Re: Laffer curve and supply side economics


"nospam" <nospam@xxxxxxxxxxx> wrote in message
news:y6qdnSyfE8Gm4HfenZ2dnUVZ_v6dnZ2d@xxxxxxxxxxxxxx
Jim Blair wrote:

The real question is: what value of x maximizes f, where f is revenue?

Yes. And that depends on factors that cannot be discovered except by
"experimentation"--looking at past changes in tax rates and government
revenues.

The problem is that is very difficult to extract the usefull signal from
the
background noise.

Hi,

I agree. Compounded by there being no "control economy".

Comparison must be with either another country at the same time period
(France, Germany, Japan, etc), or with the same country during a different
time. And either way, there are compounding factors that are difficult to
evaluate and ultimately subjective to correct for.


And the time lag between a change in tax rates and the change in
revenue.
For example the income tax rates in the US are much lower now than
during
the 1970's, and real government revenue is much higher.

The time lag is the big "noise" factor.

I would say one of many big noise factors.

....There is no one period for a change
in politic to be reflected into output. Some changes are felt in months,
some in years some may need decades to make their influence felt.

I agree.

The problem is that the fast signals are easy to associate with a
particular
action while slower signals does not.

Even "fast" (short term) effects are controversial. And changes with a
short term negative effect can have a long term positive effect.
As I claim the JFK and Reagan tax cuts did. But thee is no "control
experimant" of a US economy that continued the 94% top income tax rate into
2006.

Supply-siders constantly harp that the optimal value of x is less than
the
current value of x, but present no evidence. In fact, the evidence is
quite
the opposite.

Er, what evidence? Or rather how do you explain the lower rates today
and
the higher revenue as compared to the 1970's?

That is very simple. Beside tax rate, there are many other factors
influencing that. Some of them:

Er, yes. That is why it is not so simple.

1. Productivity. Maybe this is the most important. Increase in
productivity
generate increase in revenue. The technology generate continue increase in
productivity. If you keep the same tax politic unchanged the revenue will
naturally grow as the result of productivity increase. When it does not,
then you have a serious problem.

But productivity does not just increase automatically. Increases are the
result (mostly) of investment in capital and training. And investment is
influenced by tax policy. A major claim of supply side economists is that
lower tax rates encourage (potentially) higher income people to invest.


2. Population increase. The same, keeping policy and productivity constant
the simple population increase should generate a natural increase in
revenue.

OK, but not on a "percapita" basis.

3. Increase in business transaction speed (money flow speed). If in 70s
you
ordered by mail a wagon of products to sell in your shop, you sent the
check in envelope. In 3 days it reached the opposite coast in 2 days was
cleared and the vendor ship the goods. Today, you order online, pay by
card
and tommorrow morning the shipment hit the road. You saved 5
day/transaction. If you do 10 transactions/year the speed on money flow
increased by 13%. The simple fact that we have e-commerce is actually
supposed to increase the revenue due to increased money flow speed.

But again, this faster transaction speed is the result of capital
investment. And to some extent to deregulation of commmunications.


But I agree that when the top rates were 94% or even 70% the case for
reducing them was stronger than when the top rate was 28%.


What I showed with the model I presented was that in case of a trade
deficit
reducing the taxes is actually going to hurt the economy. While I agree
that
when a country run trade surplus you can increase the economy even further
by cutting taxes, to do that while running trade deficit it is harmfull.

I don't think you can evaluate the effect of the trade deficit without
examining what is being imported and exported.

For example, the current US trade deficit is fueled (so to speak) by oil
imports, and the deficit expanded recently because of the higher world price
of petroleum and natural gas. But would the US economy have expanded faster
if we had NOT imported that oil? I say that (in the short run at least) it
would have grown slower or even gone negative without the imported oil.

Sure in the "long run" we would likely be better off if gasoline were to be
$10 a gallon, but in the short run that would cause problems and slow GDP
growth.

With a big deficit, the gov. can and should stimulate the economy by
increasing taxes AND increasing his participation into economy by
increasing domestic spending.

I would agree with a large increase in the gasoline tax. But not with taxes
that would reduce private investment.

And could the higher growth rate of the US GDP as compared to France or
Germany be related to lower taxes?

I would rather say not. My opinion is that we are actually running an
artificial GDP increase, financed by debt.

Again not a BAD THING if the debt is to finance investment.

The 8.x trillion dollar question is: It is actually US economy going to
pick
up steam to be self sustainable again before the gov. can not borrow
anymore ?

- If yes, we may be safe but for that the companies must start to pay
again
decent wages ....

"Decent" is subjective. But higher wages will come AFTER higher
productivity. And higher productivity is the result of investment. Which is
influenced by tax policy.


....and we must cut the trade deficit and go back in surplus. AND
FAST !

That depends on what we import and export. And if the imports make the
exports and our GDP possible (petroleum?).

- If no, I don't want to imagine the outcome....




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jim blair (jeblair@xxxxxxxx) Madison Wisconsin USA.
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