True or false, to some extent the large U.S. Federal budget deficits since 1980 can be blamed on the?
True or false, to some extent the large U.S. Federal budget deficits since 1980 can be blamed on the incorrect assumption by policymakers that the U.S. was on the downward sloping slide of the Laffer Curve?
Answer:
True?
<crossing fingers over in hope of the right answer was selected out of a 50/50 chance and saying in my head "please let it be right!">
But because what everyone said from the bottom, I changed it to False.
False
The short answer is False.
I'm not sure (and I hope not) anyone ever took the Laffer curve seriously. The theory behind the Laffer Curve is that when the government lowers the tax rate, it makes individuals want to work harder. This increases the economy enough that despite the lower tax rate, the increase in the overall economy will drive absolute tax revenues higher. While there may be some truth to this theory at high levels of taxation, at the levels America has been at over the last thirty years, it is not a defensible position. Dropping from 95% tax rates to 50% tax rates might spur economic development, but I don't think the impact of reducing taxes from say, 35% to 30% would be significant.
I think the large budget deficit has been caused instead by the idea that deficits don't matter. this theory is a little different, starting from the premise that as long as the economy as a whole is increasing, it can absorb more and more debt. So as long as the economy is growing faster than the debt, it is becoming a smaller and smaller problem.
Another thought that probably drove the deficit higher is that we needed to outspend the Soviet Union. This was Ronald Reagan's strategy, to force the USSR to spend more and more on defense in order to keep up with us, and then trust that the Soviet economy could not grow rapidly enough to maintain the dramatic demands on it.
If it was an incorrect assumption, why did government revenues increase with a decrease in the income taxes?
The deficits are a result of the government spending like drunken sailors.
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Answer:
True?
<crossing fingers over in hope of the right answer was selected out of a 50/50 chance and saying in my head "please let it be right!">
But because what everyone said from the bottom, I changed it to False.
False
The short answer is False.
I'm not sure (and I hope not) anyone ever took the Laffer curve seriously. The theory behind the Laffer Curve is that when the government lowers the tax rate, it makes individuals want to work harder. This increases the economy enough that despite the lower tax rate, the increase in the overall economy will drive absolute tax revenues higher. While there may be some truth to this theory at high levels of taxation, at the levels America has been at over the last thirty years, it is not a defensible position. Dropping from 95% tax rates to 50% tax rates might spur economic development, but I don't think the impact of reducing taxes from say, 35% to 30% would be significant.
I think the large budget deficit has been caused instead by the idea that deficits don't matter. this theory is a little different, starting from the premise that as long as the economy as a whole is increasing, it can absorb more and more debt. So as long as the economy is growing faster than the debt, it is becoming a smaller and smaller problem.
Another thought that probably drove the deficit higher is that we needed to outspend the Soviet Union. This was Ronald Reagan's strategy, to force the USSR to spend more and more on defense in order to keep up with us, and then trust that the Soviet economy could not grow rapidly enough to maintain the dramatic demands on it.
If it was an incorrect assumption, why did government revenues increase with a decrease in the income taxes?
The deficits are a result of the government spending like drunken sailors.
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