(OPE-L) Re: taxation and public finance

From: Gerald A. Levy (Gerald_A_Levy@MSN.COM)
Date: Wed May 19 2004 - 11:18:48 EDT

Hi Ernesto.

> By the way, this theory recalls Laffer's curve. But a tax rate of 95% seems 
> quite irrealistic.

Yes, but so is the Laffer Curve!  What is most unrealistic about the LC is 
that it assumes that the economy is in that portion of the graph where a 
decrease in  (supply-side) tax rates (such as corporate taxes, the capital-
gains tax and the tax rate for the highest income earners within the income
tax system) will result in an increase in total tax revenues rather than the 
[lower] area of the graph where a decrease in the tax rate will result in a 
decrease in total tax revenues.  One has to remember, after all, that this
curve was basically invented as a rationalization for supply-side tax cuts 
and what George H. Bush (when he was running _against_ Ronald Reagan
for the Republican Party presidential nomination) called "voodoo economics"
(of course, after RR picked him as his running mate then it all made
sense to GHB and he ceased referring to voodoo economics).  This was
an _especially_ absurd proposition as it applied to the U.S. since the 
"supply-side" tax rates tended then and now to be much _lower_ than is
the case in just about all other advanced capitalist economies.

Also, the Laffer Curve is unrealistic and erroneous because it assumes
Say's Law.  After all, _why_ would firms increase investment and supply
when there has been a decrease in corporate taxes.  Isn't _aggregate
demand_ something that affects that decision? Indeed, basically all of the
other supply-side policy options (including the argument for deregulation)
also assume Say's Law.

In any event, what I was asking about was more related to the 
monetarist "crowding-out effect" than the supply-side Laffer Curve
argument.  I was suggesting that there might be a kernel of truth
in the crowding-out effect and that effect could be extended to thinking 
about the potential consequences on the accumulation of capital
of a heavily progressive tax.

In solidarity, Jerry

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