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CF&P Foundation Press Release

Center for Freedom and Prosperity Foundation

For Immediate Release
Wednesday, January 30, 2008
202-285-0244
www.freedomandprosperity.org

CF&P Foundation Releases Laffer Curve Video
Video Receives Praise from Art Laffer

(Washington, DC, Wednesday, January 30, 2008) - The Center for Freedom and Prosperity Foundation released a video today shedding light on one of the most controversial topics in tax policy. Entitled " The Laffer Curve, Part I: Understanding the Theory," the video is narrated by Cato Institute Senior Fellow Dan Mitchell, and it explains the relationship between tax rates, taxable income, and tax revenue. The mini-documentary from the CF&P Foundation notes that the Laffer Curve is real but also cautions that very few tax cuts generate more revenue. In the vast majority of cases, the video explains that lower tax rates generate revenue feedback, but not enough to make tax cuts self financing. 

"This video is a great common-sense tutorial that shows the real relationship between tax rates, taxable income, and tax revenue," stated the pioneer of the Laffer Curve, renowned economist Art Laffer.  "I hope it is widely viewed so that more people understand the need for pro-growth tax policy," added Laffer.

CF&P Foundation will soon release a second video on the Laffer Curve, which will review real-world evidence showing that lower tax rates generate substantial revenue feedback. This will be followed by a third video explaining how the current revenue-estimating system in Washington should be improved.

"Our educational series videos are designed to succinctly inform the viewer about important issues," said Andrew Quinlan president of the CF&P Foundation.  "We are very pleased with the feedback and we hope our future videos on key economic issues are even more successful."

This is the third installment in a series of educational videos designed for the "YouTube" audience and viral marketing, as part of a project to provide compelling free-market messages for a wider audience.

The first two CF&P Foundation educational videos were on the need to preserve tax competition and cutting the U.S.'s corporate tax rate (links below).

This new video can also be viewed on Google and the Capital Hill Broadcasting Network:

Excerpts from the Laffer Curve Video:

    This is the hotly debated notion that tax cuts - at least is some circumstances - generate additional revenue, and it is named for Art Laffer, an economist who was an advisor to Ronald Reagan.

    Let's look at this graph of the Laffer Curve. As you can see, we spared no expense to put it together. It's based on the simple - and presumably uncontroversial proposition that government won't collect any revenue if tax rates are zero. That's Point A. But neither will government collect any money when tax rates are 100 percent, which is Point C. After all, who's going to work if politicians seize every penny you make? Art then explained that there is a revenue-maximizing tax rate, which - just for the heck of it - we'll call Point B.

    Dr. Laffer explained that the top federal tax rate, which was 70 percent back in the 1970s, was so high that it discouraged the people in that tax bracket from engaging in productive behavior and it encouraged them to figure out ways of hiding income from the IRS. When tax rates got this high, Art explained, governments could lower the rates and actually collect more revenue since people would have more incentives to both earn additional income and to report that money to the IRS....

    There's pretty good evidence that tax collections from the rich rose when Reagan cut the top tax rate from 70 percent to 28 percent. There's also lots of data showing that reductions in capital gains tax rates have increased tax receipts, largely because taxpayers easily can avoid the levy by holding onto assets when the rate is too high, but they are willing to sell assets and pay a tax when the rate is reasonable.

    ... Second, the amount of revenue feedback varies depending on how you cut taxes. Supply-side tax cuts such as income tax rate reductions, capital gains tax rate reductions, and dividend tax rate reductions will generate Laffer Curve effects because they reduce the tax penalty on productive behavior. When people respond by working more, saving more, and investing more, the result is more taxable income. The actual level of revenue feedback depends on the situation, of course. ... Other tax cuts, though, such as expanded credits, deduction, and exemptions, are unlikely to have any significant impact on incentives to engage in productive behavior. ...

    Third, I definitely want to stress that Point B is not where we want to be on the Laffer Curve. The revenue-maximizing point may be here, but the growth maximizing point will be somewhere on the upward sloping section of the curve. ...

    To reiterate, government could collect more revenue by climbing the upward sloping portion of the curve and raising the tax rate closer to point B, but it would be a very costly step in terms of lost economic growth and lower pre-tax incomes for workers.

    Let's sum up what we've learned. We know there's a Laffer Curve. Heck, even John Maynard Keynes wrote that "a reduction of taxation will run a better chance than an increase of balancing the budget." But we also know that some people on both sides of the debate exaggerate. Yes, there are a few tax cuts that may pay for themselves, but the vast majority of tax cuts are not in that category. And it's also true that there are some tax cuts that generate zero revenue feedback, but those also are rare cases.

Link:  The Laffer Curve, Part I: Understanding the Theory
http://www.youtube.com/watch?v=fIqyCpCPrvU

For additional comments:
Andrew Quinlan can be reached at 202-285-0244, andy@freedomandprosperity.org
Dan Mitchell can be reached at 202-218-4615,
dmitchell@cato.org

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