Yup, He Really Said It: Obama On Tax Revenues, Laffer Be Damned

December 13, 2011

Thanks to Dr. Boudreaux for this little gem. Check out the additional links at the bottom of the post.

Obama’s Math Works Only in BizzaroEcon World: Last night on “60 Minutes” (HT IndianaJim) President Obama said to interviewer Steve Croft about tax cuts:
“Steve, the math is the math. You can’t lower rates and raise revenue, unless you’re getting revenue from someplace else.” — B. Obama
This answer reveals a deplorable understanding of either economics or math or both.

Obama’s statement here is indeed deplorable. I see one of two scenarios. In the first scenario he is simply ignorant of basic economics (yeah, I know, I know) and unfit for the job. In the second scenario he realizes that what he is saying is clearly incorrect, but does so anyway as it’s politically expedient. I’m not sure which one is true here, or which one is worse.

[When someone says he wants to raise taxes, ask him if he means raising tax rates, or raising tax revenues? They're not always the same thing, and sometimes the opposite.]

There is one thing here that I do know, it is indeed possible to raise revenues by reducing rates. Not always, but a fair amount of the time. The Laffer Curve helps to explain.
Let’s consider a world in which taxes are 1%. It it a near certainty that raising the rate to 2%, 5%, maybe even 10% would raise revenues. I don’t think anyone would argue that point. Now let’s consider a world in which taxes were 100%. Pretty clearly, no one would work, what’s the point when you get to keep 0% of our labor? Let’s ignore for a moment that a great deal of the economy would have been driven underground, away from the tax man, the effect is the same, no (or negligible) tax revenues.

So clearly, there is some sweet-spot. Some point on the curve where tax revenues are maximized. Is that point 15%? 90%, 37%? I don’t know, that’s an empirical question, likely with a moving answer over time. But I am confident that you should be very suspicious of anyone who tells you he does know. That person is either a charlatan or ignorant.

The bottom line? We don’t know right now for sure where we are on the curve, it is quite conceivable that lowering rates could increase revenues. This is not so-called supply-side economics, or right-wing economics, it’s just sound economics. Of course, if your goal is to “punish” certain people rather than raising absolute revenues, that’s another story altogether.
As an aside, can you imagine how awkward it would be to be seated at a dinner party, at a table with both President Obama and Arthur Laffer?