) is a symbiotic partner of the Conservoppotamus Meritocritus (sometimes known as a fiscal conservopotamus) and is a hypocrite of equal stature.
Variations of Deficit Chickenhawk plumage, beak, and wattle morpology:
Deficit Hawk Behavioral Studies:
The Deficit Hawk has highly predictable, obsessive-compulsive patterns of behavior from which it never deviates:
- Vocalizations: extremely loud, shrill, and continuous “clucking”, “crowing”, and “carping” vocalizations about the size of the federal budget deficit
- Cutting taxes and other burdens on the rich in any way possible (cutting upper income rates, cutting capital gains and estate taxes, creating corporate tax exemptions and loopholes, corporate welfare subsidies, public resource give-aways, generous bankruptcy rules, deregulation, etc.)
- Cutting benefits and placing more burdens on the poor and middle class: cutting social benefits, worker health and safety regulations, environmental protections, consumer protection programs, etc. in any way possible; as well as raising student loan rates, tuition, and placing unconscionable terms and penalties on student loans, on retail contracts, and on the authoritarian regulation of a worker’s workplace and bedroom behavior that no big business would ever tolerate.
- Uncontrolled and unaccountable spending on miltary-industrial contracts and other no-bid handouts to corporate crooks and cronies.
As a result of these behaviors, the Deficit Hawk is the single largest contributor to staggering annual increases in the US federal budget, budget deficits (see below), and the umpty-umpty-trillion dollar US national debt.
Deficit Hawk behavior case studies:
How tax cuts dupe conservatives: A case study.
Deficit Hawk Ecology:
- Deficit Hawks Are Not Interested in the Deficit
- So Do Outcomes Matter More than Rhetoric? “The crucial 2nd derivative of debt… the pace at which the rate-of-change of the federal deficit is itself changing… either moving toward fiscal disaster or away from it… has been positive (toward accelerating debt) during almost every year of every Republican administration since Eisenhower. In stark and dramatic contrast – that crucial metric is always negative (deceleration) every year of every Democratic administration.” — David Brin
Mythical Place: The Laffer Peak
The Laffer Peak is not actually a beast. Laffer Peaks are special, mythical mountaintops where Deficit Hawks, especially Deficit Chickenhawks, like to hide between their tax-crazed orgies of feasting on the poor.
Most economists and most laypersons would agree that in theory there is some ideal tax rate that maximizes tax revenue. If you tax at a rate under or over that “sweet spot” (represented by the “t*” on the graph below) then potential revenue is lost. However, if you tax at a rate above the “sweet spot”, in addition to losing revenue, you also inhibit economic growth–in technical terms, a double whammy.
If the tax rate is zero, you collect no revenue, but the economy takes off like a racehorse, growing at the maximum possible rate– until the electric grid collapses, the bridges fall down from disrepair, and fires and riots go unchecked the streets.
If the tax rate is 100%, you kill all economic activity and tax revenues fall to zero– along with the GDP.
All the Laffer Curve theory actually says is that there is a PEAK (a “sweet spot”) somewhere between zero and 100% that will maximize revenue without cooling down the economy too much. It doesn’t say just where that peak actually is. That’s why the mythical Laffer Curve below has no numbers except zero and 100.
Notice that in the example above there are no actual numbers on either axis. The value of “t*” (the tax rate that maximizes revenue without slowing down the economy enough to make the gross revenue start falling again) seems to be at about 50%, but that is not actually based on any real data.
One of the great advantages of the Laffer curve is that you can explain it to a congressman in half an hour and he can talk about it for six months. [Spiegel, Uriel; Templeman, Joseph, “A Non-singular Peaked Laffer Curve: Debunking the Traditional Laffer curve,” American Economist, September 22, 2004]
Laffer himself offers cherry-picked evidence from Russia, from the US in the 1920’s, from isolated capital gains rates, etc., that shows that sometimes decreases in rates can be correlated with increases in revenue. None of that says anything about the value of “t*”, the rate that actually maximizes revenues. None of that acknowledges that at some point decreases in tax rates cause predictable decreases in tax revenues (DUH!).
Laffer declined to identify the peak of the curve in testimony over the Kemp-Roth tax cut bill:
SENATOR PACKWOOD: Now, let’s go back to finding this optimum again, because obviously, if indeed you can define it and we can arrive at it …
MR. LAFFER: I cannot measure it frankly, but I can describe to you what the characteristics of it are; yes, sir.
During the 2oo8 campaign Mc Cain adviser Kevin Hassett, director for economic policy studies at the conservative American Enterprise Institute, made a similar statement to the New York Times.
What really happens is that the economy grows more vigorously when you lower tax rates. It is beyond the reach of economic science to explain precisely why that happens, but it does.
Research on Revenue-Maximising Tax Rate
According to Wikipedea (Laffer Curve): ” Pecorino (1995) argued that the peak occurred at tax rates around 65%. Another empirical study found that the point of maximum tax revenue in Sweden in the 1970s would have been 70%.
2005 US Congressional Budget Office (CBO) estimates of the effectiveness of tax cuts
In 2005, the Congressional Budget Office released a paper called “Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates”. This paper considered the impact of a stylized reduction of 10% in the then existing marginal income tax rates in the US (for example, if those facing a 25% marginal income tax rate had it lowered to 22.5%). Unlike earlier research, the CBO paper estimates the budgetary impact of possible macroeconomic effects of tax policies, i.e., it attempts to account for how reductions in individual income tax rates might affect the overall future growth of the economy, and therefore influence future government tax revenues; and ultimately, impact deficits or surpluses. The paper’s author forecasts the effects using various assumptions (e.g., people’s foresight, the mobility of capital, and the ways in which the federal government might make up for a lower percentage revenue). In the paper’s most generous estimated growth scenario, only 28% of the projected lower tax revenue would be recouped over a 10-year period after a 10% across-the-board reduction in all individual income tax rates. The paper points out that these projected shortfalls in revenue would have to be made up by federal borrowing: the paper estimates that the federal government would pay an extra $200 billion in interest over the decade covered by his analysis.
[Note that the 2005 CBO study only considers a 10% rate reduction. According to The Tax Foundation, the Kennedy tax cut dropped the top income tax rate from 91% to 70%, and the Reagan tax cut dropped it from 70% to 50%. The Bush cuts reduced the lowest rate all the way down to 10%, costing the treasury $400 billion. According to another source, Citizens for Tax Justice (CTJ), the Bush tax cuts that were passed up through 2006 (the 2001 and 2003 cuts as well as other smaller cuts in 2004, 2005 and 2006) ended up costing the Treasury approximately $2.1 trillion in foregone revenue from 2001 to 2010. CTJ claims that if you add interest payments, that number goes up to around $2.5 trillion! Nevertheless, right-wing economists, politicians, and other big, fat, professional liars continue to repeat the false claim that the tax cuts raised revenue. In fact, with the interest included they cost the Treasury $2.5 trillion which had to be borrowed and will continue to cost more in interest–on and on into the future, perhaps forever. ]
Laffer Curves in the wild. . .
There have been many reported sightings of Laffer Peaks in the mythical wilderness. They are similar to sightings of Yeti (The Abominable Snowman) footprints in the snow or sightings of the peaks of Shangri La. The outlines are fuzzy or foggy and open to interpretation.
You can see many possible Laffer Curves in the Google Laffer Curve Picture Gallery here. Below are two of the many peaks that have been sighted:
Where does the Laffer curve bend? (The Washington Post)
Emmanuel Saez, E. Morris Cox professor of economics, University of California at Berkeley: “The tax rate t maximizing revenue is …73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed.”
Joel Slemrod, Paul W. McCracken Collegiate Professor of Business Economics and Public Policy, University of Michigan: “I would venture that the answer is 60% or higher…. The idea that we’re on the wrong side has almost no support among academics who have looked at this. Evidence doesn’t suggest we’re anywhere near the other end of the Laffer curve….”
Brad DeLong, professor of economics, University of California at Berkeley: “At 70%.”
Dean Baker, co-director, Center for Economic and Policy Research: “It would be somewhere around 70 percent and possibly a bit higher. It is important to realize that you can have many different rates so we can have only a very small fraction of people actually paying the top rate and even then only on a small portion of their income.”
[The remainder of the Washington Post article is VERY interesting as it cites numerous repugnican economists and politicians declining to quote a Laffer Peak rate, or dismissing the Laffer Curve concept entirely, and advocating rates which they say “maximize growth” instead (that’s actually a tax rate of zero)! So when you corner them on the Laffer Curve they throw it right under the bus! Who knew? Rachel Maddow is right–the depth and breadth of right-wing hypocrisy today is matched only by their complete and utter, bald-faced and doe-eyed (and totally astonishing) lack of shame!]
The Laffer Curve comes back from the dead (Blog Oct 8, 2010)