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Laffing All the Way to the Bank

The real purpose of the tax cut is not to produce greater tax revenue, just like the real purpose of cheating is not to produce a stronger marriage.
tax cut

Do you know what the Laffer Curve is? It’s a graph that represents the relationship between a given income tax rate and the government’s tax revenue. It would be the one set of data you absolutely needed before deciding to pass a multi-trillion dollar tax cut. Pulling the trigger on such a massive tax cut without the Laffer Curve would be like designing a missile system without knowing the law of gravity, building a tanker without understanding buoyancy, or developing a refrigeration system without applying thermodynamics. 

But that’s essentially what 51 Republicans in the Senate and 227 in the House did. As a result, we now have an unguided missile for a tax code—a missile that may ultimately sink us and leave us in the cold.

The principle behind the Laffer Curve was introduced in modern times by economist Arthur Laffer over a lunchtime meeting with Dick Cheney and Donald Rumsfeld in 1974. Laffer, roughly sketching a curve on a napkin, pointed out something intuitively correct, which is that if the tax rate is zero there will be no tax revenue because none will be collected, and if the rate is 100 percent the revenue will also be zero, because no one will have any incentive to produce (or perhaps report) any income. 

It’s what happens with the tax rate in between these extremes that is important. As the tax rate rises above zero, the total tax revenue increases, but only up to a certain point. Beyond that point, the tax rate becomes counterproductive and creates such a disincentive for taxpayers to work that the increase in the tax rate can no longer offset the resulting decline in productivity. From that point on, as the tax rate increases the revenue decreases. 

A good analogy is how much sleep we need to be productive as individuals. Getting seven hours of sleep might make you more productive than six, and eight hours more so than seven, but at a certain point—say, 14 hours of sleep—you’re simply not awake enough time to produce very much regardless of how refreshed you might feel. 

Not only was the Laffer Curve never explained during or before December’s dead-of-night vote on the tax cut, to the best of my knowledge it wasn’t even mentioned once. Instead, Mitch McConnell and flunkies assured semi-brain-dead America the bill would be “revenue neutral.” Of course, there is absolutely no data to back that up—only the Congressional Budget Office report saying the bill would add almost $1.5 trillion to the deficit over the next ten years.

In a better world, in a better country, if there were a comprehensive study of the economic landscape it would appear in the form of a Laffer Curve based on sophisticated computer models. And even if we could somehow pull up a realistic curve through the new Laffer app on our phones, we would still have to know whether we were currently to the left or right of the maximum revenue point on that curve. If we were to the right of the peak, cutting the tax rate would increase revenue. To the left, the tax cut would mean lost revenue.

The truth is, most GOP members of either house wouldn’t know a Laffer Curve if it popped out of Charles Koch’s ass. If the true data were spoon-fed to them by Sheldon Adelson they would gag on it. The reason is simple: The real purpose of the tax cut is not to produce greater tax revenue, just like the real purpose of cheating is not to produce a stronger marriage. Scoundrels are good at telling people what they want to hear. When those scoundrels are members of the United States Congress, lying is performed at an Olympic level.

Chances are we are now well to the left of the Laffer Curve peak. Studies done at top universities over the years have put the peak revenue anywhere between a 30 and a 70 percent tax rate. Since the U.S. effective tax rate as of 2017 is closer to about 20 percent, there is little chance we’re going to have our tax cut cake and eat our revenue, too. Increased public debt was what happened during the tax cuts of the 1920s, Reagan’s cuts, and Bush 43’s cuts. More recently, Louisiana Governor Bobby Jindal’s massive cuts left the Bayou State reeling and selling off government real estate and vehicles to stave off a shutdown. Governor Sam Brownback’s radical meth-induced tax cuts in Kansas essentially bankrupted the state. 

But for the scheming folks who in recent years have foisted these twisted experiments on their guinea pig citizens, the measures were not failures in any way. They see farther down the road than we do. They have a coherent game plan, albeit nothing whatsoever like the one they roll out every couple of years on Meet the Press

You see, good fiscal policy is a one-note tune. When a recession hits, we need tax cuts for the rich to provide the proverbial trickle down antidote. Should a recovery come, you don’t want to slow the momentum, so more tax cuts for the rich. When the following recession arrives, well, see above. And if it doesn’t work you’re obviously not doing enough of it.

There is that old, hackneyed expression about laughing all the way to the bank. These days it’s more like giggling to the hedge fund or smirking to the Cayman Islands. But when the smiles fade, radical long-term tax cuts not supported by sound economic analysis leave us with four horrible choices—decimate the social safety net, print more money, borrow more money, or default on the national debt. Right wing kamikazes can live with any of these, but option number one—disassembling the nanny state that communist Franklin Delano Roosevelt put into place 80 years ago—is by far the most orgasmic reactionary option. 

And if you’d like to discover what life was like for Chileans during the 1970s under rule by the Chicago Boys, you basically have two choices—read Naomi Klein’s enlightening book, The Shock Doctrine, or let Paul Ryan and friends control all branches of government through the year 2028.