January 26, 2008 by Tom Armstrong.

Tax humor from The Tax Foundation:

“Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?”
            —Peg Bracken

“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
           — Jean Baptiste Colbert, Minister of Finance under King Louis XIV of France

“A fine is a tax for doing something wrong. A tax is a fine for doing something right.”
            —Author unknown 

“Nuclear physics is much easier than tax law. It’s rational and always works the same way.”
            —Jerold Rochwald 

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January 26, 2008 by Tom Armstrong.

Mark Perry tells us:

1. The Kennedy-Johnson tax cut reduced the top rate from 91% in 1963 to 70% in 1965, and the share of personal income tax paid by these earners rose from 16% to 18%.

2. The Reagan tax rates in the 1980s lowered the top rate from 70% to 50% and then to 30%, and the share of taxes paid by these earners rose from 14% to 22% of the total.

3. In 1997, the tax rate on income from capital gains was cut from 28% to 20%, and this rate reduction was accompanied by a substantial increase in revenues collected from capital gains taxes and personal income taxes collected from high-income taxpayers. In fact, capital gain taxes roughly doubled from $66 billion in 1996 (the last year before the tax cut) to $129 billion in 2000, when these earners paid 31% of all taxes collected.

Mark also says:

During the 1920s, The Revenue Acts of 1921, 1924, and 1926 reduced the top marginal income tax rate from 73% to 25% (see top chart, blue line). Did the drastic cut in tax rates cause tax revenues to fall? No, just the opposite. Personal income tax revenues increased substantially during the 1920s, rising from $719 million in 1921 to $1.16 billion in 1928 (see top chart, red line), an increase of more than 61% (this was a period of no inflation).

The share of the tax burden borne by the rich rose dramatically. As seen in the bottom chart above, taxes paid by the rich (those making $50,000 and up in those days) climbed from 44.2% of the total tax burden in 1921 to 78.4% in 1928.

Furthermore:

In 1980, the highest marginal tax rate was 70% and by 1988 the highest rate was cut to only 28%. The chart above shows what happened during that decade, exactly as predicted by the Laffer curve:

1. In constant dollars, the total tax revenue collected from the top 1% of taxpayers increased by 50%, from $58 billion in 1980 to to $87 billion in 1990.

2. On a per return basis, the average taxpayer in the top 1% paid 23% more taxes in 1990 compared to 1980 (inflation-adjusted real dollars).

Bottom Line: As the Laffer Curve predicts, significant cuts in the highest marginal tax rates during the 1980s caused both: a) total tax revenue collected (in real dollars) from the top 1% to increase, and b) the tax collected per return (in real dollars) for the top 1% to increase.

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January 26, 2008 by Tom Armstrong.

Chris Edwards says the president’s $100 billion plus stimulus package will just result in inflation. More money chasing the same quantity of goods will tend to produce inflation, but Chris assumes no slope in his aggregate supply curve. Aggregate supply in the short term may not alter much in our current situation, but his assumption of no aggregate supply change appears unreasonable. Read why he believes there will be no change in aggregate supply.

Update: I wrote the above before I went to take my exercise. While at the gym, I thought a little more about the above (I’ll admit it’s a little weird to ponder aggregate supply curves while doing heavy, unspotted squats–I forgot my iPod.) I just got back, so I’ll provide my take on Chris’s argument. He believes the short-term aggregate supply curve will be perfectly vertical in his example; I believe it will have a slight slope, so 100% of the “stimulus” would not result in inflation (assuming the checks represent additional spending, instead of being saved).

First, forget the standard models you’ll see in a Samuelson or Varian economics textbook,  and let’s focus on the practical.

Chris uses the cigarette industry, so I’ll stick with that. He says: A U.S. cigarette producer may notice a slight uptick in sales in those months as smokers spend their government checks. But cigarette producers probably watch the news and they will know that this is just a temporary blip. As such, they won’t add any new workers or buy any new machines.

I bolded what I believe to be his mistake. He assumes the cigarette companies are all operating at 100% capacity and will need to make additional investment to satisfy additional demand. I doubt the industry is at 100% capacity. It seems more likely that the industry has some excess capacity, and cigarette makers would choose to produce more cigarettes instead of charging higher prices–at least as much as they possibly could. Why? Cigarette makers have competitors, and they know hiking prices can result in loss of market share to other cigarette producers or producers of substitute products (Nicorette Gum). Supply will adjust somewhat, not just prices.

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