Tuesday, March 2, 2010

No Laughing Matter – the Laffer Curve

[excerpts from Some Thoughts on Supply-side Economics, by Richard M. Ebeling from Mises Daily]

An additional ingredient in the tool kit of some "supply-side" theoreticians, however, is the concept of the "Laffer Curve," named after Arthur Laffer, a USC economist.

Laffer argues that there are two possible tax rates that will generate the same level of government revenue. If taxes are zero, government revenue is zero and the people retain 100 percent of their income. If taxes are l00 percent, government revenue would again be zero because, Laffer says, nobody would bother to work if they were not allowed to keep any of what they had earned and produced.

If the rate of taxation is lowered from l00 percent, individuals would have an incentive to work, since they could now keep some of what they had produced and government revenue would rise from zero to some positive number. Every lowering of the tax rate would continue to induce more and productivity, with greater government revenue besides.

Greater government revenue, that is, until some point at which any further lowering of the tax rate would, in fact, generate less of a government take rather than more. Hence, the "Laffer Curve" . . .

But even more important than the theoretical difficulties of determining the position and shape of "The Curve" is the assumption that the goal of fiscal policy should be the maximizing of governmental revenues.

Kent comments:

This little survey of so-called supply-side economics is worth reading in full.  This is the view that some derisively refer to as ‘trickle down’ economics.  What these critics would prefer, because they are statists of some sort, is that those who have anything be taxed as much as possible so that the state will have more to redistribute.  In their view, only the state has the wisdom and fair-mindedness to distribute wealth ‘properly.’

If you love freedom, you naturally oppose this whole idea.

But as Ebeling points out in the article above, the proponents of the ‘other’ view have a very similar problem.  This is especially ironic because they are typically self-professed conservatives of some stripe who claim to be opponents of ‘big government.’

I have no doubt that some of them are in many ways.  Perhaps they have just not considered this matter carefully.  For examples, you can often hear radio talk show folks like Rush Limbaugh extol the virtues of the Laffer curve.  They often argue for lower tax rates based in part on the idea that it will, in fact, generate more revenue for governments.

I always want to ask (but I refuse to spend enough time on hold to do so):  “Exactly why would conservatives every want to generate more revenue for any government?”  And I want to ask this poignant question in a very loud and forceful voice!

If a conservative is someone who wants to conserve individual liberty, the goal should be to keep governments on a very (very) strict diet.  When fed very much, they always grow from helpful servants to horrible masters – which make us their slaves!  Those who love liberty should never give as a reason for anything the thought that it might supply more revenue to governments.

Governments always tend to spend at least as much as they collect, and almost (?) always much, much more than that.  Revenue to government is power to government, because almost anything governments do beyond discouraging us from murdering one another and stealing from one another will result in less liberty.  My desire is just enough government to preserve liberty, and no more.

So even if Laffer is right, I for one do NOT want to implement policies that take advantage of his ‘curve.’  I don’t want governments to have more revenue, because I don’t want governments to have the power to do very much – which is usually too much.

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