Relentless Pursuit of Wisdom and Liberty

The weblog companion of, dedicated to pondering, "If Patrick Henry could see us now..."

Tuesday, February 15, 2005

The Laffer Curve and Social Security reform

Well, after a bit of a respite from blogging to enjoy a family-filled weekend (and being incredibly busy at work), I'm back!

The calls by opponents of Social Security reform for higher taxes (either by raising the cap on income subject to the payroll tax or by repealing the 2003 tax cuts) ring very hollow in light of the impact of significant tax cuts on federal tax revenues:
It takes about two minutes of “Googling” to find out that the big tax rate cuts of the past 100 years (under President Harding in the 1920s, Kennedy in the 1960s, Reagan in the 1980s and Bush in 2003) have produced higher economic growth and higher government revenues.
This is the Laffer Curve at work, and those calling for higher taxes just don't get it. And endlessly repeating that the 2003 tax cuts were "for the rich" is counter-productive. As federal tax revenues have risen in the last couple of years, the percentage of those revenues paid by the wealthiest portion of taxpayers has risen as well. How this works is obvious: when tax rates are lowered, it gives people incentive to increase their productivity - to work more - because a smaller portion of the extra marginal income they make is eaten up by taxes, and they get to keep a larger portion than before. But the extra income does produce extra taxes that are added to existing revenues, resulting in higher revenues.

The higher tax rates espoused by opponents of reform would result in lower total federal tax revenue and would make the unfunded liabilities of Social Security worse instead of better.


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