Topic: Time to pay the piper

http://directorblue.blogspot.com/2012/01/illinois-suffers-yet-another-downgrade.html?utm_source=twitterfeed&utm_medium=twitter

While he might be a bit bombastic, he makes some very salient points.

For those who do not understand the above sentence:

The guy hates you, mocks you, but he also had some hard truth for you in his effort to change you.

Everything bad in the economy is now Obama's fault. Every job lost, all the debt, all the lost retirement funds. All Obama. Are you happy now? We all get to blame Obama!
Kemp currently not being responded to until he makes CONCISE posts.
Avogardo and Noir ignored by me for life so people know why I do not respond to them. (Informational)

2 (edited by Zarf BeebleBrix 21-Jan-2012 09:02:02)

Re: Time to pay the piper

[EDIT: Forget it... bad post is bad (mine, that is).]  tongue

Make Eyes Great Again!

The Great Eye is watching you... when there's nothing good on TV...

Re: Time to pay the piper

Ahhh I missed it sad

Everything bad in the economy is now Obama's fault. Every job lost, all the debt, all the lost retirement funds. All Obama. Are you happy now? We all get to blame Obama!
Kemp currently not being responded to until he makes CONCISE posts.
Avogardo and Noir ignored by me for life so people know why I do not respond to them. (Informational)

4 (edited by Zarf BeebleBrix 22-Jan-2012 04:20:40)

Re: Time to pay the piper

Alright... what the hell...


So here's a little thought experiment.  Assume for this experiment that the government's goal of revenue is $10,000.  Below is a list of all possible tax rates for a given economy, expressed as a percentage of GDP.  Next to that, you will see, in order:
Req. GDP: What the GDP needs to be at any given tax rate for the government to reach its goal.
1%: This is the total growth, expressed as a %, required for a nation to reduce its tax rate by 1% to the number given, assuming the GDP before the shift was the target GDP.  The same is done for a 5% and 10% decrease.  So, for example, if you wanted to check the GDP growth rate required to maintain the same tax income levels resulting from a reduction in the tax rate from 50% to 40%, you would find 40% on the chart, then look to the last column (for 10%), and you're given the percentage.

The percentages and required GDPs are not assumed numbers: I ran the calculations for all of them.

Tax        Req. GDP            1%        5%        10%
100% $         10,000.00            
99%     $         10,101.01     1.00%       
98%     $         10,204.08     1.01%       
97%     $         10,309.28     1.02%       
96%     $         10,416.67     1.03%       
95%     $         10,526.32     1.04%    5.00%   
94%     $         10,638.30     1.05%    5.05%   
93%     $         10,752.69     1.06%    5.10%   
92%     $         10,869.57     1.08%    5.15%   
91%     $         10,989.01     1.09%    5.21%   
90%     $         11,111.11     1.10%    5.26%    10.00%
89%     $         11,235.96     1.11%    5.32%    10.10%
88%     $         11,363.64     1.12%    5.38%    10.20%
87%     $         11,494.25     1.14%    5.43%    10.31%
86%     $         11,627.91     1.15%    5.49%    10.42%
85%     $         11,764.71     1.16%    5.56%    10.53%
84%     $         11,904.76     1.18%    5.62%    10.64%
83%     $         12,048.19     1.19%    5.68%    10.75%
82%     $         12,195.12     1.20%    5.75%    10.87%
81%     $         12,345.68     1.22%    5.81%    10.99%
80%     $         12,500.00     1.23%    5.88%    11.11%
79%     $         12,658.23     1.25%    5.95%    11.24%
78%     $         12,820.51     1.27%    6.02%    11.36%
77%     $         12,987.01     1.28%    6.10%    11.49%
76%     $         13,157.89     1.30%    6.17%    11.63%
75%     $         13,333.33     1.32%    6.25%    11.76%
74%     $         13,513.51     1.33%    6.33%    11.90%
73%     $         13,698.63     1.35%    6.41%    12.05%
72%     $         13,888.89     1.37%    6.49%    12.20%
71%     $         14,084.51     1.39%    6.58%    12.35%
70%     $         14,285.71     1.41%    6.67%    12.50%
69%     $         14,492.75     1.43%    6.76%    12.66%
68%     $         14,705.88     1.45%    6.85%    12.82%
67%     $         14,925.37     1.47%    6.94%    12.99%
66%     $         15,151.52     1.49%    7.04%    13.16%
65%     $         15,384.62     1.52%    7.14%    13.33%
64%     $         15,625.00     1.54%    7.25%    13.51%
63%     $         15,873.02     1.56%    7.35%    13.70%
62%     $         16,129.03     1.59%    7.46%    13.89%
61%     $         16,393.44     1.61%    7.58%    14.08%
60%     $         16,666.67     1.64%    7.69%    14.29%
59%     $         16,949.15     1.67%    7.81%    14.49%
58%     $         17,241.38     1.69%    7.94%    14.71%
57%     $         17,543.86     1.72%    8.06%    14.93%
56%     $         17,857.14     1.75%    8.20%    15.15%
55%     $         18,181.82     1.79%    8.33%    15.38%
54%     $         18,518.52     1.82%    8.47%    15.63%
53%     $         18,867.92     1.85%    8.62%    15.87%
52%     $         19,230.77     1.89%    8.77%    16.13%
51%     $         19,607.84     1.92%    8.93%    16.39%
50%     $         20,000.00     1.96%    9.09%    16.67%
49%     $         20,408.16     2.00%    9.26%    16.95%
48%     $         20,833.33     2.04%    9.43%    17.24%
47%     $         21,276.60     2.08%    9.62%    17.54%
46%     $         21,739.13     2.13%    9.80%    17.86%
45%     $         22,222.22     2.17%    10.00%    18.18%
44%     $         22,727.27     2.22%    10.20%    18.52%
43%     $         23,255.81     2.27%    10.42%    18.87%
42%     $         23,809.52     2.33%    10.64%    19.23%
41%     $         24,390.24     2.38%    10.87%    19.61%
40%     $         25,000.00     2.44%    11.11%    20.00%
39%     $         25,641.03     2.50%    11.36%    20.41%
38%     $         26,315.79     2.56%    11.63%    20.83%
37%     $         27,027.03     2.63%    11.90%    21.28%
36%     $         27,777.78     2.70%    12.20%    21.74%
35%     $         28,571.43     2.78%    12.50%    22.22%
34%     $         29,411.76     2.86%    12.82%    22.73%
33%     $         30,303.03     2.94%    13.16%    23.26%
32%     $         31,250.00     3.03%    13.51%    23.81%
31%     $         32,258.06     3.13%    13.89%    24.39%
30%     $         33,333.33     3.23%    14.29%    25.00%
29%     $         34,482.76     3.33%    14.71%    25.64%
28%     $         35,714.29     3.45%    15.15%    26.32%
27%     $         37,037.04     3.57%    15.63%    27.03%
26%     $         38,461.54     3.70%    16.13%    27.78%
25%     $         40,000.00     3.85%    16.67%    28.57%
24%     $         41,666.67     4.00%    17.24%    29.41%
23%     $         43,478.26     4.17%    17.86%    30.30%
22%     $         45,454.55     4.35%    18.52%    31.25%
21%     $         47,619.05     4.55%    19.23%    32.26%
20%     $         50,000.00     4.76%    20.00%    33.33%
19%     $         52,631.58     5.00%    20.83%    34.48%
18%     $         55,555.56     5.26%    21.74%    35.71%
17%     $         58,823.53     5.56%    22.73%    37.04%
16%     $         62,500.00     5.88%    23.81%    38.46%
15%     $         66,666.67     6.25%    25.00%    40.00%
14%     $         71,428.57     6.67%    26.32%    41.67%
13%     $         76,923.08     7.14%    27.78%    43.48%
12%     $         83,333.33     7.69%    29.41%    45.45%
11%     $         90,909.09     8.33%    31.25%    47.62%
10%     $       100,000.00     9.09%    33.33%    50.00%
9%     $       111,111.11     10.00%    35.71%    52.63%
8%     $       125,000.00     11.11%    38.46%    55.56%
7%     $       142,857.14     12.50%    41.67%    58.82%
6%     $       166,666.67     14.29%    45.45%    62.50%
5%     $       200,000.00     16.67%    50.00%    66.67%
4%     $       250,000.00     20.00%    55.56%    71.43%
3%     $       333,333.33     25.00%    62.50%    76.92%
2%     $       500,000.00     33.33%    71.43%    83.33%
1%     $   1,000,000.00     50.00%    83.33%    90.91%


Calculations were done as such:
2nd column=target total tax revenue/tax rate
3rd-5th columns= 1-(pre-tax cut 2nd column/post-tax cut 2nd column)

The formulas can be used to calculate different intervals of cuts under the model (i.e., calculating the required growth for a feasible 3%, 7%, or other interval of tax cut) by plugging in the numbers as shown.


You'll notice this very similarly represents the theoretical Laffer Curve, in that at higher tax rates, the required GDP level to maintain the tax amount is extremely high.  On the other end, though, it would be almost impossible to fathom the idea that cutting taxes from 2% to 1% would result in a doubling of GDP.  So... just like with the Laffer Curve, the solution is somewhere in the middle.

So... to find out where one is on the curve in this model, you would find the cut to be made and find the percentage... if the percentage given by the chart required to maintain the equivalent tax rate is higher than what one could expect in GDP growth from that rate change, the tax cut would result in a net decrease in revenue (and thus would be on the side of the Laffer Curve favoring keeping taxes high).  If, however, the percentage given by the chart for that particular cut is lower than what is expected from the tax cut, the tax cut would result in equal or greater tax revenue, and the tax cut is desirable.

Understand, this is a relatively crude model.  I'm really just experimenting here, so I could very well be terribly wrong.  Don't consider this any sort of authoritative answer on GDP growth requirements.

Now, this model cannot actually calculate what growth will happen.  That's where you come in.


Where's the peak?  What growth rates, given each tax reduction shown, are reasonable expectations?  Or, alternatively, is my math wrong?  Really, just a random thought experiment I was considering last night... wanted to throw it out here.  I'm just curious as to if it's feasible/logical to attempt mapping this out... unless I'm missing something, it may be self-explanatory.



EDIT: One additional note: Obviously, this only considers a flat tax... I'm just guessing, but more than likely, considering multiple progressive tax rates by averaging them out, for example, would disregard the specific incentives within each tax bracket... if we're discussing, for example, a society with one 10% tax bracket and one 80% tax bracket, it would probably be more appropriate to consider each bracket as a separate tax (so the ideal solution would probably be to close the gap for revenue maximization).

Also, this obviously does not consider certain tax revenues which may be considered distinct from GDP (for example, in some extremely limited circumstances, certain import tariffs would be pure revenue generators, exempt from the Laffer Curve question entirely).

Make Eyes Great Again!

The Great Eye is watching you... when there's nothing good on TV...

Re: Time to pay the piper

Let me examine tomorrow when I am less frustrated and an able to focus on this. Or maybe monday... Sigh I hate my boss.

Everything bad in the economy is now Obama's fault. Every job lost, all the debt, all the lost retirement funds. All Obama. Are you happy now? We all get to blame Obama!
Kemp currently not being responded to until he makes CONCISE posts.
Avogardo and Noir ignored by me for life so people know why I do not respond to them. (Informational)

Re: Time to pay the piper

Ok I have to disagree with your formula method. Or at least my understanding of it.

Instead allow me a small table with 10% differences between each tax level. In my demonstration of a Laffer we will not use 100% as that cancels out government taxes and individuals wealth. Like yours mine is flat

Tax Rate % - individual keeps - Government gets

0% - 100% - 0%
10% - 90% - 10%
20% - 80% - 20%
30% - 70% - 30%
40% - 60% - 30%
50% - 50% - 25%
60% - 40% - 20%
70% - 30% - 15%
80% - 20% - 10%
90% - 10% - 5%

Now someone is going to say that is skewed impropery. It is not. It is one percieved potential variation. I chose this variation to account that when the government taxes to much black market activites rise, barter increases, and tax evasion increases. Additionally government tends to not produce value as much as industry can, and incrreased taxes reduces potential economic growth is slowed. Though I did not accounr for that. Others can skew the table how they want.. I believe that for not precisely mapping it out this could be a fair representation.

What this shows is that if the average income is $10,000 annually the best the government can get per person is $3,000 and that raising taxes will in fact reduce the total the government brings in.

Everything bad in the economy is now Obama's fault. Every job lost, all the debt, all the lost retirement funds. All Obama. Are you happy now? We all get to blame Obama!
Kemp currently not being responded to until he makes CONCISE posts.
Avogardo and Noir ignored by me for life so people know why I do not respond to them. (Informational)

Re: Time to pay the piper

Our models aren't mutually exclusive.  Your model is trying to predict what the resulting GDP would be, and thus what tax revenue would be, as a percentage of GDP.  That's step 2 in a two-part problem.

My model is not saying "The GDP rate will be whatever GDP rate is actually displayed."  Rather, it simply acts as a gauge to calculate what the GDP would need to be at each point to achieve the target goal in government revenue (so, for example, the question of what will actually happen is in no way calculated under my model).  If taxable GDP would be lower than the rate # (for example, the black market argument), the tax rate isn't preferred.

Make Eyes Great Again!

The Great Eye is watching you... when there's nothing good on TV...

Re: Time to pay the piper

After another examination I either still am in error or you have an error.

The principle function of a Laffer curve is there is only one real set value. That value is the combined income or seperate income of individuals and/or corporations.

The tax is never fixed in the curve, except on a Y axis level, and the government returns is not fixed, except on an X axis level.


The way I interpet your table is that the amount needed is fixed, which would be innapropriate to a Laffer curve. The Laffer curve does not address need for the Government so much as the actual take for the government being determined by the tax rate.

Everything bad in the economy is now Obama's fault. Every job lost, all the debt, all the lost retirement funds. All Obama. Are you happy now? We all get to blame Obama!
Kemp currently not being responded to until he makes CONCISE posts.
Avogardo and Noir ignored by me for life so people know why I do not respond to them. (Informational)