Don’t make me Laff(er curve)


Dear Donald – 

I watched Mick’s hearing today. There’s so much to discuss – the fact that he doesn’t think breaching the debt ceiling is a problem, the fact that he won’t even commit to trying to collect unpaid taxes, his own $15,000 in unpaid taxes, the Norquist pledge, and on and on. But we really should focus on one big issue here that undergirds his entire approach to Federal budgeting. Mick seems to fully and totally buy into the idea that cutting taxes actually increases revenue, not reduces it. The whole idea comes from a theoretical construct referred to as the Laffer Curve (so named because economist Arthur Laffer sketched it on a napkin for Ford administration officials Dick Cheney and Donald Rumsfeld during a meeting in the early ’70s – and what has ever gone wrong in a meeting with Cheney and Rumsfeld?). 

At the end of the day, the basic premise is simple. Imagine a graph in which we put the tax rate from 0% to 100% across the horizontal axis and total government revenues on the vertical axis. At a 0% tax rate, we know that the government wouldn’t bring in any revenues, so we know that’s a point in our graph. At 100%, the thinking goes, there is no incentive for people to work, so they won’t, and the government also gets no revenue. (There are questions about whether this is true or not, but let’s assume it is) Therefore we know that both 0% and 100% generate no revenue and tax rates in between generate varying amounts.  This means that there is some parabolic function (upside down u or w shape) that tracks revenues for each tax rate. 


If we knew exactly what this curve shape was, we could pinpoint the exact tax rate that would maximize government revenue. If we set a tax rate to the left of that point, increasing taxes increases revenue. If we are to the right of that point, increasing taxes reduces revenue. 

Unfortunately, we don’t know what this curve looks like, but Mick seems to think we’re to the right of that high point, meaning reducing taxes provides more incentive for folks to work and earn, and therefore generating new revenue. There’s a problem, though. There’s absolutely no evidence that that’s the case. In the 1950s, we had a highest marginal tax rate of 92% and revenues were strong. And every tax cut since then has failed to meaningfully increase revenues. After the Bush tax cuts, revenues plummeted, generating deficits that continue to this day. 

All signs would seem to point to the fact that we are firmly entrenched on the left side of the Laffer Curve. But Mick insists that reducing taxes will increase revenues. There’s a clear reason that this is important. If Mick wants to cut taxes, he’ll end up with less money to pay the bills. The only way to reconcile that with his hardline stance on deficits is to cut spending, which means vulnerable people and the programs on which they rely will suffer. He’s already argued for cutting Medicare and, when he was a State Senator, introduced an amendment declaring Medicaid and Social Security unconstitutional. Why let his misunderstanding of the basics of taxation and revenue give him the opening he’s looking for to do major damage to our social safety net?

Balancing a budget is a laudable goal. It’s something we should strive for (though it’s not always necessary or prudent – more on that in a later letter). But we must understand that budgets have (at least) two parts – revenues and spending. We can’t look at only one side of that equation, particularly when doing so benefits the wealthiest among us at the expense of the most vulnerable. 

We’re over here on the left, won’t you join us?

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