Center for Freedom and Prosperity Foundation
For Immediate Release
Tuesday, February 26, 2008
CF&P Foundation Releases Laffer
Curve Video, Part II: Reviewing the Evidence
(Washington, DC, Tuesday, February 26, 2008) The Center for Freedom and Prosperity Foundation released a video today
discussing the Laffer Curve. Entitled "The Laffer Curve, Part II: Reviewing the Evidence" the video is the second installment of a three-part
series on the Laffer Curve.
The Laffer Curve Part II video reviews the real-world evidence showing that changes in marginal tax rates can have a significant impact on taxable income, thus leading to substantial amounts of revenue
feedback. In a few cases, tax-rate reductions even "pay for themselves,'' though the key lesson is the more modest point that pro-growth changes in tax policy will have a positive impact on economic performance
and that good tax cuts therefore do not "cost" the government much in terms of foregone tax revenue.
"It is important for people to see historic evidence that lower tax rates boost economic performance and increase taxable income," said Andrew Quinlan president of the CF&P Foundation.
Part I was praised by renowned economist Art Laffer, the pioneer of the Laffer Curve
when he said, "I hope it is widely viewed so that more people understand the need for pro-growth tax policy,"
Part II was called "superb!" by Donald J. Boudreaux, Chairman of the Department of Economics at George
Mason University and blogger at the widely read Café Hayek.
"Stop the presses . . . the new Laffer Curve video is up on YouTube," said Lawrence Kudlow the host of CNBC's Kudlow & Company, nationally syndicated
columnist and a former Reagan economic advisor.
The CF&P Foundation's Laffer Curve Part II video is narrated by Cato Institute Senior Fellow Dan Mitchell.
The first installment of the three part video series (Part I) reviews theoretical relationship between tax rates, taxable income, and tax revenue. The last video to be released next month (Part III) discusses how the revenue-estimating process in Washington can 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."
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).
Link to Previous Tax Competition Video
Link to Previous Corporate Tax Video
This new video (Laffer Curve Part II) can also be viewed on Google and the Capital Hill Broadcasting Network:
Capital Hill Broadcasting Network
Link to ALL videos on CF&P Foundation's Web Page:
Excerpts from the Laffer Curve Video:
Now it's time to look at some of the evidence.
. . . Everyone's favorite bureaucracy, the IRS, publishes something called "The Statistics of Income." If we look at their numbers for 1980 and focus on the returns showing taxable income
above $200,000, we find nearly 117,000 rich people. These folks the ones hit by the 70 percent marginal tax rate reported more than $36 billion of taxable income that year and the IRS grabbed more than $19
billion of that amount.
So what happened in 1988, when the top tax rate had dropped to 28 percent? The IRS numbers are astounding. The number of rich people jumped to nearly 724,000 and they reported nearly $353 billion of
taxable income above $200,000. The government's slice of that pie was more than $99 billion, five times as much revenue as was collected when the top tax rate was 70 percent. You heard me right, the rich paid
five times as much tax when the tax rate was slashed.
. . . Let's look at a couple of other examples. Ireland used to have a 50 percent corporate tax rate. That corporate rate in 1985 collected tax revenues equal to 1.1 percent of GDP. By 2004, as the
chart shows, the tax rate was down to 12.5 percent and revenues were 3.6 percent of GDP. And what's really amazing is that GDP was more than three times bigger and that's after adjusting for inflation. So
Ireland's government is getting a much bigger slice of a much bigger pie even though the tax rate is much lower. Actually, what the Laffer Curve teaches us is that the government is getting a bigger slice
because the tax rate is lower.
Here's another example. Russia used to have a so-called progressive tax system with a top rate of 30 percent. This wasn't too surprising. After all, Karl Marx was one of the first advocates of
penalizing successful people with higher tax rates. But in a dramatic reform, Russia implemented a 13 percent flat tax in 2001. Did this result in less revenue? Definitely not! Receipts from the personal income
tax have skyrocketed, jumping from 174.5 billion rubles in 2000 to 930.4 billion rubles in 2006. The chart shows that inflation-adjusted personal income tax revenues have been growing by an average of nearly 19
But let's not get too excited. It's time, once again, for some more caveats. To help illustrate how the Laffer Curve works, I've picked extreme examples. These are a few of the rare instances where
tax rate reductions result in more revenue, what might be called a "Strong Laffer Curve Effect". But as we discussed in Part I, the vast majority of tax cuts don't give the government more money. Instead, the
revenue feedback is more modest, meaning that the growth in taxable income is not enough to compensate for the effect of the lower tax rate. We'll call this more likely result a "Weak Laffer Curve Effect." And
in a few cases, where tax cuts aren't designed to improve incentives to earn taxable income, there is no revenue feedback at all.
. . . One of the most classic and tragic examples of the Laffer Curve, however, had nothing to do with income tax rates. In 1990, as part of President Bush's surrender of his
read-my-lips-no-new-taxes promise, he agreed to a so-called luxury tax on yacht purchases. This punitive tax supposedly was going to make rich people pay more money, but guess what happened. They bought fewer
boats, or at least they bought fewer boats in the United States, so the government collected less money than projected. But that's just the beginning of the story. Lots of boatyards lost business, so they
generated less income for the government to tax. And a lot of middle-class workers in those boatyards lost their jobs, meaning not only that they had less income to tax, but also that some of them started
relying on government handouts, so it was a lose-lose situation for the budget. Disentangling all these different effects is not easy, but it's quite likely that the luxury tax was a net revenue-loser for the
government a reverse case of the "Strong Laffer Curve Effect."
For additional comments:
Andrew Quinlan can be reached at 202-285-0244, firstname.lastname@example.org
Dan Mitchell can be reached at 202-218-4615, email@example.com
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