Two Sides of the Laffer
Posted by Jeff Id on December 31, 2012
Happy New Year readers. 2013!
I still owe everyone some commentary on Steig’s 3rd (or is it the 4th) victory lap. I have spent several hours on the new Antarctic doom paper, hopefully I will have some time shortly to write on that. In the meantime, we are awaiting some movement on the “fiscal cliff” and as usual, I have a few thoughts on that.
My first thought is that the “deep spending cuts”, is that they don’t even touch the overspending by the Federal government, yet we are told that these cuts are disastrous. I do agree that they are cut from the wrong areas, i.e. defense instead of EPA, but disastrous is not how I would describe any cuts at this point. We desperately need to reduce spending, so I’m ready for whatever we can get. The defense spending will be reinstated at the first opportunity anyway.
My second thought leaves me more confused. Democrats are pretending concern about the middle class paying too much tax, yet this is exactly what they have so often demanded. Raising taxes is the only way under the worldview of the anti-industrial left to logically balance the budget. Cutting spending is simply not an option. Keynesian economics is literally driven by the ignorant view that theft from business and spending of money by government, drives business. So they must spend or the economy will die and they will have less money to spend. Of course, like so much of life, they are partially right. The US government has so ingrained itself into business at this point, that they are in control of massive percentages of the workforce and the economy.
And this brings me to the Laffer curve.
The Laffer curve is basic economic theory representing a tax vs revenue curve, which represents how much revenue is gained at different tax levels. Wikipedia has a typically extreme leftist view of the subject here and like taxation, the public understanding of the subject is a huge irritation to me. If you tax personal income at 100 percent – or greater – then there is no incentive to make income and the government receives zero tax. If you tax at zero percent, the government gets zero tax so somewhere in-between, the government makes more than zero. The left will have you believe that you can maximize income at about 70% tax rate, which is just dumb, but that is what they think. Often, the argument the “blogging left” makes for higher tax is based on revenue as a percentage of GDP, but capitalism doesn’t exist to maximize a percentage of dollars sold, it exists to maximize total dollars earned. Because taxes retard the gross economy, maximizing a percentage of GDP is not related to the Laffer curve.
Politicians of all types are fond of saying, X tax will create additional revenue to pay for Y program. This language has then been regularly repeated by the ever-compliant and rarely understanding media. On the left, both the media and the politicians firmly believe that increasing tax on the wealthy will bring them more money, and in the short run, they will be correct.
This is where it all falls apart.
The same Democrat politicians and extreme left media are today making the claim that raising tax on the middle class, would be economic disaster and less government income would be had.
So on which side of the Laffer curve are we? We cannot be on both. Either more tax is more revenue with a decent economy and more ability for government investment, or more tax is less revenue and a terrible economy. It cannot be both. Yet the Democrats freely admit that taxing the middle class will ruin the economy. These same leftists often point out the increasing separation in wealth between the rich and poor to justify the taxes, rarely noting the indirect economic pressures that their re-distributive policies create on the poor. The reality is that a good economy has guaranteed for nearly a century that America’s poor, are some of the wealthiest poor people in the world. It isn’t about the wealth of the rich, or it shouldn’t be, it should be about the wealth of the rich and the poor, and despite the propaganda, that is what capitalism has done best. Provide money for the people, from rich to poor.
The Laffer curve is a funny thing. If you want to maximize tax revenue, you need to find the balance of where business is competitive and making a strong profit, and government is taking just enough green blood out, such that the gross economy isn’t dragged below the optimized limit. Currenlty, many countries are taxing businesses at under 20%, yet the near-bankrupt Europe is far higher. China is right at 20% by this table, but the laws are also written to allow many deductions. US business competes with these countries today. Business is war, and business in these countries are what we are at war with. Looking deeper into the table, the US is listed as taxing business at 40%, yet the reality is far worse. We are faced with many taxes, such that the true rate is north of 50% already - keeping in mind that we haven’t yet experienced the next 5% tax increase in the next few hours, and another percent for the affordable health care act.
This all fits together when you realize that when other countries tax business at a lower rate than the US or Europe, they are shifting the maximum income which can be gained through tax to a lower percentage level. If we tax the US more, and other countries tax less, their competitiveness is increased, and ours is reduced. Laffer teaches that less tax revenue for the government is a guaranteed result of a tax hike after some optimized yet unknown percentage rate, and international competition in general means that the magic point at which less government revenue is realized, is guaranteed to have shifted to a lower percentage.
Now this whole subject is way to complicated for most people, and most won’t spend more than a minute or two even thinking about it, it is key to understanding what they are voting for. Unfortunately, it literally hurts their stupid little uneducated brains, but they are not the readers of this blog.
Many economists have spent time trying to calculate the peak government revenue point (shape of the Laffer curve), but the subject is as elusive as moisture and condensation in a climate model. My impression is that the widely differing results are more based on author belief than in true accuracy. Still, it is my opinion that you can look at the successes of other countries and spot which tax levels are working, and which are not. Unfortunately, there is a great deal of noise in the data created by individual political and resource situations that allows plenty of obfuscatory argument for any direction you want to go so there are no solid answers. A low tax in a country like Somalia, cannot correct the insane government situation which destabilizes any business viability. A high tax on a country like Saudi Arabia, is equally confused by the massive oil reserves, they have a 20% rate though.
So, since I have declared a true calculation all but impossible, I will tell you my belief of where we sit on the curve. If the US government cut taxes on business income in half, halved the capital gains tax, reduced some of the stupid employment laws and the unreasonable environmental controls, slash the IRS code and filing requirements, we would see a massive influx of international business looking for a politically stable ground to put their headquarters. We could double the size of America’s economy in very short order, putting nearly everyone who wanted a job to work. Such a move would take the world by complete surprise and again, companies would compete for workers and America’s poor would stay near the top of the world in wealth. There would be a huge influx of cash from the rest of the world that over twenty years could eliminate our National Debt- except that politicians would have their hands in the cookie jar. More than that, it would again allow America the economic power to lead the world toward the freedom and health that they all deserve. If it were done suddenly, there would absolutely be a huge drop in revenue in the first few years though, just as a huge tax hike creates more revenue in the short term, yet could kill the economy in a decade.
Even if you disagree, the thinking person should not forget that more tax does not necessarily equate to more revenue.
May you live in interesting times…. 2013!