Laffer continues to mislead on 2011 tax changes

From the June 10 edition of Fox News' Fox & Friends:

LAFFER: President Obama has decided to let Bush's tax cuts expire. Which means that on January 1st, 2011, we're going to have the income tax go from 35% to 39.6. The dividend tax rate's going from 15 to 39.6. You have the capital gains tax rate going up, the estate tax rate. We have offshore taxes going up. We have a cadillac tax plan on healthcare for our policy programs. So we have all of these tax increases occurring on or around January 1st, 2011. And, now if you know they're gonna raise tax rates next year, what do you do this year? You accelerate all the income into this year which makes this year look a lot better than it otherwise should, and it will make next year look a lot worse.

FACT: Obama budget proposal would raise rates only for individuals earning more than $200,000 per year, families earning more than $250,000. Obama's fiscal year 2011 budget proposal, released February 1, included a provision to "[e]xpand the 28-percent rate and reinstate the 36-percent and 39.6-percent rates for those taxpayers with income over $250,000 (married) and $200,000 (single)." In a statement accompanying the budget proposal, Obama said:

In addition to closing loopholes that allow wealthy investment managers to not pay income taxes on their earnings and ending subsidies for big oil, gas, and coal companies, the Budget eliminates the Bush tax cuts for those making more than $250,000 a year and devotes those resources instead to reducing the deficit.

FACT: Budget calls for dividend tax increase -- to 20 percent, not 39 -- only for individuals earning more than $200,000 per year, families earning more than $250,000. The budget proposal also includes a provision to "[i]mpose [a] 20-percent tax rate on capital gains and dividends for those taxpayers with income over $250,000 (married) and $200,000 (single)." A January 31 Wall Street Journal article reported: “For families earning at least $250,000, capital gains and dividend tax rates would rise to 20% from 15%.”

FACT: Budget request includes tax cuts. The budget proposal includes a call to "[e]xtend [the] making work pay tax credit in 2011." The Office of Management and Budget further stated: “The Recovery Act created the Making Work Pay tax credit, a refundable income tax credit, which offsets the Social Security payroll tax on up to the first $6,450 of earnings for about 95 percent of all American workers. ... As part of its plan to restore health to the economy, the Budget proposes to extend the Making Work Pay tax cut for one year.”

Laffer pushes dubious claim that Reagan tax cut postponement “caused the deep recession of 1981-82”

From the June 10 edition of Fox News' Fox & Friends:

LAFFER: [W]hat Reagan did was he postponed tax cuts, which I believe caused the deep recession of 1981-82, and the tax rate cuts really began on January 1st, 1983, the big portion did. And the boom started on January 1st, 1983. You know, Brian, it has always amazed me how tax cuts don't work until they take effect.

BRIAN KILMEADE (co-host): Right.

LAFFER: And then they work like mad.

Economists dispute Laffer's link between Reagan tax cuts and recession

CBO: 1982 recession “brought on by monetary restriction,” interest rate drop “permitted the recovery to begin.” An August 1983 Congressional Budget Office report, titled “The Economic and Budget Outlook: An Update,” concluded:

The Economy At Mid-1983

Recovery started in December 1982 from the deepest postwar recession, the second of two since 1980. Both recessions were brought on by monetary restriction aimed at bringing inflation under control. Lower interest rates after mid-1982 permitted the recovery to begin. Real GNP grew at a 2.6 percent annual rate in the first quarter and at an 8.7 percent annual rate in the second quarter of 1983.

The report also concluded: “A dramatic decline in inflation, a fall in interest rates from levels that were extraordinarily high to levels that are merely high, and the stock market boom have contributed to the improvement in economic conditions.”

Reagan official Mussa links interest rate changes to recession recovery. Michael Mussa, a member of Reagan's Council of Economic Advisers, in an essay for American Economic Policy in the 1980s (University of Chicago Press, 1995), wrote that a “consequence” of the Federal Reserve's “very tight monetary policy” in the early 1980s led to a “deep and prolonged recession”:

The second and ultimately successful effort to combat inflation during the 1980s really began, appropriately enough, on 4 November 1980 -- two years after the dollar stabilization crisis of 1978 and on the day that Ronald Wilson Reagan was elected president of the United States. For twenty-one months, until August 1982, the Federal Reserve would consistently pursue a very tight monetary policy. As a consequence of this effort, the inflation rate would be driven down from 12.4 percent during 1980 to 3.9 percent during 1982. The U.S. economy would also be pushed into a deep a prolonged recession during which real GDP would fall absolutely by 3.3 percent and the unemployment rate would rise to a postwar peak of 10.8 percent.

Mussa also wrote that when the Federal Reserve cut the discount rate a half percentage point on July 20, 1982, it “signal[ed] the beginning of what would become a four-and-a-half-year period of quite rapid monetary expansion. During this period, interest rates, both short and long term, would be driven significantly lower, and the U.S. economy would substantially recover from the devastation of both inflation and recession.”

Krugman: Fed “turned the economy around” by reducing interest rates. In a January 14, 2008,Rolling Stone article headlined “Letter to Obama,” Nobel laureate Paul Krugman wrote:

Compare the situation right now with the one back in the 1980s, when [Paul] Volcker [then chairman of the Federal Reserve] turned the economy around. All the Fed had to do back then was print a bunch of dollars (OK, it actually credited the money to the accounts of private banks, but it amounts to the same thing) and then use those dollars to buy up U.S. government debt. This drove interest rates down: When Volcker decided that the economy needed a pick-me-up, he was quickly able to drive the interest rate on Treasury bills from 13 percent down to eight percent. Lower interest rates on government debt, in turn, quickly drove down rates on mortgages and business borrowing. People started spending again, and within a few months the economy had gone from slump to boom. Economists call this process -- from the Fed's decision to print more money to the resulting pickup in spending, jobs and incomes -- the “monetary transmission mechanism.” And in the 1980s that mechanism worked just fine.

Interest rate movement tracks economists' statements. The recession to which Laffer referred began in July 1981 and ended in November 1982. The federal funds rate peaked at 20 percent in late May 1981 and dropped to 9.5 percent by mid-October 1982, while the discount rate peaked at 14 percent in early May 1981 and dropped to 9.5 percent in mid-October 1982.