Once upon a time there were two entrepreneurs, Huey and Mongo. They began a business appropriately called Humongous Brothers Inc.
Since there was demand for large rocks that needed to be hauled out of quarries and plopped into landscaping projects, the brothers began driving to quarries, picking up, and delivering rocks. This was soon followed by the developing of connections to get humongous boulders from all over the world, for delivery to people who had the cash and wanted that big, pretty rock in their front yard, or mall entrance.
The brothers printed brochures, purchased capital equipment such as trucks and cranes, hired three employees, and were happy.
Then one day their accountant phoned, “Huey! How are yah? Just thought you’d like to know, President Jack Kennedy has just pushed a bill through Congress that has lowered the income tax rate on you guys from 91% to 70%. You’re gonna have extra money next quarter…”
Huey, who had been mulling over a bright idea for a long time said, “Mongo, what do you think about getting into sand and gravel?”
Excited, they talked and planned long into the night.
The result of that tax cut was the taking of a risk and the eventual purchase of two more vehicles, upgrading of their sign, refurbishing of a crane, purchasing a bobcat to handle smaller items, and the hiring of two additional employees.
They took a risk as a result of the lower tax burden and expanded into a more competitive market (nobody wanted to move humongous boulders, but everyone loved sand and gravel). Their risk resulted in more profit. They lived happily ever after.
The End.
Cute huh? So what’s the point? At the confiscatory 91% tax rate existent before Kennedy lowered it, the Humongous Brothers were happy to deal with all kinds of large boulders but without thoughts of expansion. This is because any additional money made would simply be handed over to the government, so why should entrepreneurs take the risk and work the long extra hours?
But when JFK lowered the rate from 91% to 70% an economic explosion occurred in the United States as detailed above in our example.
Conclusion: When taxes are too high, they hinder the economy and cause the government to take in less money because the rich at 91% would rather go fishing (or golfing if they must) than risk capital and work extra hours for nothing. But when the ultra-high taxes are lowered, the freed up money stimulates the economy, causes capital growth (purchasing of vehicles for example) and creates jobs.
This results in more tax money taken in by the federal government.
In essence: if taxes which are too high are lowered, the government will take in much more money than if taxes had been left alone.
At the other end, if taxes are too low, raising them will bring in more money to the federal government, as expected.
This is a brief explanation of the economic principle being blamed on Dr. Arthur Laffer, even though he says he didn’t come up with it, and had taught it in his classes for years.
The Laffer Curve says, If taxes are too high, lowering them will stimulate the economy and bring more money into the treasury. If taxes are too low, raising them will bring more money into the treasury, without affecting the economy in any dramatic way.
The trick then is to determine when taxes are neither too high or too low, but at an optimum tax rate. I’d go into that, but – enough!
Grimgold
Well, it’s easier to tell fairy tales than to cite facts, isn’t it, which is why there is no real historical example offered in this strange little story. The expansion in the economy and in the working man’s income during the post-war era of the 1950s and 1960s says it all about so-called “confiscatory taxes.” I don’t want two rich brothers to expand and take everything, do I? I’m not one of the two rich brothers.
Comment by peachfront — September 16, 2007 @ 1:04 pm
Grimgold,
Not only is your story made of whole cloth, it doesn’t support your argument.
“Expanding” from an international specialty area (a near monopoly with a large profit margin); a large boulder business, into a heavily saturated local gravel and dirt market (Dirt and gravel are not cost efficient to ship. They are almost always locally available and profit margins are low.)- or even a franchise chain of local businesses is a bad business decision and would have almost no effect on employment either – since dirt and gravel are already supplied locally fairly well.
What happens, in fact and in history, when we give profitable businesses windfall tax breaks is that they buy each other out – mergers – which tend toward monopoly, less choice for consumers, less competition and therefore less innovation and efficiency and ultimately a poorer economy generally.
Also, 91% was the top INCOME tax bracket and Kennedy’s 70% sounds about right to me too – not the current 37% or so. Huey and Mongo would pay CORPORATE taxes on profits. Kennedy lowered corporate rates five points to 47% for the largest businesses. It’s 35% now.
So now I have a question. Do you believe that the rich and/or corporations are currently taxed so much that economic growth is inhibited?… or is there some other reason you offer this strange and unsupportive story?
Comment by Swampdog — September 16, 2007 @ 3:02 pm
Yup another pie-in-the-sky parable arguing the virtues of corporate welfare.
I’m sorry but the economic dynamic is much more complicated than the simpletons at the seminary
college thinktanks, dont even mention that celebrated dullard Grover Norquist.
I think the facts garnered from the last three
decades speak for themselves and no amount of spin can undo those facts.
If everyone paid their fair share of taxes to begin with then there would not even be a need for this debate and this country would live up to the ideals of a strong and compassionate
democracy instead of a nation controlled by corporations lobbying and securing every possible handout at the expense of remaining 99%
of the population.
Why would anyone aware of the nature of swindle chearlead for it?
Unless they had a personal stake in it.Hhhmm?
Comment by Rainlander — September 16, 2007 @ 3:07 pm
Thanks for the comments.
My fairytale was done in an effort to avoid being boring. My whole cloth thrust was to explain the Laffer curve. That’s all.
I don’t think corporations pay too much tax, though they do pay tax attorneys and lobbyists too well to avoid taxes, perhaps.
If you’d read my previous stuff, which I quit writing about because I didn’t want Bart’s readers to scream, you would know I don’t particularly like corporations, but favor entrepreneurs. I like competition and the best price for the consumer.
I want the FairTax so everyone pays federal tax.
As you probably know, corporations don’t really pay any tax, because they add that cost of doing business on to the cost of goods sold. The consumer ends up paying the tax that the corporations appear to pay.
Am I on the side of big business? Yes if they are providing an excellent service for consumers.
But corporations like AT&T, which is on the verge of monopoly should be broken up. I want a lot of smaller, very successful companies in this country.
And, BTW, there is nothing wrong with being rich. It’s being poor that bothers me.
Grimmy
Comment by grimgold — September 16, 2007 @ 9:58 pm
The problem, Grimmy, is that the tax breaks have been going not to entrepeneurs, and not to consumers, but to the super-rich. The ideas you’ve been writing about here are sold to the populace as sound principle, but in practice they amount to giving away more money to corporations that have no need of it.
Comment by Peregrin — September 17, 2007 @ 1:08 am
Gee…that confiscatory tax rate must be such a problem in the European Union, eh?
Germany…France…the U.K….they’re all socialist countries at heart, because their corporate tax rates make ours look like feudalism. How can they possibly pay for their universal health care, their welfare states? How can they possibly live with their balanced budgets and NO running deficits, like Germany? How can they possibly have a currency that is worth MORE than the U.S. dollar?
You got nothin’ but fairy tales, Grim. That’s an excellent nick you picked, dude. Time to grow up and realize that supply-side economics is a con job designed to bilk you out of as much of YOUR hard-earned tax money as possible, straight into the modern-day J.P. Morgans’s wallets and portfolios.
Comment by Daddy-O — September 17, 2007 @ 9:56 am
Daddio, I don’t understand what “an excellent nick” means, but probably not complementary.
All I did was explain the Laffer curve. I said nothing about supply-side econ. When it comes to growing up, how about paying some attention to me concerning inflation? How about a comment about that rather than picking on me for things i didn’t address?
Comment by grimgold — September 17, 2007 @ 10:20 am
Comment by Ye Olde Scribe — September 17, 2007 @ 1:56 pm
Scribe! I saw MPFCircus last night – thought about you.
We need the Silly Party in this country!
Gringold
Comment by grimgold — September 17, 2007 @ 7:34 pm