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supply-side economics -
laffer curves and 'trickle down'

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supply-side economics - laffer curves and 'trickle down'
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why reducing income taxes works - laffer curves
"trickle down"
taxation and 'the rich' - and 'the poor'!

why reducing income taxes works - laffer curves

A neat little article on the Laffer curve and the relationships between tax rates, growth effects and tax returns in relation to Brown the Clown’s latest class war spasm, increasing basic tax to 50% for those earning over £150,000.

“Well, it's a textbook example of the famous Laffer Curve - the idea that beyond a certain point, increases in tax rates will reduce tax revenue, as individual taxpayers change their behaviour to escape the higher rates. In the words of the Institute for Fiscal Studies, higher income tax rates incentivise taxpayers to "work less, retire earlier, emigrate, contribute more to pension or charity, convert income to capital gains, incorporate, and invest in tax avoidance".” [Quoted from burningourmoney.blogspot.com]

Laffer chart based on 2009 UK budget. Image: Institute for fiscal studies
Laffer chart based on 2009 UK budget. Image: Institute for Fiscal Studies [IFS]

The Laffer Curve is based on logic and empiric experience. It is an attempt to estimate government tax takes from various tax regimes. Logically, it is obvious that the tax take will be zero if tax rates are zero, whereas if tax rates are 100%, people will not bother to work for (declared) wages. In the graph above, the blue line represents the government tax take for ever-increasing tax rates if there was no behavioural response.

As we can see in the graph, whereas the IFS (Institute for Fiscal Studies) places the peak of the Laffer Curve for high earners at a marginal income tax rate around 40%, the government places it at well over 50%.

The red line is typical of economic real-world wisdom. But in Britain we have mad socialists running the government, thus they try to convince themselves, and the people, that they can go on increasing the tax rate beyond 40% and still obtain increasing tax. They do this in order to hide the reality that their objective is to pander to the envy of their supporters. The reality, as you can see from the red curve in the graph, is that government tax income will actually drop as tax rates are pushed much above 40%. But as usual for socialists, despite economic damage, dogma and perception trump reality.

Notice that this graph applies to income tax rates on incomes exceeding 150,000 per annum, no where near the greatest source of government revenues. Similar curves may be estimated for corporation tax, value added tax and other regimes subject to behavioural change, for example how much work your husband will do for a given return!
See also socialist ‘new’ labour’s hidden extra £350 billion tax just this year.

Marker at abelard.org

And three short films on the Laffer Curve (20+ minutes total) from the Centre for Freedom and Prosperity and the Cato Institute.

film 1 film 2 film 3

Marker at abelard.orgMarker at abelard.orgMarker at abelard.org

useful essay by laffer on supply-side economics [1] Five GoldenYak (tm) award

This essay is very well argued and clear, as long as you can follow numbers.

• This paper serves as a response to a recent The New Republic article by Jonathan Chait which criticizes the supply side economics movement and lays out the typical redistributionist’s case for raising taxes on the rich.
• While the article refers to supply siders as “wingnuts,” the tenets of supply-side economics—low taxes, sound money, free trade, reduced regulations, etc.—have been adopted (successfully, I might add) in the U.S. and across the globe.
• The best way to help the poor is not to make the rich poorer, but to make the poor richer. All Americans as a whole have gotten richer as a result of pro-growth supply-side policies. The economic and social gains of the past 25 years—across class, race and gender lines—speak for themselves. The irony is that many of the policies promoted by the Left would hurt the very classes of people whom the Left professes to champion.”

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“Christina and David Romer find that the effect on real GDP of a tax increase of 1% of GDP is strongly negative both in the short run and over time. The effect on GDP of a 1% tax increase is consistently negative and increasing in the damage it does over time, finally reaching a maximum negative impact after 10 quarters at which point real GDP is reduced by 3%. Yikes! Given that both Christina and David Romer are faculty members at the University of California, Berkeley, we can be pretty sure that the results have not been artificially inflated, if you know what I mean. Now this is academics, not political rhetoric. Do you really want to advocate tax increases, Chait?

Deficits are a consequence of both tax and spending policies. Sometimes deficits are good, and sometimes they are bad. If someone could borrow at 3% and, at equal risk, lend at 10%, that person should borrow as much as he could get his hands on. But, if the numbers are reversed, and he could borrow at 10% and only invest at 3%, then he shouldn’t borrow anything. How much an individual or a country borrows depends on the spread. Deficits are neither bad nor good per se—it’s how the proceeds from borrowing are used that matters.” [p.5]

Laffer includes an excellent quote from John Maynard Keynes:

“When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will increase the national income and that a large proportion of any increase in the national income will accrue to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are unemployed and whose receipts are a proportion of the incomes of those who are occupied, I hope the reader will feel, whether or not he thinks himself competent to criticize the argument in detail, that the answer is just what he would expect—that it agrees with the instinctive promptings of his common sense.

“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more—and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.” [1933 Essay: The Means to Prosperity, section I: The nature of the problem, p.338, The Collected Writings of John Maynard Keynes, Macmillan Cambridge University Press, 1972]

The essay clearly shows the steadily increasing wealth of the least well off, despite the lowering GINI.

[ Link indirectly from Clint Hunter. ]

"trickle down"

'Trickle down' is nonsense regularly being used by socialists such as Ed Balls and Ed Miliband to dishonestly claim that the Conservatives will give 'tax cuts for the rich'. This is a variation to the lie told in 1920s USA by Democrats against Republicans. Known as "Trickle down", this lie was not promoted by right-wing politicians, but was developed by a Roosevelt speech writer, Samuel Roseman, in order to misrepresent the Republican assertion that lowering taxes would bring in more tax revenue.

The Democrats claimed that to say that wealth would trickle down to the poor was a capitalist lie. However, the Republicans, and now the Conservatives, were ensuring the greatest amount of tax receipts from the wealthiest, thus most effectively supporting welfare projects. They were following the reasoning of the Laffer curve, borne out by empirical evidence.

"...there were 206 people who reported annual taxable incomes of one million dollars or more in 1916. but as the tax rates rose, the number fell drastically, to just 21 people by 1921. then' after a series of tax rate cuts during the 1920s, the number of individuals reporting taxable incomes of a million dollars rose again to 207 by 1925. under these conditions, it should not be surprising that the government collected more tax revenue after tax rates were cut. nor is it surprising that, with increased economic activity following the shift of vast sums of money from tax shelters into the productive economy, the annual unemployment rate from 1925 through 1928 ranged from a high of 4.2% to a low of 1.8%."
[Quoted from “Trickle down” theory and “Tax cuts for the rich” , p.5]

The real argument is that lower tax rates lead to greater tax receipts from the very rich, as they are no longer motivated to extend great efforts in avoiding punitive taxes. Thus they tend to stop investing in, say, South America or Poland, and keep the money in their home country.

Most wealth of the really rich is not used by them for spending money, but for investment in factories and the like. Such capital is not about spending money, it is about power and investment. If the factories were sold and the money distributed to the poor, production would be lost and the poor would not become any better off (except temporarily).

While this is currently regularly attributed to Laffer, as 'the Laffer curve', but as you will see above, it was well known to J.M. Keynes and other economists long before Laffer. (To note, Keynes called the Labour Party the "party of catastrophe".)

taxation and 'the rich' - and 'the poor'!

While the linked article refers to the USA, the situation is very approximatelysimilar in all advanced countries. The USA does have lower overall tax rates, as does Japan.

Britain was anomalous among rich nations until the recent Cameron administration. The strong rise in the limen at which income tax is paid has normalised that.

Remember that personal tax rates produce only about a quarter of the government grab.

"CBO Report: The Rich Pay Most of the Taxes; the Poor Get Checks

"Jane Wells, a business news reporter for CNBC, after reviewing the latest report from the Congressional Budget Office (CBO) on who pays income taxes in America, claimed that the rich pay them all. The CBO, wrote Wells, showed that the top 20 percent pay nearly 93 percent of all income taxes, while the top 40 percent pay 106 percent of them."

"The CBO’s math is straightforward: For the year 2010, the bottom fifth earned “market income” — wages, business income, capital gains, retirement income, and so on — of $8,100 per person. But they also received “government transfers” — cash payments and in-kind benefits such as SNAP — of $22,700, leaving them with a per-person after-tax income of $30,800. Each person’s income tax liability in that group? Exactly zero.

"For the second lowest quintile, the numbers for 2010 were similar: income of $30,700 per person, government transfers of $15,200 with income taxes paid of $2,500 per person, leaving them with an after-tax income of $43,400

"This government largess must be paid for in some way, and it’s the remaining three-fifths of Americans who do the paying, especially the top fifth. Says the CBO, the average wage earner in the top 20 percent of all wage earners had an income in 2010 of $234,000, received government benefits of $6,500 and paid taxes of $58,900, leaving each with an after-tax income of $181,900."

The rest of the treacle in the article is worth attention.


“Trickle down” theory and “Tax cuts for the rich” by Thomas Sowell

Trickle down theory - Thomas Sowell

Hoover Institution Press, staple-bound, 2012
ISBN-10: 0817916156
ISBN-13: 978-0817916152

£3.11 [amazon.co.uk] {advert}

Kindle edition
Hoover Institution Press, 2012
162 KB
$1.49 [amazon.com] {advert}

1933 Essay: The Means to Prosperity, section I: The nature of the problem, p.338, The Collected Writings of John Maynard Keynes, Macmillan Cambridge University Press, 1972
Available from gutenberg.ca, and to be found from p.335 of this edition of Essays in Persuasion.
Keynes, John Maynard Essays in Persuasion

Keynes is one of the great masters of the twentieth century. He's often misrepresented under the heading of Keynesianism, for which see a useful review referenced in the EMU document. Keynes has a clear-headed understanding of both money and politics, and understands the difference; this is rare indeed. Keynes is a pragmatist par excellence. Any person wishing to gain a down-to-earth grasp of the political implications of economic factors, would be well advised to read into this collection of essays any time that they start to become confused by theory detached from reality. Keynes may even increase your sanity.

First published in 1931

(pbk, 1991, W W Norton & Co, 0393001903)
$14.95 [amazon.com / £9.40 [amazon.co.uk] {advert}

end note

Supply-side economics:
The most effective method of creating economic growth is by using incentives.

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