税务英语文章阅读

税务英语文章阅读——LaffercurveIneconomics,theLaffercurve(alsoKhaldun–Laffercurve)isarepresentationoftherelationshipbetweenpossibleratesoftaxationandtheresultinglevelsofgovernmentrevenue.Itillustratestheconceptoftaxableincomeelasticity—i.e., taxableincomewillchangeinresponsetochangesintherateoftaxation.Itpostulatesthatnotaxrevenuewillberaisedattheextremetaxratesof0%and100%andthattheremustbeatleastoneratewheretaxrevenuewouldbeanon-zeromaximum.TheLaffercurveistypicallyrepresentedasagraphwhichstartsat0%taxwithzerorevenue,risestoamaximumrateofrevenueatanintermediaterateoftaxation,andthenfallsagaintozerorevenueata100%taxrate.Theactualexistenceandshapeofthecurveisuncertainanddisputed.OnepotentialresultoftheLaffercurveisthatincreasingtaxratesbeyondacertainpointwillbecounter-productiveforraisingfurthertaxrevenue.AhypotheticalLaffercurveforanygiveneconomycanonlybeestimatedandsuchestimatesarecontroversial.TheNewPalgraveDictionaryofEconomicsreportsthatestimatesofrevenue-maximizingtaxrateshavevariedwidely,withamid-rangeofaround70%.AlthougheconomistArthurLafferdoesnotclaimtohaveinventedtheLaffercurveconcept,itwaspopularizedwithpolicymakersfollowinganafternoonmeetingwithFordAdministrationofficialsDickCheneyandDonaldRumsfeldin1974inwhichhereportedlysketchedthecurveonanapkintoillustratehisargument.Theterm"Laffercurve"wascoinedbyJudeWanniski,whowasalsopresentatthemeeting.Thebasicconceptwasnotnew;LafferhimselfnotesantecedentsinthewritingsofIbnKhaldunandJohnMaynardKeynes.Laffercurve:t*representstherateoftaxationatwhichmaximalrevenueisgenerated.ThisisthecurveasdrawnbyArthurLaffer,however,thecurveneednotbesinglepeakednorsymmetricalat50%. Lafferexplainsthemodelintermsoftwointeractingeffectsoftaxation:an"arithmeticeffect"andan"economiceffect".The"arithmeticeffect"assumesthattaxrevenueraisedisthetaxratemultipliedbytherevenueavailablefortaxation(ortaxbase).Ata0%taxrate,themodelassumesthatnotaxrevenueisraised.The"economiceffect"assumesthatthetaxratewillhaveanimpactonthetaxbaseitself.Attheextremeofa100%taxrate,thegovernmenttheoreticallycollectszerorevenuebecausetaxpayerschangetheirbehaviorinresponsetothetaxrate:eithertheyhavenoincentivetoworkortheyfindawaytoavoidpayingtaxes.Thus,the"economiceffect"ofa100%taxrateistodecreasethetaxbasetozero.Ifthisisthecase,thensomewherebetween0%and100%liesataxratethatwillmaximizerevenue.Graphicalrepresentationsofthecurvesometimesappeartoputtherateataround50%,buttheoptimalratecouldtheoreticallybeanypercentagegreaterthan0%andlessthan100%.Similarly,thecurveisoftenpresentedasaparabolicshape,butthereisnoreasonthatthisisnecessarilythecase.JudeWanniskinotedthatalleconomicactivitywouldbeunlikelytoceaseat100%taxation,butwouldswitchfromtheexchangeofmoneytobarter.Healsonotedthattherecanbespecialcircumstanceswhereeconomicactivitycancontinueforaperiodatanear100%taxationrate(forexample,inwartime).Variouseffortshavebeenmadetoquantifytherelationshipbetweentaxrevenueandtaxrates(forexample,intheUnitedStatesbytheCongressionalBudgetOffice).Whiletheinteractionbetweentaxratesandtaxrevenueisgenerallyaccepted,theprecisenatureofthisinteractionisdebated.Inpractice,theshapeofahypotheticalLaffercurveforagiveneconomycanonlybeestimated.Therelationshipbetweentaxrateandtaxrevenueislikelytovaryfromoneeconomytoanotheranddependsontheelasticityofsupplyforlaborandvariousotherfactors.Eveninthesameeconomy,thecharacteristicsofthecurvecouldvaryovertime.Complexitiessuchasprogressivetaxationandpossibledifferencesintheincentivetoworkfordifferentincomegroupscomplicatethetaskofestimation.Thestructureofthecurvemayalsobechangedbypolicydecisions.Forexample,iftaxloopholesandoff-shoretaxsheltersaremademorereadilyavailablebylegislation,thepointatwhichrevenuebeginstodecreasewithincreasedtaxationislikelytobecomelower.Lafferpresentedthecurveasapedagogicaldevicetoshowthat,insomecircumstances,areductionintaxrateswillactuallyincreasegovernmentrevenueandnotneedtobeoffsetbydecreasedgovernmentspendingorincreasedborrowing.Forareductionintaxratestoincreaserevenue,thecurrenttaxratewouldneedtobehigherthantherevenuemaximizingrate.In2007,Laffersaidthatthecurveshouldnotbethesolebasisforraisingorloweringtaxes.ProblemsLafferassumesthatthegovernmentwouldcollectnoincometaxata100%taxratebecausetherewouldbenoincentivetoearnincome.ResearchhasdevelopedtheoreticalmathematicalmodelsinwhichaLaffercurvecanslopecontinuouslyupwardsallthewayto100%,thoughitisnotclearwhetherorwhentheassumptionsonwhichsuchmathematicalmodelsarebasedholdinrealeconomies.Additionally,theLaffercurvedependsontheassumptionthattaxrevenueisusedtoprovideapublicgoodthatisseparableinutilityandseparatefromlaborsupply,whichmaynotbetrueinpractice.TheLaffercurveaspresentedisalsosimplisticinthatitassumesasingletaxrateandasinglelaborsupply.Actualsystemsofpublicfinancearemorecomplex.Thereisseriousdoubtabouttherelevanceofconsideringasinglemarginaltaxrate.Inaddition,revenuemaywellbeamultivaluedfunctionoftaxrate-forinstance,anincreaseintaxratetoacertainpercentagemaynotresultinthesamerevenueasadecreaseintaxratetothesamepercentage(akindofhysteresis).EmpiricaldataTaxrateatwhichrevenueismaximizedApossiblenon-symmetricLafferCurvewithamaximumrevenuepointatarounda70%taxrate,basedon"HowFarAreWeFromTheSlipperySlope?TheLafferCurveRevisited"byMathiasTrabandtandHaraldUhlig. TheNewPalgraveDictionaryofEconomicsreportsthatacomparisonofacademicstudiesyieldsarangeofrevenuemaximizingratesthatcentersaround70%.EconomistPaulPecorinopresentedamodelin1995thatpredictedthepeakoftheLaffercurveoccurredattaxratesaround65%.A1996studybyY.HsingoftheUnitedStateseconomybetween1959and1991placedtherevenue-maximizingaveragefederaltaxratebetween32.67%and35.21%.A1981paperpublishedintheJournalofPoliticalEconomypresentedamodelintegratingempiricaldatathatindicatedthatthepointofmaximumtaxrevenueinSwedeninthe1970swouldhavebeen70%.ApaperbyTrabandtandUhligoftheNBERfrom2009presentedamodelthatpredictedthattheUSandmostEuropeaneconomieswereontheleftoftheLaffercurve(inotherwords,thatraisingtaxeswouldraisefurtherrevenue).CongressionalBudgetOfficeanalysisIn2005,theCongressionalBudgetOffice(CBO)releasedapapercalled"AnalyzingtheEconomicandBudgetaryEffectsofa10PercentCutinIncomeTaxRates".Thispaperconsideredtheimpactofastylizedreductionof10%inthethenexistingmarginalrateoffederalincometaxintheUS(forexample,ifthosefacinga25%marginalfederalincometaxratehaditloweredto22.5%).Unlikeearlierresearch,theCBOpaperestimatesthebudgetaryimpactofpossiblemacroeconomiceffectsoftaxpolicies,thatis,itattemptstoaccountforhowreductionsinindividualincometaxratesmightaffecttheoverallfuturegrowthoftheeconomy,andthereforeinfluencefuturegovernmenttaxrevenues;andultimately,impactdeficitsorsurpluses.Inthepaper'smostgenerousestimatedgrowthscenario,only28%oftheprojectedlostrevenuefromthelowertaxratewouldberecoupedovera10-yearperiodaftera10%across-the-boardreductioninallindividualincometaxrates.Inotherwords,deficitswouldincreasebynearlythesameamountasthetaxcutinthefirstfiveyears,withlimitedfeedbackrevenuethereafter.Throughincreasedbudgetdeficits,thetaxcutsprimarilybenefitingthewealthywillbepaidfor—plusinterest—bytaxesbornerelativelyevenlybyalltaxpayers.Thepaperpointsoutthattheseprojectedshortfallsinrevenuewouldhavetobemadeupbyfederalborrowing:thepaperestimatesthatthefederalgovernmentwouldpayanextra$200billionininterestoverthedecadecoveredbythepaper'sanalysis.OtherLafferhaspresentedtheexamplesofRussiaandtheBalticstates,whichinstitutedaflattaxwithrateslowerthan35%andwhoseeconomiesstartedgrowingsoonafterimplementation.HehassimilarlyreferredtotheeconomicoutcomeoftheKemp-Rothtaxact,theKennedytaxcuts,the1920staxcuts,andthechangesinUScapitalgainstaxstructurein1997.SomehavealsocitedHauser'sLaw,whichpostulatesthatUSfederalrevenues,asapercentageofGDP,haveremainedstableatapproximately19.5%overtheperiod1950to2007despitechangesinmarginaltaxratesoverthesameperiod.Othershowever,havecalledHauser'sLaw"misleading"andcontendthattaxchangeshavehadlargeeffectsontaxrevenues.OptimaltaxationOneoftheusesoftheLaffercurveisindeterminingtherateoftaxationwhichwillraisethemaximumrevenue(inotherwords,"optimizing"revenuecollection).However,therevenuemaximizingrateshouldnotbeconfusedwiththeoptimaltaxrate,whicheconomistsusetodescribeataxwhichraisesagivenamountofrevenuewiththeleastdistortionstotheeconomy.Relationshipwithsupply-sideeconomicsSupply-sideeconomicsisaschoolofmacroeconomicthoughtthatarguesthatoveralleconomicwell-beingismaximizedbyloweringthebarrierstoproducinggoodsandservices(the"SupplySide"oftheeconomy).Byloweringsuchbarriers,consumersarethoughttobenefitfromagreatersupplyofgoodsandservicesatlowerprices.Typicalsupply-sidepolicywouldadvocategenerallylowerincometaxandcapitalgainstaxrates(toincreasethesupplyoflaborandcapital),smallergovernmentandalowerregulatoryburdenonenterprises(tolowercosts).Althoughtaxpolicyisoftenmentionedinrelationtosupply-sideeconomics,supply-sideeconomistsareconcernedwithallimpedimentstothesupplyofgoodsandservicesandnotjusttaxation.HistoryOriginTheterm"Laffercurve"wasreportedlycoinedbyJudeWanniski(awriterforTheWallStreetJournal)aftera1974dinnermeetingattheTwoContinentsRestaurantintheWashingtonHotelwithArthurLaffer,Wanniski,DickCheney,DonaldRumsfeld,andhisdeputypresssecretaryGrace-MarieArnett.Inthismeeting,Laffer,arguingagainstPresidentGeraldFord'staxincrease,reportedlysketchedthecurveonanapkintoillustratetheconcept.Cheneydidnotaccepttheideaimmediately,butitcaughttheimaginationsofthosepresent.Lafferprofessesnorecollectionofthisnapkin,butwrites:"Iusedtheso-calledLafferCurveallthetimeinmyclassesandwithanyoneelsewhowouldlistentome."Lafferhimselfdoesnotclaimtohaveinventedtheconcept,attributingitto14th-centuryMuslimscholarIbnKhaldunand,morerecently,toJohnMaynardKeynes.PrecedentsTherearehistoricalprecedentsotherthanthoseciteddirectlybyLaffer.Forexample,in1924,SecretaryofTreasuryAndrewMellonwrote:"ItseemsdifficultforsometounderstandthathighratesoftaxationdonotnecessarilymeanlargerevenuetotheGovernment,andthatmorerevenuemayoftenbeobtainedbylowerrates."Exercisinghisunderstandingthat"73%ofnothingisnothing",hepushedforthereductionofthetopincometaxbracketfrom73%toaneventual24%(aswellastaxbreaksforlowerbrackets).Personalincome-taxreceiptsrosefromUS$719millionin1921toover$1billionin1929,anaverageincreaseof4.2%peryearoveran8-yearperiod,whichsupportersattributetotheratecut.Amongstothers,DavidHumeexpressedsimilarargumentsinhisessayOfTaxesin1756,asdidfellowScottisheconomistAdamSmith,twentyyearslater.TheDemocraticpartymadeasimilarargumentinthe1880swhenhighrevenuefromimporttariffsraisedduringtheCivilWar(1861–1865)ledtofederalbudgetsurpluses.TheRepublicanparty,whichwasthenbasedintheprotectionistindustrialNortheast,arguedthatcuttingrateswouldlowerrevenues.ButtheDemocraticparty,thenrootedintheagriculturalSouth,arguedtariffreductionswouldincreaserevenuesbyincreasingthenumberoftaxableimports.A1997analysisconcludedthatthetariffrateusedwaslowerthantherevenuemaximizingrate.AnargumentalongsimilarlineshasalsobeenadvocatedbyAliibnAbiTalib,thefirstShiaImamandfourthCaliphoftheIslamicempire;inhislettertotheGovernorofEgypt,Malikal-Ashtar.Acarefulreadingofthequotebelowshowsthatheonlyarguesforadecreaseintaxes'reducingrevenues,notforanoptimalpointwheremostrevenueswouldberaised,thusmissingtheprototypicalpointoftheLaffercurve.Itdoeshoweverimplythatrevenuesmightriseintimebecauseofthisreductionoftaxes.Hewrites:Ifthetax-payerscomplaintoyouoftheheavyincidencetotaxation,ofanyaccidentalcalamity,ofthevagariesofthemonsoons,oftherecessionofthemeansofirrigation,offloads,ordestructionoftheircropsonaccountofexcessiverainfallandiftheircomplaintsaretrue,thenreducetheirtaxes.Thisreductionshouldbesuchthatitprovidesthemopportunitiestoimprovetheirconditionsandeasesthemoftheirtroubles.Decreaseinstateincomeduetosuchreasonsshouldnotdepressyoubecausethebestinvestmentforaruleristohelphissubjectsatthetimeoftheirdifficulties.Theyaretherealwealthofacountryandanyinvestmentonthemevenintheformofreductionoftaxes,willbereturnedtotheStateintheshapeoftheprosperityofitscitiesandimprovementofthecountryatlarge.Atthesametimeyouwillbeinapositiontocommandandsecuretheirlove,respectandpraisesalongwiththerevenues.—AliibnAbiTalib, Nahjal-Balagha,Letter 53InpoliticaldiscourseReaganomicsAveragetaxratepercentagesforthehighest-incomeU.S.taxpayers,1945-2009 TheLaffercurveandsupply-sideeconomicsinspiredReaganomicsandtheKemp-RothTaxCutof1981.Supply-sideadvocatesoftaxcutsclaimedthatlowertaxrateswouldgeneratemoretaxrevenuebecausetheUnitedStatesgovernment'smarginalincometaxratespriortothelegislationwereontheright-handsideofthecurve.Asasuccessfulactor,Reaganhimselfhadbeensubjecttomarginaltaxratesashighas90%duringWorldWar II.DuringtheReaganpresidency,thetopmarginalrateoftaxintheUnitedStatesfellfrom70%to31%.AccordingtoOMBhistoricaldata,federalgovernmentrevenuefellfrom19.0%ofGDPin1980to18.4%by1989,resultinginasignificantincreaseinfederaldebt-to-outlayspercentagescomparedwithbothprecedingandsucceedingdecades.DavidStockman,RonaldReagan'sbudgetdirectorduringhisfirstadministrationandoneoftheearlyproponentsofsupply-sideeconomics,wasconcernedthattheadministrationdidnotpayenoughattentiontocuttinggovernmentspending.HemaintainedthattheLaffercurvewasnottobetakenliterally—atleastnotintheeconomicenvironmentofthe1980sUnitedStates.InTheTriumphofPolitics,hewrites:"[T]hewholeCaliforniaganghadtaken[theLaffercurve]literally(andprimitively).Thewaytheytalked,theyseemedtoexpectthatoncethesupply-sidetaxcutwasineffect,additionalrevenuewouldstarttofall,manna-like,fromtheheavens.SinceJanuary,IhadbeenexplainingthatthereisnoliteralLaffercurve."Stockmanalsosaidthat"Lafferwasn'twrong,hejustdidn'tgofarenough"(inpayingattentiontogovernmentspending).SomehavecriticizedelementsofReaganomicsonthebasisofequity.Forexample,economistJohnKennethGalbraithbelievedthattheReaganadministrationactivelyusedtheLaffercurve"tolowertaxesontheaffluent".Somecriticspointoutthattaxrevenuesalmostalwaysriseeveryyear,andduringReagan'stwotermsincreasesintaxrevenueweremoreshallowthanincreasesduringpresidencieswheretopmarginaltaxrateswerehigher.CriticsalsopointoutthatsincetheReagantaxcuts,incomehasnotsignificantlyincreasedfortherestofthepopulation.Thisassertionissupportedbystudiesthatshowtheincomeofthetop1%nearlydoublingduringtheReaganyears,whileincomeforotherincomelevelsincreasedonlymarginally;incomeactuallydecreasedforthebottomquintile.BushtaxcutsChangeinrealGDPpercapitaannualgrowthratefrom1975-9to2004-8againstthechangeintopmarginaltaxratefor18OECDcountries.Thelackofsignificantcorrelationcontradictssupply-sidetheoriesandsuggeststhatcutsintoptaxratesmightnotleadtohighereconomicgrowth. TheCongressionalBudgetOffice(CBO)hasestimatedthatextendingtheBushtaxcutsof2001-2003beyondtheir2010expirationwouldincreasedeficitsby$1.8 trillionoverthefollowingdecade.EconomistPaulKrugmancontendedthatsupply-sideadherentsdidnotfullybelievethattheUnitedStatesincometaxratewasonthe"backwards-sloping"sideofthecurveandyettheystilladvocatedloweringtaxestoencourageinvestmentofpersonalsavings.OutsidetheUnitedStatesBetween1979and2002,morethan40othercountries,includingtheUnitedKingdom,Belgium,Denmark,Finland,France,Germany,Norway,andSwedencuttheirtopratesofpersonalincometax.Inanarticleaboutthis,AlanReynolds,aseniorfellowwiththelibertarianthinktankCatoInstitute,wrote,"Whydidsomanyothercountriessodramaticallyreducemarginaltaxrates?Perhapstheywereinfluencedbyneweconomicanalysisandevidencefrom...supply-sideeconomics.Butthesheerforceofexamplemaywellhavebeenmorepersuasive.Politicalauthoritiessawthatothernationalgovernmentsfaredbetterbyhavingtaxcollectorsclaimamediumshareofarapidlygrowingeconomy(alowmarginaltax)ratherthantryingtoextractalargeshareofastagnanteconomy(ahighaveragetax)."