Life on the Downside of the Laffer Curve

Floor Speech

LIFE ON THE DOWNSIDE OF THE LAFFER CURVE -- (House of Representatives - March 03, 2009)

Mr. McCLINTOCK. Madam Speaker, the Laffer Curve is a simple but eloquent method of demonstrating how increasing taxes reduces economic productivity until a point of equilibrium is reached when further tax hikes actually reduce revenue. If the tax rate is zero, tax revenues are zero. But if the tax rate is 100 percent, tax revenues also reach zero, because there is no point in working. Thus, every increase in a tax rate produces a progressively smaller return of tax revenues as people adjust their behavior to reflect the reduced value of their work. When taxes exceed an economic tipping point, revenues begin to fall.

California vividly demonstrated this effect in 1991 when Governor Pete Wilson imposed the biggest State tax increase in American history. That $7 billion tax hike, a staggering combination of increases in sales and income and car taxes, broke the back of California's economy. While the rest of the Nation's economy expanded, the tax hike put California into a nosedive, including the biggest plunge in retail sales in 30 years. Those taxes brought in barely half of the new revenue that had been predicted and then produced two consecutive years of billion dollar a year declines in State revenues.

Well, Madam Speaker, California is about to get another very expensive lesson in the Laffer Curve, courtesy of a $13 billion tax increase just approved by Governor Arnold Schwarzenegger. That hike will sock an average family with more than $1,200 of new taxes.

We should watch California's experience very carefully in the days ahead, because it is going to be a harbinger of the impact that we can expect under President Obama's proposed tax increases. Although California already has the highest sales tax in the Nation, it is about to go up by 13 percent, or a penny on the dollar. Although California has the highest income tax in the Nation, it is about to go up another quarter percent. Although California's sales tax is the second biggest generator of revenue for the State and automobile sales comprise a fifth of all sales taxes, the State has also doubled the car tax and is lobbying for new regulations which will increase the price of a new car by as much as $5,000.

Benjamin Franklin said that ``experience keeps a dear school, but fools will learn in no other.'' Appropriately, the California tax increases will take effect on April Fool's Day, illustrating that some people don't even learn from experience.

But perhaps some good will come of it for the Nation. If California's experience with the Wilson tax increases is any indication, the impact of the Schwarzenegger tax hike is likely to be immediate and devastating. I believe it could serve as an invaluable lesson for the Obama administration, which last week announced a whopping tax increase of $1.4 trillion over the next 10 years, averaging about $1,800 per family per year.

Now, I know, the President promises these taxes will only fall on the ``very wealthy,'' those folks who earn $125,000 as individuals or $250,000 as couples. But the fact is that 65 percent of those folks aren't really folks at all. They are small businesses that are the very foundation of our economy, many of which are barely holding on as it is. The other tax will directly hammer families with higher energy and consumer prices through a $656 billion carbon tax.

Now, it is not that another example should be necessary. Herbert Hoover's response to the recession of 1929 was to increase the marginal tax rate from 25 percent to 65 percent and to burden international trade with steep tariffs.

The Obama taxes have yet to be enacted, and if passed this year they won't take effect until 2010. By then, California will have become a poster child for ``governments gone wild,'' a vivid warning of life on the downside of the Laffer Curve, and a lesson that the rest of the Nation should pay rapt attention to as we consider the impact of the administration's proposal for higher taxes nationally.

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