Josh,

I think you've misunderstood my point. I am a believer in supply-side economics. My point was that instead of adhering to that theory, many people believe in "supply-side magic: Cut taxes and you'll get more tax revenue than before!"

I'm not saying that it is not possible for tax revenues to increase. But cutting taxes does not automatically increase tax revenues as many people seem to believe. In fact, you seem to have unintentionally given people the same impression when you say, "This idea - that lower taxes actually increase government tax revenue - was popularized by economist Arthur Laffer, and from him sprung the Laffer Curve."

But as Laffer himself says, "The Laffer Curve itself does not say whether a tax cut will raise or lower revenues."

Far from what Joe suggests, the fact that a Laffer Curve exists is almost universally accepted among economists.

I don't think I made that suggestion at all, but if I did it was purely unintentional. (I don't even mention the Laffer Curve by name.)

...though it's worth noting that federal government revenue has steadily increased since the Bush tax cuts.

Most of that increase seems to have come from payroll and corporate taxes, not changes in marginal tax rates for individuals.

I'm not saying that it is not possible for tax revenues to increase. But cutting taxes does not automatically increase tax revenues as many people seem to believe.

Based upon the totality of your post, and even on your comment here, it seems that you are indeed arguing it isn't possible for tax cutes to cause increases in tax revenue (e.g., "...rarely--if ever--does a tax cut pay for itself").

I do not claim that Laffer believes all tax cuts lead to revenue increases. Rather, I was summarizing your characterization of the general theory. As my post (and the accompanying graph) indicate, sometimes a tax rate increase will raise revenue, and sometimes it will decrease; it all depends on the location of the optimal rate relative to the current rate.

Although you did not mention Laffer by name, the entire theory - that tax cuts can increase tax revue - is based upon Laffer's work. It would be like critiquing the theory of relativity without mentioning Einstein's name.

Didn't Joe Carter play for the Blue Jays? I loved that home run he hit to win the World Series.

It seems to me that Laffer's equilibrium point (the rate at which taxpayers will accept taxation without flipping out) isn't fixed. It can't be. In time of war, that rate should be higher. In time of peace and prosperity, the rate should be much lower. It would move around due to huge budget deficits, or national debt. So this supply-side idea that cutting taxes for every conceivable economic situation (Budget surplus-cut taxes! Recession-cut taxes! War in Iraq/on Terror-cut taxes!) seems a little bit one-size-fits-all: too ideological, and not very pragmatic.

The idealogues have painted the once-trusted-on-economics GOP into a corner. While what I hear coming out of the mouths of most of the GOP prez candidates (not Huck) sounds like it's been scripted by Grover's Club for Growth, Americans will be looking for flexibility and real-world remedies to deal with the coming economic slowdown (or if you believe Mort Zuckerman, huge crisis). Calls for making Bush's tax cuts for the wealthy are not only gonna largely fall on deaf ears (except for the die-hards), they're gonna hurt Mitt and McCain (esp McCain, with Phil Gramm as his economic advisor), if the first half of this year is as bad economically as some people are forecasting. Calls for massive gov't spending on infrastructure, putting many of those directly affected by the housing slowdown back to work and pouring $$ back into the economy may not sit well with supply-siders, but may have great appeal to a lot of voters. Now add in Iraq to the equation: Iraq will be seen as exacerbating the economic problem. Americans already see the trillion dollar Iraq price tag and don't like it. If things start going to the dogs at home economically, they'll like it even less.

When discussing the Laffer curve, it's important to point out that the goal is never to maximize tax revenue--only the most big-government-loving statist would endorse that goal. Of course, it makes no sense to be on the right side of the Laffer curve, but beyond that, the goal should be to achieve a balanced budget while having the government provide only those services which are necessary, and doing it as efficiently as possible.

Excellent, superb point Eric, and one I'm embarrassed for glossing over.

The equilibrium point on the Laffer curve is not "the rate at which taxpayers will accept taxation without flipping out."

Laffer curves existed before Laffer? Mellon tax cuts to improve the economy, JFK slashing rates to improve the economy, even the Bible's Joseph did wonders for Pharoh's economy. None of you are old enough to recall 93% marginal tax rates on American income?

The equilibrium point on the Laffer curve is not "the rate at which taxpayers will accept taxation without flipping out."

My limited understanding of Laffer's equilibrium point is that it's the tax rate at which government revenues are maximized/highest rate at which the population will allow themselves to be taxed depending on economic conditions.

A few important distinctions need to be kept in mind here. First, there's the difference between one claim that is pretty much consensus in economics:
(i) it is possible for a tax rate to be high enough that cutting it will increase revenues
and several others that are flatly false, but commonly said by Republicans these days:
(ii) tax cuts pay for themselves (without the radical qualification of (i), that this is merely a possibility under particular circumstances);
(iii) that the current income or corporate tax rates are anywhere near rates that would be revenue-increasing to cut.

JC writes, "Whether we are above or below the optimal rate remains a mystery to me," but it is not a mystery to economists, for whom the consensus view is that we are way below it.

Since (ii) and (iii) are not at all uncommon to hear bandied about by Republicans, even at the highest levels (like that Bush quote that Joe uses), I think you should grant that Joe has a pretty good target in his third point. At most you can attack his "if ever", but his point is basically sound.

Another important distinction is between understanding "the Laffer curve" to mean just something like (i), and then understanding that phrase to mean something much more particular: a discernible, quantifiable relationship that can be graphed in something like the image included in the main post. Only the former is anything like consensus in economics. The latter is generally rejected. (There was some terrific discussion of this across the econoblogosphere a while back, when the WSJ ran a spectacularly mendacious op-ed about international corporate tax rates.)

Finally, we need to be clear on what it means when tax revenues reach new records. In a discussion of these sorts of issues, it is only meaningful if we factor out inflation and if we factor out the growth of the economy itself*. Putting it differently, if everything just goes along in a normal sort of way, we should expect record revenues over and over and over again. If anything, that it has taken so long to break revenue records indicates how _bad_ the current GOP tax system is for revenues.

*Which is the more typical place for respectable conservative economists to try to talk down the costs of tax cuts, though even there, the line is that such cuts are _less expensive_ than they might otherwise look. Pretty much no one who is at all respectable in economics thinks that tax cuts anywhere near the current rates will fully pay for themselves with increased growth, either.

JohnS wrote:

My limited understanding of Laffer's equilibrium point is that it's the tax rate at which government revenues are maximized/highest rate at which the population will allow themselves to be taxed depending on economic conditions.

Well, it's not really the highest rate at which the population will *allow* themselves to be taxed, as in they stage some kind of revolution. The equilibrium point or peak in the curve is where if you increase tax rates any further, revenue will decrease due to people choosing to work fewer hours, because the marginal income they earn with those hours is less than the value they assign to their free time.

But you are right that the rate which the peak corresponds to cannot be a fixed point. For one thing, people who are barely getting by will continue to work if their taxes are hiked, because they have to in order to pay their bills. People who have lots of disposable income, on the other hand, would be a lot quicker to decline extra hours at the office and go golfing instead.

Therefore, cutting the tax rate on the higest income bracket would be more likely to result in additional tax revenue than cutting the tax rate on the lowest income bracket.

phil mentions that growth in the economy results in increased tax revenues. But tax cuts are often intended as economic stimuli, so if the economy grows after a tax cut and tax revenues increase, it can still be argued that the tax cut resulted in increased tax revenue.

"But tax cuts are often intended as economic stimuli, so if the economy grows after a tax cut and tax revenues increase, it can still be argued that the tax cut resulted in increased tax revenue." This is what the asterisked portion of my comment was meant to address. Basically, no respectable economist -- not even those who have been paid to shill for the WH, like Greg Mankiw -- thinks that the growth from these cuts even comes close to completely offsetting the lost revenues, let alone leading to an increase in revenues.

My limited understanding of Laffer's equilibrium point is that it's the tax rate at which government revenues are maximized/highest rate at which the population will allow themselves to be taxed depending on economic conditions.

I don't have much to add to Eric's response to this, other than that the negative effect of each additional step up in the tax rate includes but is not limited to people choosing to work fewer hours -- it would also affect other economic decisions that they make, their personal resources, and the opportunities available to them (which can be affected by the strength of the economy), particularly over the long term. Eric is right that the equilibrium point is not the highest rate at which the population will "allow" itself to be taxed under a particular set of circumstances. It is the point at which the various ways in which higher tax rates negatively impact revenue overtake the expected increase in revenue that would accompany an increase in tax rates.