The Laffer Curve At Work

Yesterday CNS News reported that during the month of January (the first month the Trump tax cuts were in effect), the federal government ran a surplus.

The article reports:

January was the first month under the new tax law that President Donald Trump signed in December.

During January, the Treasury collected approximately $361,038,000,000 in total tax revenues and spent a total of approximately $311,802,000,000 to run a surplus of approximately $49,236,000,000.

Despite the monthly surplus of $49,236,000,000, the federal government is still running a deficit of approximately $175,718,000,000 for fiscal year 2018. That is because the government entered the month with a deficit of approximately $224,955,000,000.

The article also reports some of the history:

Over the last twenty fiscal years, going back to 1999, the federal government has run surpluses in the month of January 13 times and deficits 7 times. Six of the Januaries in which the federal government ran deficits overlapped President Barack Obama’s time in office—including January 2009, the month Obama was inaugurated, and the Januaries in 2010, 2011, 2012, 2014 and 2016.

If you are not familiar with the Laffer Curve, it is a financial theory that the website the balance describes as follows:

The Laffer Curve is a theory that states lower tax rates boost economic growth. It underpins supply-side economicsReaganomics and the Tea Party’s economic policies. Economist Arthur Laffer developed it in 1979.

The Laffer Curve describes how changes in tax rates affect government revenues in two ways. One is immediate, which Laffer describes as “arithmetic.” Every dollar in tax cuts translates directly to one less dollar in government revenue. 

The other effect is longer-term, which Laffer describes as the “economic” effect. It works in the opposite direction. Lower tax rates put money into the hands of taxpayers, who then spend it. It creates more business activity to meet consumer demand. For this, companies hire more workers, who then spend their additional income. This boost to economic growth generates a larger tax base. It eventually replaces any revenue lost from the tax cut.

This is an illustration of how the Laffer Curve works:

As you can see, there is a point where taxes reach a high point and the amount of revenue generated from taxes goes down. That is not a coincidence–that is what tax attorneys get paid for. One of the reasons we need to make the tax code simpler is that we need to take away the complexities that allow people to hide income and avoid taxes. I believe that was one of the goals of the Trump tax plan. It remains to be seen whether or not that goal was achieved.