[Congressional Record (Bound Edition), Volume 155 (2009), Part 5]
[House]
[Page 6196]
[From the U.S. Government Publishing Office, www.gpo.gov]




                LIFE ON THE DOWNSIDE OF THE LAFFER CURVE

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from California (Mr. McClintock) is recognized for 5 minutes.
  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.

                          ____________________