Senator Daines, Please Oppose Laffer’s Tax Cut Gimmicks

An asymmetric Laffer curve.

[UPDATED July 3, 2017]

I’m updating this post to include Senator Daines’s response.

Dear Senator Daines,

My name is Jared Pettinato, and I live in Whitefish. Would you please oppose President Trump’s tax cuts that undermine the financial integrity of the United States? They contravene the Republican Party’s commitment to fiscal conservatism, and they will cause the national debt to balloon even further.

I’m sure you have seen Kansas’s experience in supply-side economics.1 As you may know, Republican Governor Sam Brownback followed economists Arthur Laffer and Stephen Moore to cut taxes. Laffer and Moore contended that cutting taxes would spur economic growth. The facts show they were wrong.2

The Laffer Curve originated in 1974 when tax rates exceeded 70%.

The argument that cutting taxes will grow the economy arises from the Laffer Curve.3 As you may know, in 1974, Laffer drew a graph on the back of a napkin for Dick Cheney and Donald Rumsfeld.4 The graph that showed government income against the income tax rate. Laffer contended that government income ranged from zero dollars at a zero percent tax to zero dollars at a one-hundred percent taxes, and in between, the government income followed a parabola. Laffer argued that cutting taxes would grow government revenue as economic activity increased because the United States was taxing income at a higher rate than the apex in the graph.5

A simple parabola showing the traditional Laffer Curve
Traditional Laffer Curve, by Bastianowa, licensed under CC BY-SA 2.5

In 1974, Laffer may have been correct that cutting taxes may have grown the economy and government revenue. In 1944-45, the United States was taxing income over $200,000 at 94 %.6 The top tax rate exceeded 70 % into the 1980s.7

Later, researchers reshaped the Laffer Curve. Since 1974, researchers have concluded that government revenue maximizes at 70 % income tax rate.8 In other words, the Laffer Curve’s shape does not reflect a parabola, but likely some other curve.9 Because no tax rate in the United States currently exceeds 70 % (the highest bracket reaches only 39.6%,10 cutting taxes would only decrease government revenue.

An asymmetric Laffer curve.
An asymmetric Laffer curve with a maximum revenue point at around a 70% tax rate, based on estimates by Trabandt and Uhlig (2011), by Lawrence khoo, licensed under CC0 1.0

Kansas crashed its government revenue by contravening the researchers’ advice.

Indeed, Kansas’s revenue drastically decreased when Kansas cut income taxes. Kansas’s revenue dropped so low that it had to cut its school budget by $44.5 million to pay for the tax cuts.11 Kansas’s government continued in a downward spiral until a Republican-controlled legislature overrode former-senator, now-Governor Brownback’s veto. In the meantime, Kansas underperformed the United States in private employment growth, gross domestic product growth, and small business growth.12 Two bond agencies downgraded its credit ratings.

The Founding Fathers baked federalism into the Constitution, and it prevents a single state’s tragedy from befalling the entire United States. Supreme Court Justice Louis Brandeis explained in a 1932 case: “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”13 Kansas has so experimented and its failed experiment serves as a lesson without risking the United States’ entire economy.

Conclusion

Would you please follow the lessons for which Kansas has suffered, and please stop the United States from proceeding down the same destructive path? Fiscal conservatism principles prohibit cooking the United States’ books to justify a tax cut while destroying the economy.

Please oppose the proposed tax cuts that rely on future economic growth to pay for them. Tax cuts do not promote future economic growth unless the income tax rate exceeds 70 %.

If you consider yourself a fiscal conservative, you will oppose those fantastical future growth rates that contravene the hard evidence in front of you.

I look forward to hearing your proposed next steps.

Sincerely,

Jared S. Pettinato

NOTES

1 Alexia Fernandez Campbell, Kansas Republicans end the state’s failed tax-reform experiment (June 7, 2017), at https://www.vox.com/policy-and-politics/2017/6/7/15753510/kansas-brownback-tax-reform.

2 Center on Budget and Policy Priorities, GOP Tax Plans Would Emulate Failed Kansas Experiment (updated June 7, 2017), at http://www.cbpp.org/research/federal-tax/gop-tax-plans-would-emulate-failed-kansas-experiment.

3 Laffer Curve, https://en.wikipedia.org/wiki/Laffer_curve.

4 Id.

5 Bastianowa, Krzywa Laffera, https://en.wikipedia.org/?title=Talk:Laffer_curve/Archive_1#/media/File:Krzywa_Laffera.svg.

6  Philip Scranton, Tax Rates of the Mid-20th Century, http://teachinghistory.org/history-content/ask-a-historian/24489 (“In 1944-45, ‘the most progressive tax years in U.S. history,’ the 94% rate applied to any income above $200,000 ($2.4 million in 2009 dollars, given inflation)”).

7 Federal Income Tax Brackets and Maximum Tax Rates: 1950-1980, https://web.stanford.edu/class/polisci120a/immigration/Federal%20Tax%20Brackets.pdf; see also http://photobucket.com/gallery/user/tester123456/media/cGF0aDovc3RlYWx0aC5wbmc=/?ref.

8 Laffer Curve, Wikipedia (collecting resources).

9 Laffer Curve, Wikipedia.

10 26 U.S.C. § 1.

11 Kansas Republicans (“The budget crisis has collided with a long-running battle over public school funding. The state’s public schools are shouldering the burden of the state’s budget crisis, with $44.5 million cut from public education in 2015 alone.”).

12 GOP Tax Plans.

13 New State Ice Co. v. Liebmann, 285 U.S. 262, 291 (1932) (dissenting).

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