Arthur Laffer presented his now famous principle of taxation as a graph representing the general relationship between tax rates and tax revenue.
This graph has generated a long-standing debate over the “Laffer curve” and its applicability to taxation policy. Sometimes heated, the debate reveals various opposing viewpoints but little about the motivations of its participants, especially the sophisticates who habitually hide motivations. At first it may appear bombastic, but motivations frequently ignored in the debate relate to freedom versus slavery. While von Hayek’s influential work “The Road to Serfdom” argued that centralized economic planning naturally leads to enslavement by the state, the relationship of the Laffer curve to such thought sees little discussion. If you were a slave in any age, would not your master optimize you for what he can take from you economically? Is that not the whole point of enslavement, that the master can do this? Notwithstanding this obvious fact, the debate generally does not question the notion that the “optimum” is where the maximum amount can be taken from us in taxes, as though the maximum possible taxation level is unquestionably good and virtuous. To the extent that we accept this, we have already conceded our own slavery. The sometimes-complex thought of von Hayek is no longer required to see the eventual outcome; we are already there. Those who seek taxation at the level of the Laffer maximum are progressing toward more perfect slavery for us all, regardless of where each may think we are on that curve. Unfortunately, our current taxation levels are beyond that. From where we are now, honestly seeking the Laffer “optimum” would be a step toward sanity–but freedom lies even further away.
Laffer’s graph begins with no tax revenue at 0% tax rates. Revenues rise to a maximum as tax rates increase. As tax rates increase beyond that point, revenues diminish until, at the 100% tax rate, there is again no revenue. It looks like an inverted U, having only one maximum. The maximum occurs somewhere between the extremes, and defines the rate of taxation that produces the maximum revenues. (See http://www.reference.com/browse/Laffer+curve)
Mathematician Martin Gardner wrote a satirical treatment of Laffer’s theories and introduced the neo-Laffer curve, loosely based on empirical evidence. The neo-Laffer curve only looks like the Laffer curve near 0 and 100 percent taxation; in a wide middle range the curve is a chaotic “snarl”. When in the middle range, revenues can go up or down and do so unpredictably. Here revenue change cannot be predicted based on changes in tax rates. The neo-Laffer curve is generally used to rebut arguments that lowering tax rates will increase revenues. Perhaps deliberately unnoticed by Gardner’s sophisticate readers, the neo-Laffer curve also rebuts notions that raising tax rates will increase revenues. To whatever extent Gardner is correct in his theory and however wide or narrow his mid-range snarl may be, in recent historical experience significant lowering of tax rates has increased revenues. This implies that our tax rates for these many years have been beyond any possible chaotic mid-range and well into a predictable over-taxed zone.
A government that relies on Gardner’s thinking to justify increasing taxes is saying that we might as well raise taxes. After all, according to Gardner no one can prove that raising taxes will reduce revenues and it might in fact raise them. However, the taxpayers can say with equal accuracy that we might as well lower taxes; after all, according to Gardner no one can prove that lowering taxes will reduce revenues and it might in fact raise them.
Lower taxes result in more economic activity and growth: producers retain more and with fewer resources there is less government to interfere. This should be taken into account when reviewing tax policy but is often ignored by those who justify their policies through economic theories like those of Gardner. Contrary to Gardener’s conclusions, we should not have rates that put us into the unpredictable snarl at all; tax rates should instead be below the beginning of the snarl. Above that level, higher rates cannot be relied upon to increase revenues and could lower them. Regardless of where we are on the Laffer/Gardener curve, lower rates positively affect economic growth. If tax rates are above the initial predictable zone in either the Laffer or Gardner curves, we might as well lower tax rates and get the reliable benefit of economic growth. Such simple farmer logic falls on deaf ears among those who privately shun prosperity and freedom, the most notable of whom are social-justice sophisticates.
At the extreme right of the Laffer curve is 100% taxation, which is loosely taken to mean that revenues are 100% of the Gross Domestic Product (GDP). The whole pie is generally taken to be the GDP. According to Laffer’s theory, the pie ( GDP) is relatively near zero at 100% taxation; i.e., there is nothing to tax because there is nothing to be gained from work if the government takes everything. As the tax rates go up, revenues and size of the pie go down together. As the tax rates go down, revenues and size of the pie go up together. Interestingly, the government’s percentage of the whole pie (GDP) has stayed relatively constant for decades in spite of widely ranging tax rates (see the Laffer Curve link above for a short synopsis). This fact is construed by some as a contradiction of Laffer’s principle ideas. On the contrary, this supports a conclusion that we are already operating well into the overtaxed zone where Laffer’s theory allows the ratio of revenues to the whole pie to be constant. Higher tax rates diminish the size of the pie.
The idea that growth of the economy is affected by taxes and tax rates is not difficult to understand and ought to be obvious. When taxes are lowered, the increased revenues come from increased economic activity. An honest reader of Laffer’s theories should be able to reconcile constant revenue relative to the size of the pie.
Other research purports to show that if our government lowers taxes according to Laffer’s theories, it will not make up the difference for decades. This is taken as evidence that the government should not lower taxes. The almost immediate effects on revenue observed after past tax reductions belie these claims. But even if it would take decades to recover “lost revenue”, their derived conclusion could only make sense if the government is in a zero-sum game against its slaves, and a dollar spent by government is infinitely better than any dollar used in any other way. This would include any potential use by the slave who earned it. This kind of thinking has crept into the everyday discussion of tax policy; when any of us keeps a dollar that we earned, it is counted as a “cost” to the government.
Such ideas were debunked millennia ago; ancient Roman writings declare that such “optimization” is counter-productive purely in terms of the economic self-interest of slave owners. This Roman analysis of slave optimization accounted for slaves as a wasting asset; slaves grow old or are injured and become progressively less useful over time.
Similarly the Laffer curve has a different shape for populations in different stages of life. Laffer style optimization of a sufficiently old or decrepit population cannot be achieved, as they are incapable of producing enough to replenish the resources they consume. Only reassignment of their assets to others can increase the overall efficiency of the economy. The optimum is to reassign all resources in the hands of old people to younger producers. With nothing at all the old will of course die, but the sooner this happens more remains for the government to take.
Though a modern slave may have been part of a taxation-optimization program all his life, he may have secreted away assets that he then mis-applies to something that has become economically useless—himself. If a slave were to actually have property rights and own something, then he could choose to use that property to support himself in his old age when he is of no economic benefit to his owner. It more efficient if all property belongs to the slave’s owner and is merely assigned to a slave while his economic usefulness justifies it. While this principle has been applied in modern times partially through death taxes, in this age of advancing medicine the assets are often gone by the time slaves die. The ancient Romans avoided such problems by reassigning resources as slaves approached economic uselessness. America recently adopted a more modern solution already in effect in several other nations: medical assets are now honestly controlled by the state and are becoming inaccessible other than through the state. In Hillarycare it would have been illegal for a physician to provide private care. However, the single-payer concept is equivalent and appears to be the goal of Obamacare.
Perhaps it is not worth mentioning, but in America there is a lingering notion that we ought to be and by right are free people. We especially long for freedom and the prosperity that comes with it. How can this be, that a government of the people, by the people, and for the people would optimize us like this?
President Obama promotes social-justice sophisticate policies that we know will fail. We have repeatedly learned this through mass suffering when social-justice acolytes impose their core belief systems on populations around the globe. Social-justice sophisticates never seem to tire of the predictable suffering, yet his state of the Union Speech last week spoke of a vibrant future. He enumerated as many desirable outcomes as would fit, and promised that they are all coming to a theatre near you, and you, and you. Like old Soviet 5 year plans, it gave us glowing descriptions of progress somewhere in the future brought to you by the biggest impediments to achieving progress or freedom—its social-justice sophisticate authors and the nature of the plan.
Given where we are, any course towards freedom requires lowering taxes, and lowering them again and again. We should successively lower them until we are well into that zone where raising taxes would reliably raise revenues. Such a level must be well below Gardner’s snarl, if there is such a thing. Once in this zone of freedom, lowering of taxes increases freedom further and necessarily lowers the government’s take in absolute and relative terms; our freedom as a people can only exist to the extent that we are in the freedom-zone. American imperatives for freedom demand reduction of the government’s portion of the pie. From where we are now this will of course increase revenues, actually and honestly grow the economy, and do much to restore competitive American prosperity as well as freedom.Wake up Right! Subscribe to our Morning Briefing and get the news delivered to your inbox before breakfast!