Marco Rubio was recently on Charlie Rose discussing immigration policy, tax reform and Cuba. Rubio was well-spoken and impressive in his thoughts and ideas. However, he made one statement regarding tax rates that needed clarification. Rubio's quote was:
"Kennedy wanted to pass tax cuts to generate revenue, so what has changed in the democratic party? President Kennedy and President Johnson believed that the way they can generate the revenue for government that they wanted in order to pay for the things they wanted to pay for, is by lowering tax rates. Why has that now changed?"
The interview can be found here:
http://www.charlierose.com/view/interview/12426
What Rubio needs to brush up on is the Laffer Curve. The amount of government revenue from taxes can never be certain, except for 2 tax rates. If the Federal income tax rate is 0% then no revenue will be generated. If the Federal income tax rate is 100% then little to no revenue will be generated. In between those two tax rates, revenue is above zero. The top tax rate during the Kennedy/Johnson era was 91% and was cut to 70% in 1965.
"Kennedy wanted to pass tax cuts to generate revenue, so what has changed in the democratic party? President Kennedy and President Johnson believed that the way they can generate the revenue for government that they wanted in order to pay for the things they wanted to pay for, is by lowering tax rates. Why has that now changed?"
The interview can be found here:
http://www.charlierose.com/view/interview/12426
What Rubio needs to brush up on is the Laffer Curve. The amount of government revenue from taxes can never be certain, except for 2 tax rates. If the Federal income tax rate is 0% then no revenue will be generated. If the Federal income tax rate is 100% then little to no revenue will be generated. In between those two tax rates, revenue is above zero. The top tax rate during the Kennedy/Johnson era was 91% and was cut to 70% in 1965.
At these tax rates, yes, tax cuts increase government revenue. However, currently the top tax rate is 35%. Tax cuts will not increase government revenue at the 35% tax rate. The Laffer Curve below plots projected government tax revenue vs. the tax rate. An NBER paper by Marcus Trabandt and Harald Uhlig finds that government revenue is maximized at tax rates of 70%. Therefore, the 35% tax rate is to the left of the parabola peak and 91% is to the right of the parabola peak. The democratic party has not changed, basic economics is just at play. Marco meet Art, Art meet Marco.
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