Art Laffer strikes back

Folks, the snake oil salesman is back. Art Laffer wrote this brilliant op-ed (not!) in WSJ on 06/06 how the economy is gonna collapse if Bush Tax cuts expire this year. Yes, it's bunch of misrepresented facts and twisted logic. Bloggers and other columnists blasted him aptly. I'm not surprised that WSJ published this op-ed. Lately that paper looks like propaganda page for right wingers and tea party. Links at the end of blog.

I've one question about this 'Tax cuts for the wealthy' theory. Conservatives argue that less tax on the corporate profits and rich stimulates economy and create more jobs. Actually it's a good theory. But only on paper. Post great depression and Milton Friedman era, this might've made sense as the jobs are created in Manufacturing sector. Corporate profits might've created more jobs.

Now, how many Manufacturing jobs exist in USA? Everything was moved to china and third world countries by 80s. Automotive jobs moved to Canada and Mexico. 80s and 90s experienced boom of tech jobs and call center jobs. But by the start of new millennium all the possible tech jobs're moved to India and other countries.

Where exactly are these new jobs are created, and it's pretty much a fact that Bush tax cuts only helped rich people. Bush inherited a 236Bil surplus budget from Clinton, implemented tax cuts and he blessed the country with 400Bil deficit. He also threw in a depression as a good measure. And two wars, oh I digressed!

Most of the income tax paid in USA is paid on Capital gains. It's not on income. So an average guy on street making 100G per annum will pay somewhere between 25 to 35% tax based on his location, martial status, kids and other factors. But if a millionaire makes that 100G in capital market, he'll only pay 15%(long term). You see the disparity. Now Obama wants to increase it to 20%, conservatives are crying foul.

Corporate profits, it's a different game altogether. Creative accounting will be in full throttle here and there're off shore tax havens. Exxon Mobil didn't pay a single penny as income tax as they paid taxes in different countries. See this Frontline Story to learn more about tax havens.

Before I finish my rant, I want to say few things about Laffer's greatest contribution to the world, 'Laffer curve'

Quoting wikipedia, 'the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation'. So it shows that, if tax rate is 0, tax revenue will be zero and if tax rate is 100% the tax revenue will be zero. What it wouldn't tell you is what's that sweet spot what's the win-win tax rate for tax payer and government.

But I couldn't comprehend, what's that Laffer discovered which I didn't know already. Any tax payer with an Economics 101 class can guess that. Sometimes a liberal arts degree and right connections makes a mediocre person a great economist.

Peace

Media Matters fact check on Laffer's commentary

Barry Ritholtz, dissection of Laffer's op-ed

Asha Banglore's commentary

My previous blog about Art Laffer

Image from wikipedia commons