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July 14, 2005 By Fausta

Behold, the Laffer curve
Here’s the Wilkipedia definition of Laffer curve, and the Investopedia definition:

The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.

The Conspiracy to Keep You Poor and Stupid blog discusses the facts that personal withheld tax revenues are up 7.3% compared to last year, and since the recession bottom in the fourth quarter of 2001, real GDP has grown 12.0%.

Not only have tax revenues increased and real GDP continued to grow; the trade deficit has narrowed and the Federal budget deficit has decreased by nearly 25%. Additionally, Kudlow points out that

non withheld individual income tax receipts have increased by 34% fiscal year to date compared to last year. This is mostly capital gains and dividend related tax collections.

Blame it on the Laffer curve. But then there’s also Karl Rove

Rove is basically a free-market supply sider, who has consistently spoken out against raising the payroll wage-cap tax, has been a strong supporter social security reform through personal savings accdounts and lower marginal tax rates, as well as making the Bush tax cuts permanent. Rove would also love to abolish the estate tax.

In this sense, the Rove story is not merely a political story, it has economic and stock market consequences as well. If Rove is fired, pro-growth free-marketers and supply-siders lose an important advocate in the high policy councils of the White House. The stock market would lose a good friend: not only does Rove support tax cuts, he has long been a devotee of the Investor Class. More than anyone else in presidential politics in either political party, Rove knows that investors turn out heavily (2 of every three presidential votes cast come from investors) and that they vote their portfolios, for low taxes on dividends, capital gains, estates, tax free- savings accounts, and other means that would boost wealth creation.

New Jersey could use a Karl Rove or two.

(Technorati Economics Politics)

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Comments

  1. Tom in South J says

    July 14, 2005 at 8:16 pm

    BHB is reading into some fun numbers by the eco conservatives that hide a bit of the real truth.

    First the budget deficit. From 2001 to today it has exploded. Any reduction your seeing recently is a result of over predictions from 2003 and 2004 that were done on purpose in order to have some progress when revenues started increasing. Stan Collendar from the National Journal is the foremost budget expert in Washington DC. Unfortunately you need a subscription to read him, but if you can find one, please do.

    Second GDP growth since 2001 at 12%. 3% per year. Not bad at all but look at what “recovery GDP” should be and you’ll see that is on the low end. Energy prices are a big reason growth hasn’t improved more and there’s one thing you’re neglecting: Housing boom, a result of interest rate cuts, not tax decreases.

    The trade gap decreasing is because of oil prices because the stuff is $60 a barrel!!

    Finally, I like Larry Kudlow, but he’s misleading you. Companies are building up such huge cash reserves that they have started to give out more divideds to keep their stock prices high.

  2. Fausta says

    July 15, 2005 at 6:35 am

    Tom,
    Since I don’t know what an eco conservative is, my BHB’s numbers wouldn’t come from eco conservatives. The numbers I quote come from the NYT articles I linked to and The Economist. I don’t have a subscription to National Journal.

    Real GDP growth has averaged 3% over the past 40-50 years, which is a more-than-respectable number. But, looking at real GDP growth, from The Economist Country Briefing: (% real change per year) for 2001 it was 0.51, and 2.19 for 2002. By 2003 it was up to 3.12, and last year it was 4.4, so the increase has been substantial and strong.

    The budget balance as % of GDP was: 2000 2.4; 2001 1.27; 2002 -1.52; 2003 -3.46; 2004 -4.5, and 2005 (estimated) -2.7. Again, not my numbers.

    You say, Any reduction your seeing recently is a result of over predictions from 2003 and 2004 that were done on purpose in order to have some progress when revenues started increasing. Is what you’re saying that there was an overprediction due to expected higher revenues? This means then that you expected that the tax cuts would consequently increase revenues, which is my stance.

    We also agree that oil prices are keeping a lid on growth.

    I personally don’t believe there can be a housing boom from lower interest rates without higher disposable income (for instance, during the Great Depression very few houses were selling), but some economists are arguing that one over. Mortgage interest rates have decreased and increased over the past few years but remain relatively low in historical terms, especially over the last 25 years.

    The trade gap decreasing is because of oil prices because the stuff is $60 a barrel!!
    If anything, considering how very dependent on foreign oil the USA is, that would/should cause the trade gap to increase.

    Finally, I like Larry Kudlow, but he’s misleading you. Companies are building up such huge cash reserves that they have started to give out more dividends to keep their stock prices high.
    Larry is a likeable guy, isn’t he! As for the numbers he quotes, he didn’t pull them out of a hat, and he states that capital gains and dividend related tax collections are the reason for the 34% increase in non withheld individual income tax receipts, which appears to be a sound reason. Additionally, as I see it, companies increasing dividends out of larger cash is a good thing. All the better for the shareholders.

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