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Chronos

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Trickle down is the theory, what is the actual bill or policy or law or whatever that kicked in the theory back in the 70's? What was the piece of legislation voted on to bring about this change and what was in place before it?

I found a wiki article describing the theory but am not having much luck in getting specifics.

The Laffer Curve is the source, but the name wasn't sexy. They morphed the idea a little and re-christened it "Trickle Down Economics". The only part of the re-christened name that is correct is "down". The original name should be The Laugher Curve because that's really all it can generate: simplistic humor.

The Laffer Curve is a great topic for discussion when you are sitting around with a few intelligent people in a pub and having a beer or three (when discussing the Laffer Curve, three are better than two). However, the Laffer Curve cannot be measured, tested or implemented, but that doesn't stop people from claiming that it is true. There are only two points on the Laffer Curve that are valid: 0% and 100%. Everything in the middle is purely conjecture.

So, using this Laffer Curve theory, some people believe that if you reduce a tax rate from 25% to 20%, the people who have experienced a 5 point reduction in taxes will produce a lot more work, earn a higher income than before and thereby pay more taxes than before. For example, maybe someone who was at a 25% tax rate earning $35,000/year will suddenly be capable of producing $44,000 of income for their (newly) reduced tax bracket of 20%. If you do the math, 25% of 35,000 is $8,750 in taxes while 20% of $44,000 is $8,800 in taxes.[1] Since there is an extra $50 in taxes, the Laffer people say you are fully justified in reducing the tax rate.

However, it is entirely unjustified ...

Do you know somebody who has an income of $35,000/year who can suddenly raise their income $9,000/year just because of the reduced taxes? Seems to me that a salary is a salary is a salary. If you are making $35,000/year, you are working for someone else, and that employer is not suddenly going to see the light and give you a $9,000 raise in one year just because HIS taxes have also been lowered. Worse, a person earning $35,000/year is unlikely to earn a bonus anywhere near $9,000/year. There are very few people employed in occupations making $35,000/year in which a $9,000 bonus is a reality. But let us suppose for a moment that there are many people for whom this scenario is true ...

What the Laffer Curve completely ignores is that when higher levels of income are earned more services are consumed. So, you say, well duh! Isn't that the point? Yes, it is, but only on the surface. Just because someone is consuming more services doesn't mean that all of those services are by and for private enterprise. Government (all levels) spends about 30% of all dollars in the economy -- these are not just dollars for government programs like social welfare and the armed forces, but everything like salaries, supplies, real estate, fixtures, etc. Each time more private dollars are spent in the economy, so are more government dollars spent. As an example: remember that mythical friend you have that earns $35,000/year and is eligible for a $9,000 bonus? What is he going to do with his $9,000? Put it in the bank? Maybe some of it, but not all of it. If he is looking to buy a house he may be saving up for a down payment, but if he is ready to buy now that $9,000 not only put him over his goal, he will spend a few more bucks once he buys the house. Let's say that house is in a new development of 1,000 homes off Serendipity Boulevard (remember we are growing the economy Laffer-style) ... what do you need for 1,000 new homes? You need additional fire protection, police protection, housing inspectors, additional water sources and perhaps additional purification capacity, new zoning, new easements, additional boxes for delivery of mail (and the associated personnel that go with those boxes), schools, medical facilities, etc, etc, etc.

Do you think that your friend is going to get all that extra stuff because the government earned $50 extra?  Hell no!  If you do, then Serendipity Boulevard is located in Fantasyland USA. If the government did reduce his taxes 5 points, the government will have to create new taxes to compensate, like a water/sewer hookup fee of $5,000 instead of $3,000, or real estate taxes of $0.30 per $1000 instead of $0.26 per $1000, or a $2000 fee for the fire truck to show up at your house instead of the old $500 fee ... etc, etc, etc.

The Laffer Disciples think that if you reduce income taxes everything will trickle down from the people higher up the income ladder to those who are below it. What they fail to tell you is that those who are down the ladder are unlikely to gain any real income from this maneuver and they are still likely to consume more services than their tax reduction justified because now the government is operating at a loss. (Remember, inflation still occurs so dollars are devalued constantly.) Is the government just supposed to lay off employees because you saved a few bucks in taxes? Since government is the largest single consumer of goods and services, reducing the output of the government is going to reduce the input to your paycheck. This means that the economy will stagnate or shrink, or in the worst case scenario, your government will take out loans (incur debt) to help pay the expenses from the mythical taxes that were never collected. Meanwhile, the Laffer Disciples just invested another $100,000 in Apple this week.


 1. These examples are not intended to bear any relations to tax rates per thousand of income anywhere in the United States. They're just examples.
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MadBunny An excellent deconstruction and explanation. November 28, 2013, 04:38:22 PM