(OPE-L) Re: taxation and public finance

["Gerald A. Levy" <Gerald_A_Levy@xxxxxxx>]

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