The International Monetary Fund has recently published a report which concludes that when taxes are high and you can't write much off, businesses and investors go underground, and the government takes in less money. But if tax rates are too low, the government also takes in less money. In short: if taxes are too low, you don't get much money, but if taxes are too high, you still don't get much money.
This should be common sense. Tax too hard, and people either decide "screw it" and stop bothering to try to earn more, or they cheat more so they can avoid paying. Common sense, right? All the IMF report is doing here is describing what countless economists have been saying for decades.
It's known as "the Laffer Curve." That's just a bell curve which shows that when you tax at 0%, you get no revenues, and if you tax at 100%, you get very nearly 0 revenues, and there's a big hump of high revenues somewhere in the middle. Therefore, the question is, what's the rate at which you get the most tax revenues?
The problem is that the curve can't be plotted precisely. Indeed, that's the main debate--what's the optimal rate? 10%? 90%? 50%? 2%? It seems like a very important question, since at some point, too much taxation just shoots everyone in the foot.
Most everyone on the political left I know (hi Ara!) likes to make fun of the Laffer curve. Although strangely, I can rarely get them to give me a straight answer as to what's so stupid about it. Usually, I just a lot of vague stuff about "deficits as far as the eye can see" and "the rich get richer and the poor get poorer," and, well, really anything except a straight answer. As in, "yes the curve is valid, but," or "no it is not valid, because."
Me? I view this as proof that the political left in this country made a reactionary wrong turn--ceased to be liberal, in other words--some time in the last 20 years. Frankly, every time I hear people on the left joke about this, it reminds me of the people who rant, "I ain't descended from no monkey!" when confronted with the theory of evolution.
(Link via Bill Hobbs.)
* Update * Trivia question: In the 1980s, Laffer worked as an adviser to a major party politician's campaign for President. This candidate advocated a so-called "flat" tax to help stimulate the economy and to boost tax revenues. Who was that candidate, what political party did he belong to, and what's he doing today?*Update 2* The answer is not Steve Forbes. Any other guesses?
*Update 3* The correct answer was given by Rudy, who named former California governor and Democratic Party stalwart Jerry Brown. He is currently mayor of Oakland.
Hi Dean:
Yeah, I've made fun of the Laffer Curve. As I've said on numerous occasions the concept is a valid one, but laff-ably imprecise, as you point out.
The problem with the Laffer Curve is that it needs to be figured not as a line but as a surface. The other surface is the ability of the revenue source to go away. Municipal curves are much different than national curves, but as George Gilder said, tax increases do not redistribute wealth, they redistribute taxpayers.
Governments represent not so much people but patches of territory over which they have jurisdiction. These territories, in order to grow, maintain and/or expand a healthy economy, openly solicit for investors to come in with their money and create or sustain enterprises that will provide jobs for their residents and taxes that will provide food and housing for their bureaucrats.
Just as you and I review blandishments from competing junkfood chains or other establishments in which we feed our faces, investors review blandishments from competing jurisdictions and their governments as to which one they will come to for purposes of making money and, in turn, giving some of it to that jurisdiction in the form of taxes.
This is as true now of competing national jurisdictions, i.e., countries, as it has been for a almost two centuries among competing states and local communities in the USA.
The lesson? There is nothing more fluid than money. It knows no boundaries. It recognizes no controls, no jurisdictions, no governments. It goes where it is welcome, flees from where it is not.
Therefore, the "sweet spot" on any governments optimum tax-rate curve is that point low enough to attract investment away from 49 other competing states and a couple of hundred competing countries, all of whom will have exactly the same idea, once they rediscover pure capitalism.
Which is exactly what they shall do, once the commissars, fuehrers, duces, imams/priests and other illegitimate gang leaders of the world's totalitaranisms either are decommissioned, put to work on something useful, or put to death.
Arnold Harris
Mount Horeb WI
Triticale makes a very good point. It is certainly true that the ability of revenue sources to go away is a valid second dimension. However, he doesn't go far enough. There is an intimate link here between freedom and "ability to go away." That is, revenue can always "go away" if people are free to refuse to work (which they will do at 100% taxation). Only in a police state where people are compelled to work and to deliver the fruits of their labor to the state could you even theoretically find tax revenues marching in lockstep with tax rates.
Interestingly enough, this sheds a bit of light on the left's disdain for the concept. *Of course* you can eliminate the laffer curve and *make* people pay. Just look at the "Great Leap Forward" in China or the Stalinist purges in the Ukraine (both of which are still defended in some communities on the hard left). What you right-wingers miss - obviously because you are blinded by your silly allegience to the bourgeoise - is that the laffer curve is just for states that are too sissy to really turn the screws on the economic *oppressors of the people.*
My mother worked for tax complaince (ok ran it) in a US state. When ever taxes were raised the amount of complaince dropped. There is more of an incentive to not pay if they are higher. This is logical but those who tax either have too much faith in the populace or in their enforcers.
I believe the person you are refering to is Steve Forbes.
Hmmm... Arnold Harris' point is also a good one (except that part about putting people to death ... *that's* a bit creepy).
Perhaps here we see some further light being shed on the attraction of transnational progressivism? That is, if we can enforce rules across all countries, then we can reduce some of this freedom of economic movement.
Was it John Anderson who ran as an independent in 1980 (he also wanted to raise gasoline taxes 50 cents a gallon I believe
I think Kevin is correct.
The Laffer curve is just a really technical way to express the concept of "no taxation without representation". In other words, if people feel that taxes are unjust, they simply won't pay them. While you can look at specific averages in various countries, the variables are so numerous as to render any single formula without much meaning.
There is a wealth of information about the IMF and the World Bank and the deleterious effects their economic policies (and the conditions under which they grant loans) upon developing nations. I'm not saying that just because the IMF isn't that great of an organization (globalization as it is currently practiced can be good for some people, but only at the profound expense of others -- usually the poor) that the Laffer curve is invalid; I'm saying that when you attempt to apply market principles to real human societies, without taking into account the requirements of human survival, you're essentially asking for suffering, which is what globalization does.
There is also a wealth of history that shows us that people with money tend to effect policies that ensure they will keep that money and get more money, while people without money generally find themselves on the wrong end of such policies, and end up with less money. The "middle class" was a paroxysm, a rather sudden economic phenomenon that had to do with the timing of several world wars, industrialization, the rise of Socialism, and the need for the moneyed classes to retain power and the legitimacy of their governance (Congress may represent the common people, but the common people do not reside there). The middle class has only existed for, what, less than a century? I find it interesting that people who look askance at something like gay marriage as a "revolutionary new idea" would look upon Capitalism and the concept of the middle class as a venderable tradition worth protecting.
I thought that Reagan had embraced the Laffer Curve as part of supply-side economic theory...I know Dick Armey embraced it in the 90s...
I thought that Reagan had embraced the Laffer Curve as part of supply-side economic theory...I know Dick Armey embraced it in the 90s...
I thought that Reagan had embraced the Laffer Curve as part of supply-side economic theory...I know Dick Armey embraced it in the 90s...
And WildMonk in turn points toward something which I left buried in my original post. When a revenue source goes away, it doesn't always go elsewhere. It can also cease to produce revenue at all, either thru bankruptcy or massacre.
WildMonk,
What exactly do you find creepy about my statement to the effect that
"...once the fuehrers, commissars, duces, imams/priests, and other illegitimate gang leaders of the world's totalitarianisms either are decommissioned, put to work on something useful, or put to death." ?
These people, in the last century alone, put to death probably more than a hundred million other residents of this planet. Why should mankind by compelled to live under the rule of such political perverts? If they cannot be removed from power by peaceful means, and if they cannot be put to work doing something useful for themselves, their families or their societies, then why should they NOT be put to death? That would be small expiation for their crimes.
In any case, everyone dies sooner or later. For people such as I have described, the world is better off if they lose their lives sooner.
But that, of course, is a minor rant on my part. My main point was an argument solely based on economics.
Arnold Harris
Mount Horeb WI
Bill Bradley?
I would have no problem with a $0.50/gallon gasoline tax if that fairly and completely encompassed the true cost of maintaining the roadways. Better a consumption tax than an income tax.
Always internalize the externalities, and the world will become a happier place.
Of course the Laffer Curve is imprecise. I like the idea that it should be plotted as a surface rather than a curve.
Still, the core notion is sound. There is a level of taxation, in whatever form, that will generate maximum revenue. What income tax rate, what sales tax rate, what gasoline tax rate, what walking-on-the-sidewalk rate, what import duty rate? Each can, conceivably, be optimized, but in practice only in relation to the others. Hence, the surface plot. Brilliant idea. I wish I'd thought of it.
Does anyone think any single person or committee, can actually figure it all out? Ted Kennedy? George Bush? Arianna Huffington?
One would think that if government wanted revenue, it would experiment with tax rates of various kinds, testing year to year what brings in the most money.
But no, that would not give politicians a ranting point.
I think it was Paul Tsongas, but I'm not sure. I was still in college and not that political, but I can tell you he would have had my vote had he been nominated.
*heavy sigh*
Everything that is wrong in this country right now is because of the election of Bill Clinton. Not that it is Bill Clinton's fault. It's just that he infuriated the right by being able to say anything and do the opposite and get away with it, whereas he earned the left's admiration for exactly the same reason. This aspect led directly to the impeachment, which just intensified the dichotomy. The left felt they had already earned Gore's successful election on the strength of Clinton's years. The right wanted an anti-Clinton. They love Bush because he is exactly that, and the left hate Bush for the exact same reason: he is the opposite of Clinton, i.e., he does exactly what he says he'll do, isn't a polished schmooze-artist, and takes responsibility for his actions and decisions.
This deepened the polarization, and what little polarization hadn't occurred was finalized by 9/11 and the aftermath.
The whole point of that personal viewpoint ramble is that I often wonder what would have happened if Tsongas had been elected... I can only believe that the US would be a better place.
Check out this quote from The Tech (an MIT publication):
Tsongas also benefits from untarnished integrity. While there are doubts about the sincerity of many of his competitors, Tsongas is as worthy of this nation's trust as any potential president could be. Tsongas has also removed speculation about his electability with this week's strong showings in Maryland, Utah, Idaho, and Colorado. His economic strategy is well thought-out and makes more sense than the other Democrats' plans.
While Tsongas, a Lowell native, may lack charisma, the nation needs an effective leader, not a suave charmer. This country needs a leader with economic sense as well as concern for the welfare of all. Tsongas fits this bill. We urge readers to cast their ballots for Tsongas.
Dangit, the last three paragraphs are supposed to be in the blockquote...
Jerry Brown-D
nathan,
Politics is simply warfare by other means. Your post implies a gentility unsuited to executive level politics (Paul Tsongas was a very good man). A politician who is not a warrior (vedi Al Gore, hyperbole etc.) will not achieve executive office or will be ineffectual when they do achieve it (vedi Carter, J.).
Gray Davis is a quasi warrior chief - albeit with a very small tribe (sorry Marangos). Arnold is about to show him what a real war chief looks like.
We should always elect war chiefs for executive positions. Good men belong in the Senate and House. That's the essence of the balance of power. And that's the reason that Bush (compassionate as he is) will win against any of the 10 dwarves. Can you see Wesley (Ashley to many) as an effective war chief?
"The problem is that the curve can't be plotted precisely. Indeed, that's the main debate--what's the optimal rate? 10%? 90%? 50%? 2%? It seems like a very important question, since at some point, too much taxation just shoots everyone in the foot.
Somewhen, in the WSJ (sorry, no link...just memory) there was published a graph of tax collection figures which provides direction for addressing the "optimal rate" problem.
The graph showed (and it went back for years) that no matter what percentages, numbers of rate tiers, deduction mixes, etc. were in force, federal collections always came in between 18.5 - 20.5 % of GDP.
Uhm, John? The middle class has done nothing but expand for the last 50 years.
Furthermore, I don't think you can name any third-world country which employs free trade policies and eschews excessive socialism which is not measurably better off today than it was in the past--with less poverty, better medical care, lower infant mortality, and longer lifespans. Just pick the country, and let's compare them 50 years ago vs. today.
Globalism helps the world's poor more than anyone else, from all the hard data I've seen. Although I'd love to see any hard data you have which refutes that.
Although, by the way, I would agree that the IMF isn't a particularly good institution. Funny thing is, for exactly the opposite reasons: they advocate excessive socialism and regulation of business, which retards the growth of growing companies and makes them dependent on IMF funds for their futures. Like crack dealers. Bad deal.
I suspect the left's disdain for the Laffer curve comes not from its existence, but the use to which it was put. Reagan used Laffer as an excuse to lower taxes, but gave no proof that this would help tax receipts. The existence of the curve was used as justification, but it certainly could have been an equally valid for *increasing* them. As a result, quoting the Laffer curve is shorthand for "I believe in cutting taxes, damn the consequences", something that the left finds a little annoying.
As for experiments, there are so many variables that I suspect the results would be meaningless. Lower taxes may help grow the economy, but it's only one factor among many. With so many variables uncontrolled, any results would be subject to endless argument and prove little.
It should be self-evident, but apparently it isn't.
The Laffer Curve is simply a crude, intuitive way of depicting the crashingly obvious idea that there is an optimal level of taxation. If you want to maximize tax revenue, set the rate here, not there. That's all it says. The details are left to the students, or, God help us, the politicians.
Fair enough, Tom, except, people on the Left should be able to think hard enough to think, "Okay, maybe there really is such a thing as taxing people too much, even the so-called rich, and at least admit that too much taxation can be a problem."
I swear, for more than ten years I've been waiting for a debate to start on tax policy that started from that point. Rather than the all-too-easy answers. "The rich have more, take more from them!" is simply not a smart way to think.
Tom:
I think you're being unscientifically pessimistic. Where would we be if Newton hadn't discovered his laws of Physics, which satisfactorily explained some phenomena but broke down at the atomic level in the face of Einstein's corrections?
A model doesn't have to be perfectly predictive in order to be useful. If the Truth exists in the form of a given model, it will prove out over time or it won't. There's really no room for debate in the face of observed fact.