Nobody really knows if the Laffer Curve actually exists.
The theory, as it was originally propounded by Arthur Laffer, in a famous dinner meeting with a few influential Republicans back in the late 1970s, was simple enough. It centered around a curved line drawn on Laffer's napkin.
If you cut taxes to nothing, you get no tax revenues. That's because zero percent of anything is zero. If you tax everything at 100% you also get nothing. That's because nobody would be willing to work for nothing, so people wouldn't work. And a 100% tax on nothing gets you the same result as a zero percent tax on everything.
So the maximum amount of revenue comes at a rate that is somewhere between zero and confiscation of everything. Arthur Laffer argued that taxes were a lot closer to the 100 percent mark than they were to the zero mark. So lowering taxes would result in higher tax revenues.
When Ronald Reagan became President, he managed to get Congress to cut taxes. An enduring conservative myth is that this resulted in more revenue, thus proving the validity of what came to be called Supply Side economics. In reality tax revenues went down until President Reagan reached an agreement to have taxes go up, although they went up only on working people.
President Clinton convinced Democrats to raise taxes on the wealthy, the economy boomed, and tax revenues went way up. In fact, deficits disappeared. Estimates were seriously floated showing the entire National Debt being retired in the following decade. Then came the Bush tax cuts.
Total federal revenues declined not only in 2001, but also in the following two years, according to CBO historical budget figures. In fiscal 2002, total revenues declined by $138 billion, and in fiscal 2003, they went down for a third year in a row — by nearly $71 billion. Revenues turned up in fiscal 2004, but didn't reach pre-tax-cut levels until fiscal year 2005.
That was shortly before the bottom dropped out and tax receipts fell again in the last two years of the Bush Presidency. Not a very good record for the GOP tax cutting theology.
All that doesn't disprove Supply Side economics. The theory that is based on Arthur Laffer's napkin could still be valid, if our current point on his after dinner graph happens to be closer to the left side of the napkin than the hump of the curved line is.
But, along the way, the Laffer curve became less a bell shape than a continuing asymptote, a hyperbolic curve that extends to an impossible infinity of division by zero. That sort of thing makes computers give errors because it can't be done. The infinity of forever tax cutting became less a theory than an article of faith, like our Lord and Savior, in Republican hands. Tax cuts, they said, always pay for themselves. Cuts in taxes never result in increases in deficits.
Did everyone hear that? Tax cuts always pay for themselves.
Congressional Representative Mike Pence (R-IN):
The reality is during the Reagan years, for instance, we doubled the amount of revenue that we were sending Washington DC after the tax cuts took effect. The point is, we got to get this economy moving again.
Doubled? That's what he said. Doubled.
A booming job market will reduce demand for government assistance. And rising incomes will increase federal revenues. In the 1980s — revenues increased by 99%. In the 1990s — revenues climbed high enough to balance the budget.
99 percent increase in revenues during the 1980's? That's what he said.
There’s no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue because of the vibrancy of these tax cuts in the economy.
And the fact is the tax cuts have dramatically increased revenues.
Senator Jon Kyl (R-AZ) - See below:
You do need to offset the cost of increased spending. And that’s what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans.
But now? President Obama wants to extend payroll tax cuts for working Americans. Let's keep a few more dollars in the pockets of ordinary Americans for the sake of the economy.
Republicans opposed keeping a tax cut for working Americans. They vowed to dig in their heels. Then, this week, the pressure got too great and leaders in the Senate and House both said the extension for the middle class might pass.
Republicans insist it must be paid for. Maybe by cutting benefits earned by Seniors, or cuts in Medical benefits, or cuts for Veteran benefits, or in breakfast programs for little kids, or by laying off more teachers or police officers, or by letting more bridges decay.
You see why, right? A continued tax cut for the middle class is nice. But it has to be paid for. All those lost revenues. Lost revenues from not increasing taxes on the middle class. After all, tax cuts don't just pay for themselves.
Okay, now that we're abandoning the Supply Side theology, tossing the greasy, food stained, Laffer napkin into the trash, how about paying for the extension with a very slight tax increase on the very wealthy? No, No, NO! Republicans will, in fact, continue to fight to extend tax cuts for those extremely wealthy Americans.
Why? Because tax cuts pay for themselves.
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I don't have a theory myself, but it's curious that he's targeting the tax cuts that just happen to fund entitlement programs like Social Security. Why would he want to undercut such important progressive programs?
And if these tax cuts are so wonderful, why doesn't he propose making them permanent instead of having this fight annually?
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