We spent some time this morning talking about the myth of the always applicable Laffer curve and the supply-sideristas who always claim that tax cuts will be off-set by revenues from greater economic productivity. But we’re not Alan Greenspan—who famously doesn’t think it’s his job to think about how his comments on economic matters are perceived. So we don’t want our lack of enthusiasm for the great Republican myth to be construed as support for the great Democratic myth.
Perhaps you haven’t heard much about the great myth that seems to be the animating economic idea behind the Democratic party at the moment. You’ve heard the myth in various forms, of course, but it is rarely presented in terms on which it can be identified, analyzed and critiqued. Instead, it’s presented as nothing other than the obvious truth.
To put it succinctly, the myth is that increases in tax rates and higher tax revenues reduce budget deficits. Like the supply side faith, this one begins with a kernel of truth—that, all things being equal, higher revenues would reduce budget deficits—and then warps it into a poisonous lie. The mischief comes from the fact that all things are never equal, and there is little evidence that higher revenues results in lower deficits.
What is particularly not equal here is government spending. The myth of deficit reducing revenues depends on something that is patently untrue: the assumption that the demand for government spending is inelastic. In other words, when the government collects more revenues it tends to spend more.
What truly limits government spending is the size of the budget deficit. Or, more precisely, the political tolerance for budget deficits. It is the size of the deficit that is fixed, not the level of government spending. When you grow revenue, you grow spending, and the budget deficit chugs along.
This is not to say that it is impossible to reduce budget deficits. We’ve reduced them in the past, and even achieved something like a surplus at times. But this has been an achievement in politics—a political demand for lower deficits that overcame the demand for more spending—and not a function of revenue collection.
So before deciding that Republican proposals for tax cuts are irresponsible and Democratic proposals for tax hikes are responsible—that is, deficit reducing—ask yourself whether or not you think the demand for government spending is likely to increase or decrease when the government receives that added revenue.

The economist Murray Rothbard believed that the Laffer curve was one of the great myths of the Reaganite right, distorting Republican economic policy and distracting Republicans from the goal of reducing the size and scope of government. It was an economic idea that could be explained on a cocktail napkin, so it appealed massively to politicians and propagandists. And it contained an important kernel of truth. But there have always been serious problems with the way it was used by supply siders.
“It is true that if tax rates are 99%, and they are cut to 95%, tax revenue will go up,” Rothbard wrote in Making Economic Sense. “But there is no reason to assume such simple connections at any other time…People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut.”
He could list off a half dozen problems with the claims of supply siders about the Laffer curve. But the most devastating was this one: they had no metric for showing where we were on the curve at any given time. And yet this never stopped them from always claiming we were on the diminishing tax-revenue side of the curve, regardless of what the marginal tax rates were at the time.
And apparently the great myth of the Laffer curve remains central to conservative orthodoxy. The long-legged and razor smart Megan McArdle of Asymetrical Information reports that she recently had a book review spiked by a conservative magazine because she had written that the Laffer curve didn’t apply to American levels of taxation. “The Laffer curve and the supply siders pushing it seem to be the teacher’s unions of the right,” McArdle writes.
Now we’re not sure that she’s right when she claims that the Laffer curve doesn’t apply to current levels of taxation. But we’re not sure she’s wrong, either. As we’ve said, there’s never been a plausible metric for figuring this out except in the most extreme cases, which renders the Laffer curve useless as a predictive model.
More importantly, there are probably many Laffer curves operating in our economy at any point because there are many kinds of taxation. Income taxes. Corporate taxes. Capital gains taxes. Excise taxes. Sales taxes. Because these are set at different levels and hit at different points in our economy, we may well be on the left side of the curve for some taxes and the right on others.
In any case, it’s distressing to see the closing of the conservative mind to economic debate. No wonder those Republican presidential hopefuls were so terrible in the Michigan debate.
I take it all back [Asymetrical Information]

Senator Schumer plans to introduce legislation to raise taxes on private equity executives, hedge fund managers and a slew of other rich people. “My intent is to raise the most revenue and do it in a fair way,” Chuck said. “My bill will certainly raise the taxes on people who not get 15 percent for carried interest, for sure.” Though he did not share whether or not the individuals currently privy to paying only 15 percent on carried interest would have to pay 35 like normal people, he did suggest that the political wisdom that says you can’t raise taxes on the wealthy—which Schumer referred to as “old bugaboo”—is no longer valid.
In the past, Schumer’s been against any proposals that he felt unfairly singled out minorities (women, blacks, private-equity firms, hedge funds), by stripping them of their right to keep more of their money than other people. Now he claims to want to “treat everyone across the board,” and says he isn’t afraid to raise taxes on the rich in order to level the playing field. The only thing he may be afraid of is not getting an invite to Jim Chanos’s next 4th of July clambake, the last one at which he was heard saying “I’m still thinking about it,” re: taxation on HF managers and “I’ve never gotten why people would want to eat mussels. There’s too much work involved, too labor intensive. I don’t want to be breaking a sweat while I’m eating.”
Schumer Says He’ll Sponsor Tax Rise on Fund Managers [Bloomberg]

With regard to a House bill that would swap the much-loved 15% tax rate loophole for a staggering 35%, White House flak Tony Snow said Wednesday that Bushie will veto any and all attempts to increases taxes on hedge funds y buyout firms. Snow, never afraid to go where no one else will, noted that “This is not an administration that’s predisposed toward tax increases.” This bill is separate from the one aimed at Blackstone, Fortress, et. al., though similar in nature, and one that Treasury chief Hank Paulson believes would have “unintended consequences on capitalism,” namely that the mind-blowingly rich would have to let some of its hired help go.

Bush Attacks Tax [New York Post]