Following up on my preceding post, I will here document who has said what.
High officials in the Reagan Administration apparently did subscribe to the Laffer Hypothesis:
• Reagan himself: “…our kind of tax cut will so stimulate the economy that we will actually increase government revenues…” July 7, 1981 speech 1/
• His Secretary of the Treasury, Don Regan, even after events had falsified the proposition to the satisfaction of most observers, wrote of his “very strong opinion that a tax cut would produce more revenue than a tax increase.”2/
Also: “The increase in revenues should be financed not by new and higher taxes, but by lower tax rates that would produce more money for the government by stimulating higher earnings by corporations and workers…” (p.173).
Similarly, high officials during the Bush era have also have been quoted saying that tax cuts, via faster growth, lead to higher tax revenues:
• President George W. Bush : “The best way to get more revenues in the Treasury is not raise taxes, slowing down the economy, it’s cut taxes to create more economic growth. That’s how you get more money into the U.S. Treasury.” – July 24, 2003.
• OMB Director Joshua Bolten, press conference July 2003; & WSJ, Dec. 10, 2003
• Majority Leader Tom DeLay: “We, as a matter of philosophy, understand that when you cut taxes the economy grows, and revenues to the government grow.” NYT, 3/31/04.
• Treasury Secretary John Snow, Congressional testimony, Feb. 7, 2006: “Lower tax rates are good for the economy and a growing economy is good for Treasury receipts.”
• CEA Chair Ed Lazear, press conference 2/12/07, “revenues have come in…higher than we predicted…because the economy has grown at a rate higher than we predicted…[T]he tax cuts…[were] at least in part responsible for making the economy grow.”
Most leading Republican economists who served as chief economic advisers to Presidents Reagan and Bush during their tax cutting frenzies, however, do not subscribe to the Laffer Hypothesis, and did not compromise their beliefs while in office. Three examples:
• Martin Feldstein: “I objected therefore to those supply-siders like Arthur Laffer who argued that a 30 percent across-the-board tax cut would also be self-financing because of the resulting increase in incentives to work.”3/
• Glenn Hubbard: “Although the economy grows in response to tax reductions… it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity.”4/
• Greg Mankiw: “Subsequent history failed to confirm Laffer’s conjecture that lower tax rates would raise tax revenue. When Reagan cut taxes after he was elected, the result was less tax revenue, not more.” 5/
1/ Feldstein, American Economic Policy in the 1980s (U. Chicago Press) 1994, p.21.
2/ Regan, For the Record (St. Martin’s Press: New York) 1988, (p.214).
3/ American Economic Policy in the 1980s ( U. Chicago Press) 1994, p.24 .
4/ Economic Report of the President (Government Printing Office) 2003, p.57-58.
5/ Principles of Economics (Dryden) 1998, p. 166.
I thought it would be useful to get all this into the record, since some observers have claimed that Reagan and Bush never subscribed to the Laffer hypothesis, while others have inaccurately accused Feldstein, Hubbard and Mankiw of selling out on this score.
[...] Brian wrote an interesting post today onHere’s a quick excerptAlso: “The increase in revenues should be financed not by new and higher taxes, but by lower tax rates that would produce more money for the government by stimulating higher earnings by corporations and workers…” (p.173). … [...]
What is so pathetic about the Lafferite comments is the underlying assumption that the relationship between tax rates and tax revenue is inverse, linear and infinite, that you can keep cutting taxes forever and keep on getting the same unchanged increase in revenue.
Common sense tells us that the relationship between tax rates and tax revenue has to be arc or parabola shaped. Think of a chart where the horizontal axis represents the tax rate and the vertical axis represents tax revenue.
Obviously there is some point where the tax rate is so high that business activity falls off and tax revenues decline. Likewise, there is has some point where the tax rate is so low that government is unable to provide or maintain a supportive infrastructure for business and commerce, the economy suffers as result, and tax revenue falls off.
The search should be for the optimal tax rate where the parabola representing revenue peaks.
I do think it is interesting that liberals always think we are to the “left” of the top of the parabola and can grow the economy with a little more government investment, while conservatives always think we are to the “right” the top of the parabola.
[...] jfrankel wrote an interesting post today on â
[...] jfrankel wrote an interesting post today on â
I think that you put Lazear and possibly even Snow in the wrong group. They are not making that patently absurd claim that lower tax rates (from our current baseline) will yield increased receipts.
Lazear is saying–very subtly, to be sure–that tax cuts have a stimulative effect and they can lead to *lower than predicted* losses. Snow is a closer call but he can read to be saying something very similar.
[...] my earlier post, I catalogued some quotes from high Bush Administration officials asserting the Laffer [...]
Everyone can read the quotes for themselves and make up their own minds. It’s true that one or two of the quotes might be read subtly as saying that because tax cuts stimulate income, the fall in tax revenue is not quite as bad as one would otherwise assume. But most of the quotes are too unambiguous to allow that interpretation. And there can be little question, taking all the quotes together, that the Bush Administration (excluding most CEA members) deliberately sought to assert the Laffer proposition. — JF
Administration (excluding most CEA members) deliberately sought to assert the