Wednesday, August 5, 2009

Unemployment Part 4: Federal Tax Revenue, Unemployment and the Laffer Curve

Below are two links to stories regarding the unprecedented drop in Federal Tax Revenue (down 18%). Be prepared to see a second story soon regarding the same decline in State Tax Revenues.

Here are some observations:

(1) the published unemployment rate is 9.5%. The 9.5% rate is highly suspect. The published rate of 9.5% does not count the Self Employed or Contract Labor beyond the other suspect assumptions made within the 9.5% published unemployment rate,

(2) many economists say the real unemployment rate is north of 15%,

(3) An 18% drop in tax revenues correlates with a 15% unemployment rate not a 9.5% unemployment rate.

Upon further review, take a look at the graph in the first link above. Click the graph for a larger view. Look closely at 1984-1989. Note the tax revenue increase. Then think about Art Laffer and Ronald Reagan tax cuts.

To review the Laffer Curve please see the following links for information:

Here is the question you need to ask yourself: Is the Federal Government's proposals to raise taxes going to further reduce revenue? Further increase unemployment?

Consider these points:

(1) the Laffer Curve clearly exists (taxation/revenue equilibrium). Reduced tax rates in the Reagan administration, counter intuitively, increased tax revenues as the "economic effect" of lower taxes trumps the "mathematics" of lower taxes. In other words, the tax reductions were actually a movement toward tax/revenue equilibrium,

(2) with the Federal Government currently experiencing an 18% reduction in tax revenues while chalking up record spending leading to record deficits, the reaction of Government will be to raise taxes,

(3) the increased taxes will create movement on the Laffer Curve,

(4) the prediction of the Laffer Curve, given increasing taxes in the current environment, would be to create a tax rate completely out of equilibrium. Meaning the tax revenue will decrease further (the economic effect will trump the mathematics of a higher tax rate).

(5) higher tax rates reduce consumption by businesses and consumers (less disposable income) leading to further unemployment,

(6) higher tax rates are a disincentive to Private Capital Formation which leads to the creation of Private Sector Jobs.

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