Friday, June 11, 2010

John Boehner and the Laugher Curve

John Boehner has dusted off some Laugher Curve nonsense:

“You equate the idea of lowering marginal tax rates with less revenue for the federal government,” Boehner cautioned. “We've seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment, and more people paying taxes. And if you look at the revenue growth over those 30 years, you've got a prime example of what we've been talking about.”

Michael Ettlinger and John Irons debunked this nonsense about a year and a half ago. I’d like to simply pick up on this statement:

Economic growth as measured by real U.S. gross domestic product was stronger following the tax increases of 1993 than in the two supply-side eras. Over the seven-year periods after each legislative action, average annual growth was 3.9 percent following 1993, 3.5 percent following 1981, and 2.5 percent following 2001.

Part of the Reagan 3.5% per year average increase had to do with the fact that he inherited an economy below full employment. If you take out the Keynesian effect of returning to full employment – which was mainly from a reversal of tight Federal Reserve policy – average long-term growth during the Reagan years was closer to 3%. For the period from the end of World War II to around 1980 (just before the Reagan tax shift) average growth over this extended period was 3.5% per year. Why? Well in part because national savings as a share of income was higher before the 1981 tax cut than afterwards.

Maybe a reporter should ask the Congressman – how does fiscal irresponsibility and a lower national savings rate lead to more long-term growth rather than less?


Jazzbumpa said...

The best GDP growth of the post WWII era came under Kennedy-Johnson, averaging almost 5%. Clinton was next at about 3.7. Reagan's numbers were inflated by running a huge deficit.

Growth under both Bushs was awful.

Every post WWII Repug pres has achieved below average GDP growth. Every one of them. (long avg is about 3.7%.)

GDP growth has been declining, more or less steadily, since the Nixon administration. Republicans are ruining the U.S. economy. Everything in that Boner quote is just flat-ass wrong. He is just spouting supply-side, party line Reagan mythology.

We are so screwed.

TheTrucker said...

Your last sentence says it all, Jazzbumpa. The people that elect and re-elect the government are totally ignorant of economics and historical facts of data. And the Republicans will constantly distort, lie, and sew seeds of distrust in government and science. I think the few very crisp and repeated "FACTS" of history such as those on which PGL has focused are essential to any hope at all in arriving at constructive policy.

devin said...

Have you guys seen (I have no financial interest in it, btw) It's a great place to make exactly the point being made here. Enter any two years in US history and it will give you the average GDP growth (or any of a number of other stats) over that time period. Just because I'm a nerd, I did every presidential term since Lincoln. Reagan ranks 9 out of 27 in per capita GDP growth and 11 out of 27 in national GDP growth. Not bad, but hardly the legendary performance his admirers credit him with. JFK, FDR, Clinton, etc. all do better. FDR, who raised taxes as high as 94%, blows every other president away in terms of GDP growth. In fact, I find the most interesting comparison to be comparing periods with maximum tax rates above and below 50% (or any other threshold between 35 and 65%). You'll find that the economy on average has performed far better when maximum rates were above 50% than below. Naturally, that in itself is not sufficient reason to raise taxes...but it's more than sufficient to prove the argument we can raise taxes without hurting the economy is nonsense.

Just a useful site for obtaining hard numbers when refuting ridiculous arguments like Boehner's. Not that people drinking that kool-aid care one bit about actual facts and numbers...

devin said...

first paragraph, last sentence, should say, "prove the argument we CAN'T raise taxes without hurting the economy is nonsense."

TheTrucker said...

Thanks for the correction, devin. I assumed that was what you meant. As a matter of historical fact, there has never been an increase in the progressive nature of the tax system (an increase of tax rates on extreme incomes) that caused a reduction in economic growth. It is argued by the extreme "right" that the increase of taxes on the rich in 1936 caused the 37-38 recession. But it was the simultaneous tightening of the Fed and the cuts to federal spending that were causal. This interpretation is well supported by the fact that as soon as the Fed let up and the government spent again the recovery continued. The tax rates WERE NOT RESCINDED and were actually increased again in 1938.

Anonymous said...

Real GDP per capita from 1980-1988 is nearly identical to 1992-2000, even with the depth of the 81-82 recession taken into account.

To claim that Clinton tax hikes were an economic positive that aided growth is disingenuous -- GDP per capita was relatively weak from 1993-1996 and only accelerated AFTER telecom deregulation and the cut in the capital gains tax (the surplus gov't revenues arose largely from capital gains revenue and nonqualified stock options during the 1997-2000 internet boom). Suffice to say that telco deregulation and capital gains tax cuts are policies that would be wholly endorsed by any serious supply-side economist.

Anonymous said...

Kennedy-Johnson era was also aided by a 30 percent across the board tax cut, which correlates nicely with the acceleration of growth that ends with Johnson's surtax and Nixon's cap gains hike. After growing modestly during the 1950's, real GDP per capita accelerates from 1964-1968, before slumping from 1968 onward.

The Kennedy tax cuts also lowered capital gains rates for the majority of taxpayers despite the fact that the maximum cap gains rate of 25 percent remained in place (established in 1942). Only taxpayers with incomes of $44,000 (inflation adjusted over $300,000 in current dollars) would have had to pay the maximum rate).

Anonymous said...

The whole point of raising tax rates is to increase the amount of revenue the government receives from each dollar of income. By this measure, raising the highest marginal tax rates fails to increase revenues.

When Hoover and FDR raised marginal income tax rates beginning in 1932, income tax revenues were actually less than those cllected during the mid to late 1920's (maximum rate 25 percent). From 1933 to 1939, the majority of federal revenues came from non-income tax sources -- for the late 1920's income taxes provided more than half of federal revenue. This is despite the fact that the total number of individual tax returns increased from 1932 onward.

By 1936, there were 2.86 million individual returns yielding only 14.2 billion revenue -- less than the 17.3 billion collected from 2.5 million returns in 1925. This is despite the fact that real GDP in 1936 was 8% higher than in 1925. In 1937, an additional 500,000 individual taxpayers were added to the tax rolls and collections still totalled only 15.2 billion from 3.3 million individual returns.

History proves over and over that the government's primary effective tool for increasing revenue per unit of GDP is not increasing the highest marginal rates, but instead increasing the number of taxpayers. This is what the evidence show for WWI tax hikes, 1930's tax hikes, WWII tax hikes. Taxable incomes of the rich declined during each of these periods while the total number of taxable returns increased sharply. The evidence works in the other direction as it is widely known that individual income tax revenues as a percentage of GDP are roughly the same today as they were during the postwar 1950's, despite the absence of high marginal rates.