Center for Freedom and Prosperity Foundation
For Immediate Release
Tuesday, August 11, 2009
202-285-0244
www.freedomandprosperity.org
Fact, Fiction, and the Laffer Curve:
Obama’s Higher Tax Rates May Raise
Revenue, but Far Less than Politicians Expect
(Washington, D.C. Tuesday, August 11, 2009) The Center for Freedom and Prosperity Foundation (CF&P) today released a new paper analyzing how movements in tax rates lead to behavioral changes that cause significant shifts in the amount of income reported to tax authorities.
The new paper, entitled “The Laffer Curve: Understanding the Relationship Between Tax Rates, Taxable Income, and Tax Revenue,” reviews the theory and evidence for “Laffer Curve” effects and discusses how the Joint Committee on Taxation’s revenue-estimating process is based on the absurd theory that changes in tax policy – even dramatic reforms such as a flat tax – do not affect economic growth. Because of congressional budget rules, this leads to a bias for tax increases and against tax cuts.
Link to the Study:
http://archive.freedomandprosperity.org/Papers/laffer1/laffer1.shtml
PDF Link to the Study:
http://archive.freedomandprosperity.org/Papers/laffer1/laffer1.pdf
“When you tax something, you get less of it, and that applies to income. When taxable income goes down, this at least somewhat offsets the impact of higher tax rates,” explained CF&P President Andrew Quinlan. “As politicians in Washington seek to expand the burden of government, they need to understand that higher tax rates ultimately becomes a self-defeating policy,” he continued.
The paper is accompanied by the re-release of CF&P’s notable Laffer Curve Video Trilogy. The videos (Part I: Understanding the Theory, Part II: Reviewing the Evidence and Part III: Dynamic Scoring.) garnered over 75,000 views worldwide upon their initial release. The videos were praised on CNBC by Larry Kudlow and even by Art Laffer himself.
The new paper augments its theoretical analysis with real-world examples such as the rise in tax revenues in Russia after the implantation of a low-rate flat tax.
Cato Institute Senior Fellow Dan Mitchell is the author of the paper and the narrator of the video series. “With Obama planning a number of anti-growth tax measures, it is especially important to educate both the general public and policy makers that the Laffer Curve is very real. Higher tax rates will cause taxable income to fall. Revenues may increase, but the cost to the economy will be far higher than any gain for politicians.” Mitchell said.
The paper’s “Executive Summary”:
- The Laffer Curve shows the relationship between tax rates, taxable income and tax revenues: at a certain point, higher tax rates fail to produce more revenue. This paper uses real world evidence to demonstrate that certain tax cuts can have a positive impact on economic performance and that “supply-side” tax cuts do not “cost” the government much in terms of foregone tax revenue. This paper further explains how the Joint Committee on Taxation’s revenue-estimating process is based on the untenable theory that changes in tax policy – even dramatic reforms such as a flat tax – do not effect economic growth. In other words, the current system assumes the tax rates have no impact on taxable income. .
To view the Laffer Curve videos please see:
Part I: Understanding the Theory
Part II: Reviewing the Evidence
For additional comments:
Andrew Quinlan can be reached at 202-285-0244, andy@freedomandprosperity.org
Dan Mitchell can be reached at 202-218-4615, dmitchell@cato.org
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