Friday, May 2, 2008

Is McCain a Lafferite?

A few weeks ago, I attended a talk at the Tax Policy Center with McCain's economic advisor, Doug Holtz-Eakin. (See here for an earlier post on the talk.) The audio of the complete talk is on this page.

During the Q&A, one questioner asked "Does Senator McCain believe that tax cuts pay for themselves?" Holtz-Eakin responded "No."

I followed up by asking how he could reconcile this answer with the fact that McCain has on multiple occasions said that he subscribes to the Laffer hypothesis that cutting taxes increases revenues. For example, he told the National Review:

Tax cuts, starting with Kennedy, as we all know, increase revenues. So what’s the argument for increasing taxes? If you get the opposite effect out of tax cuts?
The essence of Holtz-Eakin's response was that if you talk as much as McCain does, "you will occasionally cut corners and say things that are too blunt. That's all that's going on." You can listen to the audio clip here:







There you have it. When McCain says something that is untrue, he's just being "too blunt."

This is the economy policy version of McCain's repeated assertions that Iran is training al-Qaeda. The problem is not just that these claims are demonstrably false--it's that they are false and crucially important to policy. These very falsehoods could be used to justify government-bankrupting tax cuts and a war with Iran, which is exactly what we're likely to get if McCain is elected.

(I didn't have a chance to ask Holtz-Eakin why it is, if he thinks Laffer is full of it, that Laffer is a special adviser to McCain, as Jeff Frankels pointed out.)

4 comments:

IM said...
This comment has been removed by the author.
IM said...

First I must say great blog! It's nice to see a civil discourse on a subject so near and dear to my heart.

Normally I don’t post many responses to blogs that I stochastically stumble across, but in this case I just had to. Dr. Arthur Laffer is one of my dearest friends and mentor, so I feel the need to set the record straight in re the “Laffer Hypothesis.” Arthur Laffer has never postulated that ALL tax cuts ALWAYS increase tax revenues. It is one of the most misconstrued ideologies in all of economics and both sides of the aisle are guilty of misrepresenting Laffer’s philosophy. What Laffer states is that the over taxation of a resource renders it less productive and that, in fact, there are cases where relieving the tax burden on that resource can increase its productive capacity, i.e. people don’t work to pay taxes and incentives matter. He will be the first one to admit that the Laffer Curve is not solely his idea. He will gladly cite Ibn Khaldoun (1332-1406 A.D.) and John Maynard Keynes, both of whom postulated the same idea before he did. Now in regards to Laffer’s belief in cutting taxes and increasing revenues, he would say that it depends on the elasticity of supply for taxable funds. The Robin Hood mentality of taxing the rich to give to the poor never works because of this. The wealthy are much more sensitive to changes in tax rates because they have the resources to, legally and illegally, offset the new tax burden. Normal folks in the middle don’t have that luxury so they simply have to “eat” the new tax burden. Cutting some taxes increase revenues while cutting other taxes decrease revenues. Not all tax cuts increase revenues, especially with where the tax rates are currently. In any event, I’ve never heard of taxing a country into prosperity.

Again, great blog. It’s a good read and I’m sure we could have some very interesting conversations.

All the Best,

IM

Sorry about the deleted comment. My cat thinks he’s helpful when he walks across my keyboard.

ken kranz said...

Tax cuts, starting with Kennedy, as we all know, increase revenues. So what’s the argument for increasing taxes? If you get the opposite effect out of tax cuts?

is this 1960? No. I hear this excuse for thinking all the time. To assume that one stimulus plan works in all cases is just plain stupid. We dont have strong unions or the demand pull inflationary pressures Dillon and Kennedy faced. In their economic environment those policies were probably the right thing to do. Not now or in the past 25 years was it the right thing to do.

Curtis said...

IM:

You wrote that you have "never heard of taxing a country into prosperity."

Based on my research I would say that a country whose real taxation is less than 20% of GDP will see growth in prosperity by increasing government taxation and spending and bringing it up to a level of 20%. I have seen empirical research on this; although I don't have the data at my fingertips at the moment. Countries with spending and taxation below 20% see their growth rates increase whent the taxation and government spending is increased.

There was also an econometric analysis done by the National Center for Policy Analysis that indicates an optimal (growth-maximizing)level of taxation is in the range of 21.5 percent to 22.9 percent of gross national product (GNP).

I need to point out that the "real" taxation level under the Bush administration is much higher than what they are taking in in taxes. When a government enters into deficit spending it is actually taxing everyone equally without the politically difficult process of actually raising taxes to produce a balance budget.

If we are talking about incentives to growth for the US economy what we really need to do is to curtail government spending in areas that do not contribute to the productive capacity of the people.