Who's Laffing now?

"Tax cuts pay for themselves." A single statement that sounds too good to be true. Well, it is too good to be true. Tax cuts, against the appeal, fail to increase revenue and stimulate the growth and sustainability of an economy. The Laffer Curve is an ingenious model showing that the rate of taxation doesn't necessarily increase tax revenue. What this means is that there's a certain point (the apex of the curve) where tax rate and tax revenue are at a happy max - any further increase lowers revenue. Note that this is government revenue and actually is under fixed assumptions, don't be mislead by supporters of the curve, all economic models are under some fixed assumptions whether it be ceteris paribus, full-employment, etc. Laffer Curve is often under the assumption that there is a full employment of resources, and does not take into account inflation or income gaps.  

The Laffer Curve is often used to support tax cuts, citing "When we have lower taxes, people keep their money and we starve the beast," completely ignoring the assumptions under which the curve is based. I know many people love tax cuts. For the general public, more money is always nice. For the nation as a whole, tax cuts aren't the best thing. Edward Lazear, the latter Chairman of the Council of Economic Advisers under Bush 43 was one of the people who said that tax cuts do not pay for themselves. He was of course, talking about long-term effects. In the short run, tax cuts can help, as evidenced by that short respite we had in 2003. Economists were screaming "calm before the storm," and nobody listened, was it complacency? Mayhaps. N. Gregory Mankiw, the man who preceded Lazear had once compared an economist who says that tax cuts pay for themselves to a “snake oil salesman trying to sell a miracle cure." (Edward Lazear, testimony before the Joint Economic Committee, June 27, 2006; N. Gregory Mankiw, Principles of Economics (Fort Worth: Dryden Press, 1998), pp. 29-30.) Peter Orszag concluded that the 2001 and 2003 tax cuts are “likely to reduce, not increase, national income in the long term” because of their effect in swelling the deficit. (William Gale and Peter Orszag, “Bush Administration Tax Policy: Effects on Long-Term Growth,” Tax Notes, October 18, 2004.) Bush Treasury Department’s own “dynamic” analysis of the cost of the 2001 and 2003 tax cuts estimated that they would generate only enough economic growth to cover less than 10 percent of their long-term costs. The report is here and really only tries to fluff up the policies - it is very very very important to note that the long-term effects can only be determined under best-case scenarios. That is, the models and projective benefits are under a set of assumptions. All of which are to be ignored in the current economic situation.  

I am in no way saying that I want an 93% tax rate or something insane. We all work for our money, bring home the bacon, the phrases go on and on. In relation to public policy and economic stimulus/sustenance, we should be focusing on investing revenue and getting returns - nobody ever pulls money out of a stock that has potential of a return simply because "more money in my pocket." The point of investment, by the government or by an individual is to gain long term benefits. Short-term investing might get you a grand next month, but keeping long-term, sustainable investments and playing it smart gets you a lot more when you need it - in your future. The benefits-to-cost ratio of a long-term investment dwarf those of a short term fix. Keynes is rolling in his grave and Laffer's laughing.  

A personal comment: It's sad to see how we're still debating tax cuts when we should be looking at growth. Rather than a $150 billion dollar tax cut, we should have a $150 billion investment in public works and/or toss that into infrastructure spending seeing as though currently the stimulus bill only has about 11-12% of its money going towards infrastructure spending. That's tiny, and really hinders job growth in all sectors, not to mention, pushes the United States back in terms of efficiency. Members of the GOP have also called for an additional $150 (depending on where you read the info from - different news outlets are reporting varied numbers, probably averages to begin with anyhow) in tax cuts to be added to the bill. Giving an additional 18% of the total bill to tax cuts, claiming that direct financing of infrastructure would not provide jobs nor would give the "middle-class" any benefit - as though renovations aren't needed, that steam pipe bursting in Midtown in July 07 is no sign, nor the water main break in Maryland in December that we could sure use some renovations. Those won't give us "jobs." People don't need to be employed in order to fix things! <- Sarcasm.