Tax Cut Chicanery (4) Joe Biden’s Folly

An exhaustive interview of Vice President Joe Biden was recently  published in GQ.   Asked when the economy would finally turn around he answered:

I say we have turned it around, and here’s how we’re gonna create the jobs. We’re not gonna go back to those policies that in fact stripped you of your job. Look, the basic difference between us and Republicans is—and they’re good guys—they still genuinely believe this idea of the Laffer curve. That if you cut taxes—even though it hadn’t worked twice when they tried it—it’s gonna create jobs.

It’s Astounding that Biden saw fit to sneer at The Laffer curve, an economic theory more than validated by historical experience. Named for economist Arthur Laffer the curve demonstrates an obvious economic truism:

A higher tax rate does not necessarily produce more revenue to the government, and an lower rate does not necessarily produce less.

Changes in tax rates effect resulting tax revenue in two ways:

• The arithmetic effect is deceptively simple.  It predicts that a tax rate change will result in a revenue increase or decrease in direct proportion.
• The economic effect recognizes human nature and the motivational result of tax rate changes on work, saving, investment and risk taking, the activities that produce taxable income.

The Left-leaning political-media establishment generally disregards the economic effect, or gives it very little weight when they assert amazingly precise predictions as to revenue increases or decreases from given tax rate changes.  They ignore human nature, and assume everyone will produce the same amount of taxable income no matter how high the tax rate.  Thus their predictions virtually always turn out to be wrong.  But they are never held accountable for inaccurate projections of the past and their predictions of future tax revenue increases and decreases are always treated as absolutely factual and reliable.

In the current tax debate Obama and the Democrats insist that if the top income tax brackets remain at the “Bush rates” enacted in 2003, government will collect $70 Billion per year less than if rates go back up to where they were before the Bush tax cuts.  But as the chart shows this assertion contradicts historical reality.  Before the rates were lowered by the Bush tax cuts revenue from top bracket tax payers had declined for three years.  When the rates were reduced revenue increased each year until the mortgage meltdown and recession hit in 2008.

Obviously, it’s possible that the tax rate increases Obama demands would result in less taxable income in the top two brackets which, tragically, would also be symptomatic of less capital investment in business expansion, resulting in fewer jobs and thus, less revenue from tax payers in the middle class tax brackets.  Revenue from the rich could down and total revenue from all tax brackets could go down.

Biden simply could not be more wrong about the historical tests of the economic principle illustrated by the Laffer curve.  Since the income tax was enacted there have been four major tax-rate cuts:

• the Harding-Coolidge cuts of the mid-1920s;
• the Kennedy cuts of the mid-1960s;
• the Reagan cuts of the 1980s; and,
• the Bush cuts of 2003.

Each of these tax cuts resulted in business expansion, job creation, increased tax revenue to the government, and greater prosperity.

Biden says cutting taxes “didn’t work twice when they tried it.”  These two charts document the last two times “they” tried tax cuts, During the Reagan Administration and in 2003 during the Bush Administration when the rates now in effect were established.

Unfortunately the horrific recession, brought on by malfeasance at Fannie Mae, Freddie Mac, and some in the private mortgage industry, bought the era of prosperity following the Bush tax cuts to an abrupt end.  But the efficacy of the Laffer principle was proven over the four years before the mortgage meltdown began.