What Is the Revenue-Maximizing Tax Rate?

By Bruce Bartlett

Bruce Bartlett is a former Treasury deputy assistant secretary for economic policy. His new book, The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take, has been published by Simon & Schuster.

In this article, Bartlett explains that President Obama’s endorsement of the “Buffett rule” to raise taxes on those with high incomes and Republican efforts to require dynamic scoring for tax bills will lead to a debate on what tax rate maximizes federal revenues. This is an issue that has been debated since the 1970s. Recent academic research shows that the top U.S. rate could rise substantially from its current level of 35 percent before the increase would have such disincentive effects that revenues would start to fall.

Bruce Bartlett (Goodman/Van Riper)

Bruce Bartlett (Goodman/Van Riper)

With the economy recovering and increasing attention being paid to the budget deficit, Republicans are finding it harder and harder to gain political traction on tax cuts. Although they continue to maintain that spending can easily be cut enough to finance even a big tax cut, they are quietly preparing an alternative strategy. They are moving to force the Joint Committee on Taxation and the Congressional Budget Office to adopt dynamic scoring, which would incorporate macroeconomic growth effects into revenue estimates. Republicans have long believed that incorporating those effects would greatly reduce the budgetary cost of tax cuts and make them easier to enact.1

Dynamic scoring got started with the so-called Laffer curve, supposedly drawn on a napkin in 1974 by University of Chicago business Professor Arthur Laffer for Donald Rumsfeld and Dick Cheney, both members of President Ford’s staff.2 The curve was popularized by Wall Street Journal editorial writer Jude Wanniski, who first described it in a 1975 article.3 He went on to develop it at greater length in his 1979 book, The Way the World Works.

At its core, the Laffer curve is unobjectionable. It shows simply that neither a 0 percent tax rate nor a 100 percent tax rate raises revenue; somewhere in between is a rate that maximizes revenue. The trick is to empirically estimate the revenue-maximizing rate based on the existing tax regime and economic conditions. It turns out that even supply-side economists have seldom found examples of tax rates that were so high that a rate cut would increase revenue.

In the 1970s Harvard economist Martin Feldstein and others argued that a cut in the capital gains rate would raise net revenue. However, that was mainly a short-term unlocking effect. A Treasury Department study later concluded that the cuts in the capital gains rate in 1978 and 1981 reduced long-term capital gains revenue and did not materially increase economic growth.4

When asked about the impact on revenues of an across-the-board rate cut, as proposed in the 1978 Kemp-Roth bill and later by President Reagan, Laffer declined to estimate whether that would raise revenue even though tax rates were substantially higher than they are now, with a top rate of 70 percent. The most Laffer would say was that the Kemp-Roth tax cut would self-finance by reducing spending for things like unemployment compensation as economic growth increased, raising private saving, reducing the value of tax shelters, and creating higher revenues at state and local levels.5

In 1978 economists Norman Ture and Michael Evans incorporated supply-side economics into their detailed revenue forecasts, and both concluded that the Kemp-Roth bill would never pay for itself. Ture estimated substantial revenues losses, net of feedback, even 10 years after enactment, when revenues would still be $53 billion (in 1977 dollars) below baseline.6 Evans’s figures were very similar, showing a $61 billion deficit increase in 1987.7

Contrary to popular belief, the Reagan administration never incorporated Laffer curve effects into its revenue estimates for the 1981 tax cut. All published estimates conformed to standard Treasury revenue-estimating methods and were almost identical to independent estimates done by the CBO.8

Treasury tried to empirically estimate the Laffer curve in 1984. It concluded that most tax cuts lose revenue. Rate cuts for those in the top bracket had the potential to raise revenue, but only in the long term. In the short term, revenues would fall. As Treasury explained:


    • Discussions of the Laffer Curve often presume that there is a single aggregate tax rate elasticity that applies to a nation. Thus they argue over whether a tax cut will increase or decrease revenues. In reality there is not a single tax rate and tax elasticity. Rather, there is a series of tax rates and elasticities that pertain to different income classes. Our estimates suggest that the income tax base is not very responsive to tax rate changes in the income categories occupied by most Americans. In this sense, they are highly consistent with estimates by other researchers indicating that aggregate tax elasticity is quite small.


In 1985 economist Lawrence Lindsey attempted to compute the revenue-maximizing tax rate. Given the 1982 tax structure, which had a top rate of 50 percent, Lindsey concluded that reducing the top rate to 43 percent would raise revenue, but that reducing any other rates would lose revenue.10

Not much was heard about the revenue-maximizing top rate for some years because tax reductions were the order of the day. But as the need to raise revenue — and perhaps legislate increases in the top tax rate, for both revenue and distributional reasons — has become pressing, there is once again interest in the subject.

An important contribution to the discussion happened in 2009. N. Gregory Mankiw, chair of the Council of Economic Advisers under George W. Bush and widely considered to be among the most conservative U.S. economists, coauthored a paper that explored optimal tax theory and concluded that the optimal marginal tax rate is between 48 and 50 percent.11

Also in 2009, economists Mathias Trabandt and Harald Uhlig examined revenue-optimizing tax rates for the United States and Europe. They found that the United States is well below the revenue-maximizing top rate of 63 percent, that taxes on labor could be increased by 30 percent before labor supply dropped enough to reduce revenues from further increases, and that taxes on capital could be increased by 6 percent.12

A 2010 paper by economists Anthony Atkinson and Andrew Leigh looked at five different Anglo-Saxon countries and found similar tax elasticities among high-income taxpayers. They concluded that the revenue-maximizing top rate is at least 63 percent and may be as high as 83 percent.13

Most recently, economists Peter Diamond and Emmanuel Saez concluded in a 2011 paper that the revenue-maximizing top tax rate is 73 percent — well above the current top rate of 42.5 percent.14

Informal surveys of top economists confirm that the top tax rate could increase substantially before the Laffer effect caused revenues to decline. One survey was taken by The Washington Post in 2010 and quoted University of Michigan economist Joel Slemrod as suggesting that the revenue-maximizing top rate is at least 60 percent:


    • The idea that we are on the wrong side [of the Laffer curve] has almost no support among academics who have looked at this. Evidence doesn’t suggest we’re anywhere near the other end of the Laffer Curve.


University of California, Berkeley, economist Brad DeLong and Dean Baker of the Center for Economic and Policy Research have said that the revenue-maximizing top rate is about 70 percent. Even conservative economic journalists Larry Kudlow of CNBC and Stephen Moore of the Wall Street Journal editorial page said that revenues would rise until the top rate hit at least 50 percent.16

    Revenue Loss From Tax Cuts for the Top 1 Percent of Taxpayers Since 1986
                             (billions of dollars)

                                                 1986 Revenues
           Actual Effective                      Effective
 Year      Rate (percent)    Actual Revenues     Rate of 33.1%      Difference

 1987           26.4              $91.6              $114.8           $23.2
 1988           24.0             $113.8              $156.9           $43.1
 1989           23.3             $109.2              $155.1           $45.9
 1990           23.2             $112.3              $160.1           $47.8
 1991           24.4             $111.3              $151.3           $40.0
 1992           25.0             $131.2              $173.5           $42.3
 1993           28.0             $145.8              $172.5           $26.7
 1994           28.2             $154.3              $181.1           $26.8
 1995           28.7             $178.0              $205.3           $27.3
 1996           28.9             $212.6              $244.0           $31.4
 1997           27.6             $241.2              $289.2           $48.0
 1998           27.1             $274.0              $334.4           $60.4
 1999           27.5             $317.4              $381.9           $64.5
 2000           27.4             $366.9              $442.9           $76.0
 2001           27.5             $300.9              $362.5           $61.6
 2002           27.2             $268.6              $326.6           $58.0
 2003           24.3             $256.3              $349.4           $93.1
 2004           23.5             $306.9              $432.8          $125.9
 2005           23.1             $368.1              $527.3          $159.2
 2006           22.8             $408.4              $593.7          $185.3
 2007           22.4             $450.9              $665.3          $214.4
 2008           23.3             $392.1              $558.4          $166.3
 2009           24.0             $318.0              $438.8          $120.8

 Total                         $5,629.8            $7,417.8        $1,788.0

 Source: Author's calculations based on IRS data.

I’m not sure how much we could raise the top rate before it would become counterproductive in terms of revenue. But I think it is revealing that as recently as 1986, during the Reagan administration, those in the top 1 percent of taxpayers, ranked by adjusted gross income, had an effective federal income tax rate of 33.1 percent when the top marginal rate was 50 percent. Their effective rate has been significantly lower every year since. Had they simply kept paying the same effective rate, the federal government would have reaped $1.8 trillion in aggregate additional revenue between 1987 and 2009, not counting interest.

Of course, it goes without saying that the optimal tax rate in terms of revenue is not necessarily the one that maximizes growth or is socially optimal. Personally, I would prefer not to have a top income tax rate exceeding 50 percent, because it is important psychologically and morally that people not be forced to give more than half of their income to the federal government. However, given the magnitude of our nation’s fiscal problem, a rate higher than that may be inevitable unless the United States adopts a VAT, carbon tax, or other broad-based tax to supplement existing revenue sources.


1 On February 2 the House passed H.R. 3582, the Pro-Growth Budgeting Act of 2012, Doc 2012-15552012 TNT 17-22, which would force the JCT and CBO to do a dynamic score for major tax bills, but not for appropriations bills.

2 Arthur Laffer, “The Laffer Curve: Past, Present, and Future,” Heritage Foundation Report No. 1765 (June 1, 2004).

3 Jude Wanniski, “The Mundell-Laffer Hypothesis — A New View of the World Economy,” The Public Interest (Spring 1975), at 49-50.

4 Treasury report to Congress on the capital gains tax reductions of 1978 (1985).

5 Bruce Bartlett, The New American Economy 113 (2009).

6 House Ways and Means Committee, “Tax Reductions: Economists’ Comments on H.R. 8333 and S. 1860 (The Kemp-Roth Bills)” (1978), at 96.

7 House and Senate Budget committees, “Leading Economist’s Views of Kemp-Roth” (1978), at 76.

8 Bartlett, “The 1981 Tax Cut After 30 Years: What Happened to Revenues?” Tax Notes, Aug. 8, 2011, p. 627, Doc 2011-167662011 TNT 152-7.

9 James Gwartney and James Long, “Income Tax Avoidance and an Empirical Estimation of the Laffer Curve,” Treasury’s Office of Economic Policy (July 1984), at 22.

10 Lawrence Lindsey, “Estimating the Revenue Maximizing Top Personal Tax Rate,” National Bureau of Economic Research Working Paper No. 1761 (Oct. 1985), at 18.

11 N. Gregory Mankiw et al., “Optimal Taxation in Theory and Practice,” 23 J. of Econ. Persp. 147, 158 (Fall 2009).

12 Mathias Trabandt and Harald Uhlig, “How Far Are We From the Slippery Slope? The Laffer Curve Revisited,” NBER Working Paper No. 15343 (Sept. 2009).

13 A.B. Atkinson and Andrew Leigh, “The Distribution of Top Incomes in Five Anglo-Saxon Countries Over the Twentieth Century,” Institute for the Study of Labor (IZA) Working Paper No. 4937 (May 2010), at 29.

14 Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” 25 J. of Econ. Persp. 165, 171 (Fall 2011).

15 Dylan Matthews, “Where Does the Laffer Curve Bend?” The Washington Post, Aug. 9, 2010.

16 Id.

Reagan’s Supply-Side Warriors Blaze a Comeback Under Trump

Like perms, Members Only jackets and Duran Duran, their economic theories were big in the go-go 1980s. Now they’re back.

On a Tuesday evening earlier this month, several dozen Washingtonians gathered in a ballroom at the Trump International Hotel, ostensibly to enjoy an open bar and watch a new PBS documentary about money. In reality, the event also served as a rally for a small clique whose fierce devotion to supply-side economics made them influential figures in the 1980s, and has won them renewed clout and access under President Donald Trump.

Invitations listed the hosts as Stephen Moore, a habitué of conservative think tanks, and Art Laffer, the supply-side economist, who did not end up attending. Larry Kudlow, the director of Trump’s National Economic Council and one of the president’s closest advisers, showed up in a pinstriped suit. “Larry Kudlow is my best friend in the world,” gushed Moore in opening remarks, noting that Laffer and Kudlow served as co-best men at his wedding to his second wife, Anne, who sat in the front row. Taking the floor next, Kudlow gazed out at the room and offered a shoutout to Adele Malpass, a RealClearPolitics reporter and former chairwoman of the Manhattan Republican Party, whose husband, David, has just taken over as president of the World Bank on Trump’s say-so.

Those decades of free-market machinations are now paying off, as a quintet of Ronald Reagan administration alumni — Kudlow, Laffer, Forbes, Moore and David Malpass—united by undying affection for each other and for laissez-faire economics, have the run of Washington once more. Members of the tight-knit group have shaped Trump’s signature tax cut, helped install each other in posts with vast influence over the global economy, and are working to channel Trump’s mercantilist instincts into pro-trade policies. Blasted by their critics as charlatans and lauded by their acolytes as tireless champions of prosperity, there’s no denying that the quintet has had an enduring impact on decades of economic policy.

Most recently, in late March, and partly at Kudlow’s urging, Trump announced his intention to nominate Moore to one of two open seats on the Federal Reserve Board of Governors, the body that sets the tempo of the global financial system.

The announcement prompted protests from economists across the ideological spectrumGeorge W. Bush’s top economist, Harvard’s Gregory Mankiw, said Moore lacked the “intellectual gravitas” for the job—who warned that appointing Moore, a think-tanker with no Ph.D., would politicize the Fed. Soon, it emerged that Moore had made a mistake on a 2014 tax return that led the IRS to place a disputed $75,000 lien against him, and CNN dug up scathing comments Moore had made about Trump during the presidential primary.

Whether Moore can survive the scrutiny and pass muster with the Senate will be a test of the supply-siders’ renewed cachet. They believe they can pull it off.

“I understand there are imperfections,” Kudlow told POLITICO. “I think it can be worked out.”

Moore described some of his recent conversations with Trump, which often turn to Fed Chairman Jerome Powell.

“I think his criticism of Powell is excessive and could be counterproductive,” Moore said, because it could actually provoke Powell to prove his independence by defying Trump’s wishes. Generally speaking, Trump wants Powell to keep interest rates low to decrease the chances of any economic slump before the president faces voters again next November.

Moore also recounted how he and Laffer, who began advising Trump in 2016, helped place Kudlow in his current posting.

Roughly a year into Trump’s term, as Trump’s first NEC director, Gary Cohn, prepared to depart the post, the duo sprang into action. Moore said that during this period, whenever he and Laffer engaged in their semiregular consultations with Trump, they would have some version of the following exchange:

“You know, Mr. President, you’re missing one thing,” Laffer or Moore would say.

“What is that?” Trump would ask.

“Larry Kudlow,” Laffer or Moore would tell him.

We just drilled the message over and over,” Moore recalled. “‘Larry, Larry, Larry, Larry.’”

At the same time, Moore said, the pair worked the press. “We made a concerted effort to make it seem like a fait accompli that Larry would get the job.”

That included knifing a few of Kudlow’s rivals. “We had a campaign to say ‘this person’s completely unqualified,’” he said, though he declined to name their targets. “I think we took them down,” he added.

It proves that in Washington, appearance is reality, sometimes,” Moore continued. “So that was highly effective.

During that same period, following the 1974 midterms, Laffer first drewhis famous Laffer Curve — a representation of the idea that at a certain level of taxation, lowering taxes would theoretically spur enough growth that government revenue would actually rise—at a meeting near the White House with Wanniski, Dick Cheney, then an aide to President Gerald Ford, and Grace-Marie Arnett, another free marketeer active in Republican politics.

Reagan would go on to fully embrace supply-side theory, a shift from the party’s traditional emphasis on fiscal discipline, appointing Laffer to his Economic Policy Advisory Board.

Then as now, supply-side economics was criticized for favoring the rich and derided by critics as unrealistic “Voodoo Economics.” The critics got an early boost from a 1981 Atlantic cover story in which Reagan’s budget director, David Stockman, aired his doubts that this novel theory was working in practice.

The piece ruined Stockman’s standing with Reagan—Laffer calls him “the traitor of all traitors”—but Stockman’s young aide, Kudlow, now 71, remained a loyal supply-sider and struck up a relationship with Laffer.

Reagan would go on to appoint Forbes as the head of the Board of International Broadcasting, which oversaw Radio Liberty and Radio Free Europe, and Moore worked as the research director for Reagan’s privatization commission. Malpass, meanwhile, worked in Reagan’s Treasury department. Representatives for Forbes and Malpass said they were not available for interviews.

In the 1988 presidential primary, another supply-sider, the late New York congressman Jack Kemp, lost out to George H.W. Bush, curtailing the crew’s influence within the party.

But they stuck together. Moore, now 59, first became close with Laffer and Kudlow in 1991, after he recruited them to participate in an event celebrating the 10-year anniversary of Reagan’s first tax cuts for the libertarian Cato Institute.

In 1993, Kudlow and Forbes teamed up to craft a tax cut plan for New Jersey gubernatorial candidate Christine Todd Whitman, who went on to unseat incumbent Democrat James Florio.

Meanwhile, Kudlow hired Malpass to work for him at Bear Stearns, where he had been flying high as the investment bank’s chief economist.

The next year, Kudlow crashed to earth—he left the bank and entered rehab for alcohol and cocaine addiction. Laffer stuck by Kudlow, hiring the investment banker to work for his consulting firm in California when he emerged.

In 1996, Forbes, backed by Moore, entered the Republican primary and lost out to Bob Dole, but the group takes credit for getting Kemp picked for the bottom half of that year’s ticket, which lost to incumbent Bill Clinton.

At some point, Forbes, Kudlow, Moore and Laffer became inseparable in the eyes of their peers.

You could call them the Four Musketeers of the supply-side movement,” said Avik Roy, an editor at Forbes involved in some of the group’s advocacy. Or you could call them the “the supply-side Beatles,” as Moore does—or “the four amigos,” as anti-tax crusader Grover Norquist does. “There’s a fourness to them,” observed Jack Fowler, vice president of the conservative National Review.

Malpass, 63, who has maintained a lower public profile over the years, qualifies as something of a fifth musketeer.

“They’re a little rat pack. There’s no doubt about that,” said one New York financial world player who keeps in touch with the group. “They’re all pretty straight guys. They’re not criminals. They don’t do anything weird, outwardly. You know what I’m saying? They like talking about supply-side economics. They get hard talking about tax cuts.”

Whatever you call them, there’s no denying their impact on American society. The group has argued that the best way to manage the economy is to make life easier for the producers of goods and services—by limiting taxes and regulations—so that producers are incentivized to supply more of these goods and services to the market, and that taming deficits is less important than spurring growth.

Before Reagan took office and empowered the supply-siders, the top marginal federal income tax rate in the U.S. had remained somewhere north of 60 percent since the Great Depression. Under their influence, Reagan briefly pushed the top rate below 30 percent, and it has not returned to anything near the pre-Reagan status quo since then.

Before Reagan, the national debt-to-GDP ratio had been declining since World War II, thanks in large part to the old Republican school of fiscal discipline. Since Reagan, the debt ratio has been climbing back toward its wartime peak. Trade and migration barriers have also come down. American society has become both wealthier in real GPD terms and more unequal. These trends have persisted thanks to a post-Cold War, bipartisan free market consensus, and to the bipartisan Keynesian response to the last financial crisis—but it was the supply-siders who really got the party started.

And they have not stopped partying since. Members of the group have continued to actively socialize with each other over the decades, with some spending New Year’s eves together. At one birthday party for Laffer in New York, they presented the aging economist with a signed poster of the Jedi master Yoda. “I’m short, a little bit fat. I’ve got big, green ears,” Laffer explained. “I look sort of like Yoda.”

In 2015, Forbes, Laffer, Kudlow and Moore created the Committee to Unleash Prosperity, a group intended in part to counter the emergence of the “Reformicons,” a rival gang of Republican eggheads who felt the party had gone too far in the direction of laissez-faire policies favoring the rich.

Among the other 29 committee members listed in a press release were both Malpasses, Kevin Hassett, now chairman of Trump’s Council of Economic Advisers, and Andy Puzder, who was Trump’s initial pick for labor secretary until allegations of domestic abuse unearthed by POLITICO derailed his nomination.

The group sought, with considerable success, to vet Republican presidential candidates for their supply-side credentials and to influence their platforms, holding large private dinners at Manhattan venues such as the Four Seasons and the 21 Club, so that committee members and other notable invitees—like Rudy Giuliani and Roger Ailes—could feel out the candidates.

Before meeting with the larger group, candidates would huddle with the committee’s founders to receive economic tutorials. Or in the case of Ohio Governor John Kasich, to give one. “We were all sitting there, and he would talk for an hour,” Moore recalled. “We’re like, ‘No, we’re supposed to be talking to you,’ and he’s talking to us.” Moore called the episode “Classic John Kasich.”

Though the events were supposed to be off the record, journalists often attended, and an otherwise lackluster February 2015 dinner for Wisconsin Governor Scott Walker made headlines when Giuliani barged in, proclaimed he did not believe that President Barack Obama “loves America,” and insisted a POLITICO reporter could print the quote.

Almost every serious Republican candidate participated in the dinners—but when Trump’s campaign first came calling early in the mogul’s bid, Moore said the committee passed.

It just seemed like a joke to me that he was even running. I was like, ‘No, we’re a serious organization,’” he recalled. In hindsight, Moore said, “That was stupid.”

Meanwhile, Trump defied the committee’s free market orthodoxy on issues like trade and immigration, drawing public criticism from both Moore and Kudlow, and feuded with the laissez-faire Club for Growth, which Moore had co-founded in the late ’90s.

At the same time, Kudlow—who spent two decades in media as a National Review editor and CNBC host—was also eyeing a 2016 Senate run in Connecticut, but he did not jump in.

As the voting started, it became clear that Trump was emerging as the likely nominee, but he continued to have trouble attracting experienced advisers. In March 2016, then-campaign manager Corey Lewandowski invited Kudlow and Moore to meet with Trump at the candidate’s midtown office. (Laffer—who moved from California to Tennessee in 2006 for tax reasons—had already met with Trump and begun advising the campaign on a tax plan.)

The duo hit it off with the apparent nominee, and Trump asked them to help refine his tax proposal, which he had first unveiled in September 2015. According to “Reagonomics,” Trump wanted the pair to make his plan “bigger and more beautiful” than Reagan’s tax cut, but he also needed to trim the projected cost of his original proposal, which was about $9 trillion. The populist Steve Bannon, the book says, pushed Trump to trim the cost by jacking up his original plan’s top income tax rate. The supply-siders fought back, making charts for Trump that showed when Reagan slashed taxes on the wealthy, the share of tax revenue paid by the top 1 percent actually went up. Ultimately, Trump’s new proposal reflected a compromise position between the two camps, with a top tax rate that was higher than the original plan’s, but lower than the current effective rate.

At the March meeting, Trump also mentioned he was planning a trip to Capitol Hill to confer with congressional Republicans. Moore had heard a similar recent meeting with lawmakers had gone badly—they complained Trump was “arrogant”—and suggested that he and Kudlow, who personally knew much of the caucus, accompany the candidate to help “break the ice.”

Apart from a confrontation between Trump and Arizona Senator Jeff Flake, Moore said the approach “worked like a charm.”

After Trump won, the trio continued to advise on the tax plan. Kudlow and Moore pushed the plan on Capitol Hill, drawing on the same relationships with Senate Republicans that they hope will ensure a smooth nomination process for Moore. Malpass, who had begun advising Trump during the campaign and then went into the Treasury Department, also helped craft the plan.

After the tax bill’s passage in December 2017, Laffer and Moore turned their attention to their campaign to install Kudlow in the White House, which succeeded last March. (Two other members of the Committee to Unleash Prosperity, the grocery and real estate billionaires John and Margo Catsimatidis, were dining with Kudlow and his wife at the Italian restaurant Cipriani when Trump called to formally offer Kudlow the job.)

Once inside, Kudlow returned the favor, ensuring that Moore’s and Laffer’s writings regularly made their way to Trump’s desk.

The supply-siders began pushing Trump on trade, advising him to encourage a lowering of trade barriers on all sides, rather than raising them. Last June, Kudlow persuaded Trump to float the idea of the world governments eliminating all tariffs at a G-7 summit in Quebec.

Last month, Kudlow showed Trump an op-ed co-authored by Moore in the Wall Street Journal that criticized Powell. The op-ed reportedly pleased Trump so much that it prompted him to offer Moore the Fed job.

Kudlow also championed his former Bear Stearns protege’s World Bank ascension. “For Malpass, I worked very, very hard,” he said.

Moore has predicted that Malpass will gradually bring the supply-side gospel to the World Bank, which influences the economic policies of governments around the world.

To their friends, the prospect of the rat pack getting back at the economic levers is wonderful. “The economy is the best it’s been in a long time!” John Catsimatidis exclaimed.

Republicans Keep Repeating the Same Tax Mistake

For budget wonks, the saga of the Kansas budget will be reminiscent of the Reagan years, when supply-side tax cuts resulted in big deficits. The administration had hoped that the tax cuts could be paid for by a combination of faster economic growth unleashed by lower marginal rates, and the infamous “magic asterisk” (in which unidentified spending cuts were promised, details to come later).

.. Reagan was forced to do another tax reform a few years later, hiding the fact that he was increasing taxes by cutting marginal rates but doing away with the generous exemptions that had dramatically lessened what people actually paid. Nonetheless, it took two more tax hikes — under Bush the First, and Clinton — to get the budget into some semblance of structural balance.

The answer is, I think, that a lot of Republicans have a view of how taxes affect labor markets that is simple, intuitive, and wrong.

.. Many of you will recognize that I am describing the famous Laffer curve. And the Laffer curve is absolutely right — for some effective tax rates. It has not, however, turned out to be correct for the tax rates actually prevailing in the United States during the later postwar era. Relatively modest decreases from modest tax levels do not increase economic growth enough to offset the losses from the lower tax rate, at least not in the short or medium term. In fact, they may not increase economic growth at all.

.. People who expected great things from tax cuts were essentially hoping that labor supply was very elastic

.. Yes, as your hourly wage rises, each additional hour of leisure is more costly in terms of other stuff you could buy. On the other hand, it’s also more enjoyable.

.. If you have a yacht and can afford to cruise around the world staying in fine resorts, each hour of leisure lost is more painful.

.. I haven’t even gotten into complex effects, like the fact that many high-income, high-status people like working.

.. most of what happens in the economy will end up being determined by other factors,

  • such as regulation,
  • technological change,
  • demographics,
  • and the individual decisions made by millions of people about what they want to do with their lives.