Today’s Brew 1-20-15

☕ Jim Brown Jr. takes a look at the 1986 tax reform efforts in this column for Arkansas Business.

The Spirit of ’86

As a president who embraced supply-side economics, Reagan wanted lower marginal tax rates. He had pushed through previous tax reform efforts that had lowered rates, but as 1986 began, the top rate was still 50 percent. However, because of a variety of loopholes, many wealthy individuals and corporations paid little or no taxes. This tax avoidance infuriated some, who wanted to eliminate these tax breaks in the name of “tax fairness.”

President Reagan’s advisers put these two ideas together and came up with a plan that would eliminate many loopholes and use the resulting new revenue to lower tax rates. It would also remove many lower-income Americans from the tax rolls.

As the plan worked its way through Congress, both Democrats and Republicans changed it to preserve some loopholes. However, the final bill that emerged was a remarkable piece of legislation that, on the whole, embodied tax policy that promoted the common good instead of special interests.

In the years since the 1986 tax reform, many of its major provisions have been weakened or undone. Lobbyists have been busy in the past 28 years inserting more loopholes, deductions and credits to benefit their clients. Tax rates have also risen. Our code is far less pro-growth than it was in 1986. Few, if any, would claim that it treats all taxpayers fairly.

Today’s Brew 1-19-15

Ralph Benko hits some high notes at Forbes.com in describing a possible turning point in recognizing the Fed as the biggest money player in politics.

Monetary Politics: The Biggest Money Player In Politics Is The Fed

Washington finally shows signs of coming to grips with the importance of money to politics. This is not about mere campaign finance. Last week there was a breakthrough in bringing the money policy issue out of the shadows and to center stage … where it belongs.

The real issue of money in politics is about the Fed, not the Kochs. The Fed’s political impact is orders of magnitude greater than all the billionaires’ money, bright and dark, left and right, combined.

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Monetary policy has been relegated to the Fed and largely excluded from the formal electoral process for almost two generations. This is, at it happens, and as O’Brien states forthrightly, a historical anomaly.

Monetary policy was a white hot topic at the Constitutional Convention of 1787. Thereafter, it was crucial to the success of George Washington’s administration, one of the few matters in which cabinet members Thomas Jefferson and Alexander Hamilton concurred.

Today’s Brew 1-15-15

Professor Brian Domitrovic writes at Forbes.com about the Laffer Curve and its real anniversary. This column is pretty interesting and informative.

The Laffer Curve Anniversary Is Just Now

It was not the first time that Laffer had sketched the curve, even for Rumsfeld. Laffer, a professor at the University of Chicago business school, had been putting it on the chalkboard for years. George Shultz, Laffer’s dean at Chicago and then his boss at the Office of Management and Budget, along with Shultz’s Chicago buddy Rumsfeld, had surely been treated to the curve before.

So it sort of was not the anniversary of the Laffer curve in December. Now, the reason that that meeting became famous was because of attendee #4, Wanniski. He is the one who let the story out about that evening. The first reference to the curve came forty years ago not last month but just now, care of Wanniski. In the spring 1975 issue of the journal The Public Interest, Wanniski set down in print (without calling it expressly the “Laffer curve”) Laffer’s argument about tax rates and receipts, in a footnote in fact.

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The John F. Kennedy tax cut—the book Larry Kudlow and I are writing about it forthcoming—had Laffer-curve argumentation all over it. Kennedy himself said that a “creative” tax cut such as he was offering (a cut in rates) would have the “paradoxical” effect of enhancing receipts.

When Kennedy was trying to ram the bill through Congress in 1963, he lowered the capital gains rate by four points to make it more palatable to budget “scorers” in the House, in that it was clear to all that capital really responds to incentives. The bill passed the House much on the strength of the revenue-reflow argument concerning capital-gains rate cuts. The Senate took that part of the bill out a few weeks later. Albert Gore of Tennessee, sitting on the Finance committee, was offended because it was so kind to the rich, even if a boon to the Treasury. “Tax the Rich!” by lowering their rates, the Wall Street Journal would blare.

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It was a missed opportunity, 25 years ago, that this country did not permit the 28 percent top rate to survive any more than three years, 1988-90. This low rate surely would have proven itself productive of receipts. Had we discovered this, given a little time in the 1990s, we would have comprehended the real dynamics of marginal tax cuts. They can be so productive of receipts and growth that low rates can lead to a virtuous cycle of a sequence of tax cuts.

President George H.W. Bush broke his “no new taxes pledge” in 1990, raised the marginal rate past 28 percent, and we never got the clarity. His son’s “tax cuts” in the 2000s were largely non-marginal, damaging the clarity even further. As the Laffer curve turns 40—or is it 50?—the lesson that tax rates can stifle real economic activity remains one of the great flashes of insight of modern public policy.

Today’s Brew 1-7-15

Robert P. Murphy, writing for National Review Online, offers an interesting critique on a possible carbon tax, and he uses supply-side economics to debunk the arguments in favor of a carbon tax.

Taxing Carbon Won’t Help the Economy

Second, even to the extent that a new carbon tax’s revenues were devoted to minimizing the blow to the economy, any politically plausible legislation would be quite inefficient from the perspective of supply-side economics. For example, many proposals include provisions to direct funds from a new carbon tax to lower-income households, since they will be disproportionately hit by higher energy prices. This makes perfect sense from an egalitarian point of view, but it does little to promote economic growth. Suggestions of payroll-tax reductions are poorly suited to unleash entrepreneurs and job creation: On the margin, a given amount of tax reduction would be much better targeted at the corporate rate or the top personal-income-tax bracket.

Today’s Brew 1-4-15

Dan Mitchell provides an excellent post today.

The Left’s Position on the Laffer Curve and Dynamic Scoring: Being Exactly Wrong Is Better than Being Inexactly Right

Since I’m a big advocate of the Laffer Curve, that means I favor dynamic scoring. This is the common-sense observation that you can’t figure out the effect of tax changes on revenue without first estimating the impact on taxable income.

And I’ve shared some very persuasive data and analysis in favor of the Laffer Curve and dynamic scoring.

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The evidence strongly indicates we need less government rather than more. Unless, of course, you think the United States would grow faster if we were more like France or Greece.

* There are some “micro-economic” feedback effects in the current system, so even the JCT wouldn’t assert that revenues would double if tax rates rose by 100 percent.