Some weeks ago in Reality Check, I referred to the
Laffer Curve; and thought today to give it a closer look - for it has something interesting to tell us. The Curve applies to individual incomes,
aggregated to describe behavior in the whole society. Tax rates
of 0% and 100% each produce zero tax revenue, but there must be
a rate in between those extremes which produce a maximum grab for
governments; usually the curve is drawn as a parabola with that peak
at 50%, but the choice is arbitrary. The simple theory
is that for everyone working and producing, there is some tax rate
which disincents them to work; they prefer to devote effort to
avoiding tax, or simply to enjoy leisure. This is not incorrect. However, suppose it's applied not to the aggregate of
individual earnings, but to the nation's product in total; the
Gross Domestic Product. The two seem at first to mean the same
thing - but there's a key difference. GPD is defined to include the "product"
of government activities, valued at what they cost. This is of
course absurd, for if government pays a billion dollars a year to
have ditches dug and filled in again, that billion counts towards
GDP even though no rational person would choose to purchase that
service. Therefore, since any rate of tax confiscates
money from all contributors to GDP, government is taking
money from itself with regard to its own component. It is not
raising any new revenue there, but merely recirculating what
it already has, at some non-zero cost. I assume here that it "taxes
itself" at the same rate as it taxes everyone else, though that's
an approximation; it's true about income taxes, and sometimes about
property taxes (eg a city may tax federal property) but not about
sales taxes. With that inaccuracy, for the true tax yield
see the formula here. Let's suppose that 15% of government spending is
useful, ie that it produces goods and services that people would
buy anyway if offered in a free market. That part would yield
genuine tax revenue if taxed. Suppose also that the cost of
collecting taxes is 10%, from both the productive and the
parasitic part of the economy. Then by that formula, net tax revenues are: This shows 50% to 60% is an optimal rate from government's
viewpoint. I then plugged in different values for the collection cost,
between 5% and 25%, and it made little difference to that
conclusion; but when I varied the estimate of how many of the
government services are useful and marketable ("P") it did have a
marked effect; the higher it was, the further to the right moved
the optimal, max-tax rate: So why don't governments impose taxes at rates higher than 60%?
Because they know
quite well that their delivered services are of low value and so that higher rates
would yield lower revenues. Thus in most of Europe, where some government services
are of relatively high quality, they get away with taxing people at 55%
to 60% - suggesting that their services are perceived as being around
20% useful and marketable. Here in the US, the total tax rate is still about 50%,
suggesting that we see their value as being 10% useful or less.
Yes; that figures. Something fascinating follows: governments know
it too, and by implementing tax rates that fit it well they admit
that they know quite well that their "public"
sector of the economy is indeed largely parasitic; ie, that its
true market value is only around 10% to 20% of what it costs. Since they know
that yet do nothing about it, we can accurately conclude from this
alone that the purpose of power is power, not service. Long-time readers of this Blog will find no surprise there. But now, thanks
to the Laffer Curve, that conclusion is backed by a little math.
11A124
No Laffing Matter
by Jim Davies, 9/16/2011
Tax Rate %
0
10
20
30
40
50
60
70
80
90
100
% Tax Revenue
0
9.45
17.1
22.95
27.0
29.25
29.7
28.35
25.2
20.25
13.5
Usefulness %
10
15
20
25
30
35
40
50
75
Max-tax %
55
57
60
63
65
68
70
75
90
Had enough GOVERNMENT yet?
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