Featured in Second Thoughts by O.G. Rose
Considering the Laffer Curve
1. At 0% tax rate, there is 0% tax revenue. At 100% tax rate, there is also 0% tax revenue, because no one would work if they could make absolutely no money by working. Hence, at a certain point, a higher tax rate ironically translates into lower tax revenue. We will refer to this point as Point X, and this relationship between tax rate and tax revenue is called “The Laffer Curve.”
2. Until Point X, as tax rates increase, tax revenue always increases, and hence there is more money to finance government programs. Beyond Point X, as tax rates increase, there is less money to finance government programs.
3. The maximum amount of tax revenue that can be generated by tax rates is Point X, and those in favor of the maximum amount of financing for government programs should be in favor of tax rates at Point X. If I am in favor of large government and raise tax rates beyond Point X, I lessen the amount of tax revenue, and hence lessen the amount of money that is available for government programs.
4. At Point X, I can only increase tax revenue by increasing “the size of the pie” of which I am taxing. Taxing $100,000 at Point X will generate less money than taxing $1,000,000 at Point X. Hence, if I want to increase tax revenue and government programs at Point X, I must increase overall GDP.
5. If a certain government program will increase GDP, which I will call Y, then Y at Point X will increase tax revenue. If the reduction of a government program will increase GDP, which I will call Z, then Z at Point X will increase tax revenue. At Point X, both Y and Z are means to increase the amount of government programs which can be financed by tax revenue.
6. If a certain act which “frees up the free market” will increase GDP, which I will call A, then A at Point X will increase tax revenue. If an intervening act of the State into the free market will increase GDP, which I will call B, then B at Point X will also increase tax revenue.
7. Those in favor of government programs should be in favor of A, B, Y, and Z at Point X. Those against government programs should possibly be against A, B, Y, and Z, and in favor of a tax rate below (and even above) Point X.
8. Those in favor of government programs who are against A, B, Y, and Z, and in favor of a tax rate below (and above) Point X, are those who “act like” those against government programs. Those against government programs who are in favor of A, B, Y, and Z at Point X, are those who “act like” those in favor of government programs.
II
1. In a tiered tax system where different rates are applied to different income levels, it is possible that the (motivational) “Point X” of those making $100,000 is different from the “Point X” of those making $30,000: what constitutes “Point X” to a given taxpayer might be relative to the taxpayer’s income and tax bracket.
2. It is obviously impossible to determine the Point X of every individual taxpayer in a nation. Hence, it is impossible to truly maximize tax revenue, and trying to maximum it to such an extent could prove, in practice, to be incredibly counter-productive.
3. Perhaps however there are general ranges that can be determined, such as “$0 to $40,000,” to which a given Point X can be determined and applied. If it is possible to determine a series of ranges and an optimal Point X relative to each of those ranges, a tax system that consisted of bracketed tax rates could maximize tax revenue.
4. However, if determining these “ranges” was too complex to determine, and if it was the case that trying to find out could risk overall tax revenue, it could be the case that a “flat tax rate” could maximize tax revenue.
5. If there was a “flat tax rate,” those in favor of government programs should favor that tax rate being Point X, as those against government programs should favor a tax rate below or above Point X.
III
1. Tax breaks, deductions, write-offs, etc., that put tax rates below or above Point X decrease tax revenue.
2. Tax breaks, deductions, write-offs, etc., that put tax rates at Point X maximize tax revenue. However, if the complexity of doing taxes results in people missing these tax breaks, deductions, write-offs, etc., then in practice, people could feel like their tax rate is different from Point X, lessening tax revenue.
3. If Point X can be achieved without tax breaks, deductions, write-offs, etc., then Point X should be achieved that way, seeing as it removes complexity that could be a barrier to entry and increase the probability of inefficiency.
4. If tax breaks, deductions, write-offs, etc., make it possible for tax rates to miss Point X unnecessarily, then tax breaks, deductions, write-offs, etc., should be erased.
5. It may be the case that the Laffer Curve is “easier to trace out” (and Point X easier to find) under a tax code that makes tax avoidance incredibly difficult if not impossible, perhaps by eliminating all means of reducing one’s tax obligations (such as deductions). This would perhaps be a “flat tax” model.
IV
1. It is possible that people would actually not stop working even if tax rates were at 100%; hence, it is possible the Laffer Curve is false.
2. If 100 people were to each earn $1,000, at a 10% tax rate, they would each pay $100 in taxes; consequently, $10,000 in tax revenue would be generated. However, if taxes increased to 100% and this caused 99 people to stop working, if the one person who worked earned $10,000, the same amount of tax revenue would be generated. Since this is possible, it is possible the Laffer Curve doesn’t always apply.
3. However, if the one person who continued to work made less than $10,000, at 100% tax rate, less tax revenue would be earned than at a tax rate under which more people worked. However, if at 100% tax rate, one person would work and earn an amount that was greater than any amount that would be earned by more people, than the Laffer Curve would always prove false.
4. That said, it seems unlikely that one person could generate any amount of tax revenue needed for the Laffer Curve to always be false. Could the government function as that individual? No, for the government cannot pay taxes to itself (without causing inflation).
Also, if one person were to make $10,000, at a 100% tax rate, total tax revenue and total GDP would both be $10,000 (at a 100% tax rate, GDP and tax revenue would be one and the same). If 100 people were to each earn $1,000, at a 10% tax rate, $10,000 in tax revenue would be generated, but GDP would be $100,000. Though both tax rates generate the same tax revenue, they generate different GDPs.
5. Hence, though it is theoretically possible for tax revenue to stay stable or even increase at a 100% tax rate, it is unlikely that GDP wouldn’t be greatly reduced. This is because it seems improbable that fewer individuals under a higher tax rate would generate more overall wealth than more individuals under a lower tax rate, for it seems that these “super taxpayers” would generate the same amount of tax revenue and overall wealth under a lower tax rate as they would under a higher tax rate. It does not seem tenable that these “super taxpayers” would be motivated to become “super taxpayers” because of higher tax rates: if they exist, they exist regardless the tax rate.
6. The assumptions held by the Laffer Curve about human motivation seem to be true for the majority of people, and if they aren’t true for everyone, it is doubtful that few could generate a tax revenue that was equal to or greater than the tax revenue to be earned at Point X, and it is especially unlikely this minority could do so without greatly reducing GDP.
7. Hence, determining Point X and setting tax rates at Point X seems to be the most likely means for maximizing tax revenue. Additionally, the Laffer Curve seems to be the best guide for Progressives who want to maximize government revenue in order to increase government programs for the sake of helping the citizenship.
8. If it is true that government spending increases GDP, Point X is probably the point at which the government can most increase GDP while also increasing tax revenue. It doesn’t seem as if we have any better possible goal (assuming Point X can be determined, though perhaps it cannot be determined).
V
1. What if 100% of government spending stimulated the GDP? Then at a 100% tax rate, isn’t it possible that taxpayers would keep working, seeing as their tax money would directly translate into an increase in the quality of life for themselves and the socioeconomic order? Furthermore, if a taxpayer’s tax money went toward buying the taxpayer a house, a car, and ultimately everything the taxpayer needed and wanted, wouldn’t it be the case that the taxpayer would have no problem paying a 100% tax rate?
2. Indeed, if tax revenue was spent by the government in such a way that everything a taxpayer wanted and needed was provided for him or her efficiently and when and how the taxpayer wanted, it is probably the case that tax revenue wouldn’t drop regardless the tax rate. In fact, a higher tax rate may translate into more productivity, seeing as all tax revenue directly benefits the taxpayer in ways that he or she would benefit from if the given taxpayer kept 100% of his or her overall revenue.
3. Is it practically possible for the government to do such a thing? Perhaps for one individual, but it is highly doubtful the government could so coordinate the economic wellbeing of millions exactly as they would coordinate themselves. Hence, it is improbable that a 100% tax rate would motivate the population as efficiently as a Point X tax rate without lessening the efficiency of resource distribution and lessening overall GDP.
4. What if at100% tax rate the government gave 100% of the tax revenue back to the people in a manner that was relative to the given citizen’s productivity (everyone wouldn’t receive the same pay)? In this situation, the government would act as an employer, and though this perhaps would keep tax revenue up despite a 100% tax rate, it is curious what value this step would add, seeing as you could just receive your pay from your own employer. Though perhaps this scenario would prove the Laffer Curve doesn’t always apply, it is a scenario that seems inefficient and meaningless, and seeing as there is an unnecessarily “middle step,” the added complexity invites the possibility for inefficiency and a consequential drop in human motivation.
5. What if the government taxed the public above Point X, but spent the revenue on goods the people would have bought had they been allowed to keep the extra revenue? In other words, what if the government were to provide maternity care to a woman who, had she kept her tax dollars, would have used the money to finance maternity care anyway? In this situation, it is possible that that tax revenue doesn’t drop as tax rates rise over Point X.
6. However, seeing as a given taxpayer who receives government assistance still “feels” as if a lot of his or her money is going to the government, even though that money comes back to him or her in the form of things he or she would have bought, his or her productivity and motivation may still lessen. If the government cannot provide goods to people as well and as quickly as the people can provide goods for themselves, then even if all the money comes back to the people, motivation will still be impacted.
7. Additionally, it is improbable that the government could accurately assess what every individual needs and wants in order to spend government revenue in such a way that everyone’s taxes over Point X were to be spent on what the given taxpayer would have purchased had the individual been allowed to keep his or her tax dollars over Point X. It is hence improbable that tax revenue generated thanks to a tax rate over Point X could be spent in a fashion that would maintain the same — and better yet increase — the level of general human motivation achieved at Point X.
8. Assuming though goods were adequately supplied by the government, what if taxpayers didn’t realize their tax rates were too high, because there wasn’t a single, high tax rate, but countless, small tax rates that added up to a rate over Point X? Perhaps this would help keep motivation from being negatively impacted, but it is improbable that most people wouldn’t realize that their total tax burden was great, even though no single tax rate was notably high, seeing as citizens could check their bank accounts whenever was best for them. Furthermore, citizens would probably recognize how regularly they were being taxed.
9. Hence, it is probable that the Laffer Curve applies generally even when government spending is used to support the taxpayer in ways the taxpayer would have supported his or her self had she or he kept the money paid due to the tax rate beyond Point X.
VI
1. What though if it’s the case that a given individual won’t work unless he or she receives a certain government program, and that program can only be funded by raising tax rates above Point X? For this tax rate raise over Point X to not lessen tax revenue, it must be the case that the majority of people who don’t work are in need of this same program in order to work, and that the gained productivity and corresponding tax revenue is greater than any tax revenue lost by the overall population working less.
2. Perhaps something like maternity care would be an example of a government program that would increase tax revenue despite raising tax rates over Point X? It is hard to say, but we cannot assume that there aren’t such programs.
3. However, the existence of these programs cannot be determined without risking lowering tax revenue; also, it is doubtful there are many of these kinds of programs, seeing as there are not many services that a majority of the non-working class needs to be able to work (assuming they do in fact want to work). Also, it should be noted that if the maternity care provided by the government is low in quality, the raise of the tax rate over Point X may in fact ultimately lessen overall tax revenue. Hard to say.
VII
In conclusion, the Laffer Curve seems to be a good guide for determining a tax rate that maximizes tax revenue without reducing overall GDP, for though it may not apply to everyone, its assumptions about human motivation do seem to apply to the majority of taxpayers.
At Point X, it is probable that the only way to further increase tax revenue is by growing the whole GDP. If tax revenues at this point fail to be enough to finance a certain program, it will be tempting to raise rates and perhaps even seem to be the obvious course of action, but this act will probably prove counter-productive.
What though if it’s the case that Point X cannot be determined at all? Not simply individually, but also more generally? Well, then it might be impossible to confidentially maximize tax revenue, and if it is the case that government programs and spending can increase overall GDP, then this reality is discouraging. My concern with the Laffer Curve is that it might also create the impression that lower tax rates always generate higher tax revenue, while 0% tax rates also generate 0% tax revenue: there is a ditch on either side of the road. This being the case, all the Laffer Curve tells us is that we need tax rates “just right,” which might not tell us anything at all. Is it useful then? Perhaps not, meaning that we might just want to opt for a “flat tax” of some kind, reducing complexity and increasingly the likelihood of approaching Point X (though determining this might not be possible), but I’m not sure.
That said, at least by knowing that Point X exists, we won’t carelessly think that increasing tax rates necessarily leads to an increase in tax revenue. If we do think this way, we run the risk of crippling tax revenue, and if government programs and spending are good for the nation, we threaten the well being of our country.
“The Laffer Curve” is theoretically useful in my view, for we indeed should not assume “higher tax rates lead to higher tax revenue,” for I think it is unlikely that there isn’t a Point X at which the inverse proves true. At the same time, Greg Dember makes the point that the Laffer Curve might be like ‘telling someone that drinking too much water can kill them. It’s true on the edge cases and interesting scientifically, but in practice almost ways drinking more water, not less, is better.’ Similarly, although there might be extreme circumstances in which “raising tax rates lowers revenue,” that tax rate might be so high that it’s irrelevant to consider. How can we be so sure this isn’t the case? I’m not sure we can: the prospect might be impossible to model, and even if it was it might only apply to one city, town, nature, etc. and not another.
I do wonder if the Laffer Curve assumes basically a “flat tax world,” and that unless we’re dealing with a “flat tax” and very simple tax system without deductibles, write-offs, etc., that the Laffer Curve won’t tell us much, precisely because it is not given how much taxes a given person, enterprise, corporation, etc., will pay (seeing as it is dependent on their accountants, and in a Globalized world they might also be able to move between countries for differing corporate rates). I acknowledge that not all “flat taxes” are without deductibles, etc., but that’s how I mean it (for good or for bad), seeing as I favor reductions of complexity (not in modeling but to model). As “Trading Wages for Hours” by O.G. Rose sought to make the argument that determining “The Point X” of Federal Reserve spending might not be determinable, and thus it is too risky to employ except at the most dire circumstances (which I admit is an open door to who knows what), so the Point X of the Laffer Curve might not be determinable, meaning the Laffer Curve is not particularly useful for particular policy making, even if theoretically valid. This is likely especially true in a world that isn’t basically just a “flat tax” (without deductible, write-offs, etc.), but perhaps then the use of the Laffer Curve is to suggest the need for a “flat tax” so that we can perhaps determine Point X? In this sense, what the Laffer Curve might unveil is precisely that it is not usable, meaning we should create a tax system where it could be more useable? Perhaps that is the point of the Laffer Curve, to suggest a need to make it more usable by changing the tax system overall.
Right now, the Point X of a given nation seems dependent on the number of deductibles, culture, laws, corporate structures — the “optimal point” seems to vary radically, and if the Laffer Curve suggests a simpler motivational model of a “tax rate,” that assumption seems countered by the complexity of the world as a whole. Thus, the world would have to simplify, meaning something like a “flat tax” would be needed (and I do think the sheer complexity and “unknown” of taxes keeps many people from starving ventures they otherwise might). Is that idealistic? Easily, but that would likely just mean that making the Laffer Curve practically useful is also idealistic.
To summarize, I am not sure if the Laffer Curve is useful for policy making unless we are dealing with something like a “flat tax,” given that the Laffer Curve basically assumes a simple and direct source of human motivation). More Hegelian and Nietzschean, and in favoring human action, I am basically interested in destabilizing all models, theories, and the like which remove from us the need to actively think, for I believe “the loss of active thinking” causes trouble. When the Laffer Curve was introduced, it was very useful in that it destroyed the assumption that “higher tax rates cause higher tax revenue,” but not I fear the Laffer Curve is ironically being used in service of “thoughtlessness,” which is to say that people can assume “lower tax rates cause lower tax revenue.” Thus, the Laffer Curve, which could destroy “thoughtlessness” may have led to a new “thoughtlessness,” destroying the “active thinking” it might have originally helped motivate (an assumption of “higher rates lead to higher revenues” may have ironically led to a new assumption of the inverse).
I think it is generally good when models are destabilized and we must actively think (for the loss of active thinking causes trouble), so there is use in the Laffer Curve forcing us to think. But there’s also a question of its use behind that point, other than perhaps suggesting a new for a “flat tax” so that it could have use, optimizing tax revenue for either Liberal or Conservative ends. Does this mean we need a “flat tax?” Well, it would reduce complexity (a point which also brings to mind “Universal Basic Income or Basic Income” by O.G. Rose), increasing the probability of useful modeling and perhaps helping us focus on “what matters,” but effective modeling might also mean we are more easily “captured” by the State and system. Life is tradeoffs, I fear.
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