Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: DuckTapeSunroof who wrote (746917)	8/4/2006 10:22:00 AM
From: TimF	Read Replies (2) \| Respond to of 769670

The important thing then - when evaluating 'Laffer Curve effects' on proposed public policy - would be to know WHERE YOUR COUNTRY IS ON THE CURVE! You can't ever know precisely. The economy is too complex, you can't predict the future, and even if you could know where you are on the curve it would change. The number isn't static, its different in different places at different times. The Treasury Department 'dynamic analysis' (assumes the TRUTH of 'Laffer Curve' effects) The dynamic analysis is (or at least properly should be) mostly about extra economic growth caused by lower taxes. The Laffer curve is more of a short term effect. If taxes are 100% everyone will avoid them. Part of the avoidance is less economic activity, which would reduce growth, but the Laffer curve is not about growth over time. Your likely to almost immediately get more revenue if you cut taxes from 95% to 65%. Well almost immediately might be an exaggeration because it takes time for people to change their behavior, and also people might be skeptical that the lower tax rates will stay in effect but still its a relatively short term issue. If I understand it correctly the dynamic analysis is about extra economic growth in the short to mid term. Over a few years, perhaps since Bush's tax cuts took effect. That may well have gained back 10% of the revenue that was lost to lower rates. But growth compounds. Its not a one time effect. As the economic growth compounds eventually it can often produce more extra revenue than what was lost by lowering the rates. This effect is stronger if the rates are higher, and its stronger if you cut taxes on investment returns. In other words, they DO project SOME 'Laffer Curve benefits' from the tax cuts The Laffer curve benefits happen even if spending is not cut. People avoid and evade taxes to a lesser degree if rates are lower. However it could be argued that the long term growth effect of lower taxes is partially or in some cases even totally canceled if you just borrow the money instead. If you borrow the money you still take it out of the private sector, just as if you had taxed it. This "crowding out" counteracts much of the positive effects of lower taxes. However since investment decisions are distorted less by taxes when taxes are lower, they should be more efficient, and thus produce better overall returns and more growth so some of the extra growth should remain. But most of it might be gone. Apparently the treasure report calculated only a 0.04 % extra growth rate which is minuscule. Others might say its higher, but it does seem that much of the positive effect of lower taxes is countered by the negative effects of the borrowing. But only having a tiny fraction of the positive effects that we could have had is not the same as imposing negative effects. The negative effect of the borrowing and interest is already calculated in to the equation that winds up concluding there is a very slight positive effect. Cut spending as much as the taxes where cut and that positive effect should increase a lot. It might not be huge, but it should at least increase from "minuscule" to "moderate", and over the long term a moderate increase (say an extra .5% growth) means a lot. But unfortunately we are unlikely to get lower taxes over the longer term, and even more unlikely to get restraint in spending over the long term, so this possibility might not be very meaningful in the real world.