Supply-Side Economics

[finnbow]

Originally Posted by whell

No, I didn't say that, and I explained it. Go back and read again if you didn't understand.

Uh, yes you did - "You always know where you are on both the X and Y axis."

Laffer never assumed that there was a single variable at work.

Sorry, but yes he did. A smooth parabola such as his describes a specific relationship of one variable to another (the dependent variable (revenue) and the independent variable (tax rate)) and no other variables. And that's exactly why it's completely worthless as an economic model, considering the number of variables that impact the nation's economy, not to mention the illegitimacy of the underlying model (he has/had no data points with which to establish the relationship between tax rates and revenue).

Is it likely that an economy will have more capital formation and conversion as the tax rate on capital gains goes down?

Debatable. Most equity investors don't invest in equities strictly due to favorable capital gains treatment. They do so because in the long run, equities generally outperform bonds. In any event, the latest GOP tax plan didn't touch capital gains while it gave huge contraindicated income tax breaks to the wealthy.

You also avoided the other question:

As the tax on income approaches 100%, does the revenue from that tax keep going up, or does it start to go down?

It does the same thing as it does when tax rates go to zero. It's a no-brainer that a 0% and a 100% tax rate will result in no revenue. There's never been any argument about that. It's every other point on the Laffer Curve that is suspect and Laffer's theory represents nothing other than a drunken doodle on a cocktail napkin that somehow became conservative economic dogma without a shred of evidence to support it (and plenty to refute it).

(T)his tidy arc of cause and consequence (of the Laffer curve) doesn’t exist in the real world. Sure, extremely high tax rates douse economic activity. But there’s no reason to assume the relationship between tax revenue and tax rates is perfectly U-shaped. And the equilibrium point at which a government collects the most revenue possible without dragging down the economy is impossible to know—and varies by country. There was no reason in 1974—or, for that matter, now—to think the US was on the curve’s “prohibitive” half (many economists put the inflection point for the highest marginal tax rate at around 70%). In fact, without detailed data, you can’t tell where on Laffer’s curve (or non-curve) you are at all.

https://qz.com/895785/laffer-curve-e...d-reaganomics/