Actually, let me rephrase that assertion. There is a small group of people in the nation who claim that there’s no Laffer Curve. But that’s no surprise, the world is filled with weird people. Some genuinely think the world is flat. Some think the moon landings were faked. You can probably find some people who actually think the sun is a giant candle in the sky.
But what is surprising is that this small cadre of anti-Laffer Curve fanatics are at the Joint Committee on Taxation, which is the group on Capitol Hill in charge of providing revenue estimates on tax legislation.
They aren’t completely oblivious to the real world. They do acknowledge some “micro” effects of changes in tax rates, such as people shifting between taxable and non-taxable forms of compensation. But they completely reject “macro” changes such as changes in economic growth and employment.
So if we replaced the nightmarish income tax with a simple and fair flat tax, the JCT would assume no impact of GDP or jobs. If we went the other direction and doubled all tax rates, the JCT would blithely assume no change to the economy.
To give you an idea of why this is an extreme view, I want to share some polling data. Last week, I spoke at the national conference of the American Institute of Certified Public Accountants. As you can imagine, this is a crowd that is very familiar with the internal revenue code. They know the nooks and crannies of the tax code and they have a good sense of how clients respond when tax policy changes.
Prior to my remarks, the audience was polled on certain tax issues.
Some of the answers disappointed me. By a narrow margin, the crowd thought it would be a good idea if the overall tax burden increased. But here’s the response that fascinated me the most. The audience was asked what could be described as a Laffer Curve question. Specifically, they were asked, “Do you believe the growth potential of marginal tax rate cuts could lead to some degree of revenue feedback, even if not enough to be self-financing?”
They had four possible responses. Here’s the breakdown of their answers.
These are remarkable results. A plurality (more than 36 percent) think the Laffer Curve is so strong that lower tax rates are self-financing. Even I don’t think that’s the case. Another 23.5 percent of respondents think there are very significant feedback effects, meaning that lower tax rates don’t lose much money.
There were also 18.6 percent who thought there were some Laffer Curve effects, though they thought the revenue feedback wasn’t very significant.
Less than 15 percent of the crowd, however, agreed with the Joint Committee on Taxation and said that lower tax rates have no measurable revenue feedback.
Why am I sharing this information? Well, we’re going to have a big debate in the next month or two about President Obama’s proposed class-warfare tax hike on investors, entrepreneurs, small business owners, and other rich people.
Supporters of that approach will cite Joint Committee on Taxation numbers to claim that the tax hike will generate a big pile of money.
That number will be based on nonsensical and biased methodology. In an ideal world, opponents will mock that number and expose the JCT’s primitive approach.
For additional information, here’s Part III of my video series on the Laffer Curve, exposing the role of the Joint Committee on Taxation.
If you want to see Parts I and II, click here.