Carpe Diem

Why the Stimulus Shouldn’t Stimulate You

“What makes you think that this tax rebate will put anyone to work? The idea behind the stimulus deal is to give people tax cuts so they’ll feel richer and spend more. But government can’t make people richer on average; all it can do is shuffle wealth around. To pay Peter, you must tax Paul (or at least promise to tax Paul in the future, when your debts come due). Peter spends more, but Paul spends less.

Moreover, even if you do somehow manage to increase spending, that doesn’t mean you’ll put Americans to work. More likely, you’ll put Asians to work producing goods for the U.S. market.

President Bush seems to have become confused on this key point because he misunderstands supply-side economics. He has vaguely remembered that tax cuts put people to work, but he’s forgotten that only marginal tax cuts put people to work. Non-marginal tax cuts — such as the ones in the stimulus package — have exactly the opposite effect, when they have any effect at all.”

~Economist Steven E. Landsburg in Sunday’s Washington Post

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The Laffer Curve in the 1920s


During the 1920s, The Revenue Acts of 1921, 1924, and 1926 reduced the top marginal income tax rate from 73% to 25% (see top chart, blue line). Did the drastic cut in tax rates cause tax revenues to fall? No, just the opposite. Personal income tax revenues increased substantially during the 1920s, rising from $719 million in 1921 to $1.16 billion in 1928 (see top chart, red line), an increase of more than 61% (this was a period of no inflation).

The share of the tax burden borne by the rich rose dramatically. As seen in the bottom chart above, taxes paid by the rich (those making $50,000 and up in those days) climbed from 44.2% of the total tax burden in 1921 to 78.4% in 1928.

Source: Heritage Foundation, “The Historical Case for Supply-Side Economics,” by Dan Mitchell

Bottom Line: The significant cuts in marginal income tax rates in the 1920s increased tax revenues collected, and the share of taxes paid by “the rich” increased.

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The Laffer Curve in the 1980s

In 1980, the highest marginal tax rate was 70% and by 1988 the highest rate was cut to only 28%. The chart above shows what happened during that decade, exactly as predicted by the Laffer curve:

1. In constant dollars, the total tax revenue collected from the top 1% of taxpayers increased by 50%, from $58 billion in 1980 to to $87 billion in 1990.

2. On a per return basis, the average taxpayer in the top 1% paid 23% more taxes in 1990 compared to 1980 (inflation-adjusted real dollars).

Bottom Line: As the Laffer Curve predicts, significant cuts in the highest marginal tax rates during the 1980s caused both: a) total tax revenue collected (in real dollars) from the top 1% to increase, and b) the tax collected per return (in real dollars) for the top 1% to increase.

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What a Difference A Century Makes

Some U.S. statistics for the year 1904:

Average life expectancy: 48 years

Homes with a bathtub: 14%

Homes with a telephone: 8%

Cost of a 3-minute call from Denver to NYC: $11.

Number of cars in the US: 8,000

Tallest structure in the world: Eiffel Tower

Average hourly wage: $0.22 ($4.61 in today’s dollars)

Average Annual earnings: $450 ($9,500 in today’s dollars)

Percent of births at home: 95%

Percent of physicians without college education: 90%

3 leading causes of death: Pneumonia, influenza, Tuberculosis

Percent of Americans graduating from high school: 6%

Number of murders in entire US: 230

Average length of recession: 22 months

Source: LibertyPost.org

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The Wayback Machine: Complete Internet Archive

Yahoo! in 1996
First NY Times website in November 1996.
In 1996, the Internet Archive began archiving the web for a service called the Wayback Machine, where you can browse through 85 billion web pages archived from 1996 to a few months ago. The top graphic above shows one of the very first Yahoo websites on December 20, 1996, and the bottom graphic shows the very first web site of the New York Times on November 12, 1996. The World Wide Web sure has come a long way in the last 12 years.

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CEOs Rank States for Business Climate 2008

Chief Executive’s fourth annual “Best & Worst States” survey recently asked 605 top executives to evaluate their states on a broad range of issues, including proximity to resources, regulation, tax policies, education, quality of living and infrastructure. CEOs were also asked to grade each state based on the following criteria: 1) Taxation & Regulation, 2) Workforce Quality, and 3) Living Environment.

“Overall, the message CEOs are sending is that over-taxed and over-regulated states are not conducive to the health of their businesses,” said Ed Kopko, CEO and publisher, Chief Executive Group.“This is the message they’ve been communicating since our poll started in 2005. However, in states like California, Michigan and New York, where we are increasingly facing a shrinking population, the message seems to have fallen on deaf ears, as CEOs continue to be extremely frustrated with the business-unfriendly practices in these states.”