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The 5 trillion tax cut, Fact or fiction?

Discussion in 'Politics, Elections & Legislation' started by omgb, Oct 4, 2012.

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  1. omgb

    omgb Well-Known Member

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    The 5 trillion dollar tax cut: Fact or Fiction


    To understand what the President and the Governor were arguing about you have to know something about the economics behind Mr. Romney’s plan. The Romney tax plan is loosely based on the science behind the Laffer curve. This curve, sometimes more parabolic than hemispherical, is a graphic model of how as tax rates climb so does revenue captured unit
    until one reaches the apex of the curve where further increases in taxation result in a lowering of revenue generated as the incentive to work is removed and as people find ways to dodge the tax.

    In the Laffer model, two forces work on taxation. The first is mathematical. As the tax rate increases so does the money taken in. The second is economic. This force acts in such a way as to discourage economic activity as the cost of such activity rises. The theory is that at the 100% tax rate, zero revenue would be generated because people would either choose not to work or will find ways around reporting the income.


    To be fair, the Laffer theory has some merit, it also has some problems. During WWII for example, tax rates hit nearly 90% and yet revenue continued to come in. That this was a time of national emergency cannot be discounted. There are very few other times when such high rates were tolerated and even then, not for long. So in theory, Romney’s reliance on the Laffer curve model for growth just might work. His gamble is based on a couple of things though. First he must create an inelastic tax model, that is, one were there are no ways around the tax. That’s his “loop hole” closing. Whether or not he can do that is still open for discussion. Second, the resulting decrease in taxation has to result in an increase in taxable economic activity. It usually does, but since spending is a matter of personal choice and trust in the stability of the economy, it just might not work.

    The Obama people are using the Laffer model too, though they come at it differently. They feel we are still on the up side of the curve and that the safest way to raise revenue is to increase taxation on the wealthy. They believe that we are nowhere near the apex of inverse revenue generation. Historically, this might be true. We have seen rates as high as 65% still generating revenue. The big questions though, will such rates fall on small business. If they do, small business will decline and revenue will go the same way as will jobs.

    In short, it’s all a tricky bet and the American people are the pawns in the cross hairs. FWIW, my money is on the Romney plan. It’s a take off on a business model that has proven successful in the past and I have no reason to believe it will not also prove so in the future.
     
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