The second installment of the Cato Institute’s three-part video series on the Laffer Curve (featuring Dan "Bulldawg" Mitchell) has just been released. It is superb! (You can find the first installment here.)
Laffer Curve: The Evidence
Share
Previous post: Spare Me from Collectivism
Next post: For the Exhibit Entitled "Truly Dumb Ideas"
{ 38 comments }
I wonder how much these tax revenue analyses are muddied because of the payroll taxes collected to fund Social Security and Medicare (and other spending the the special issue bonds allow the asshats in D.C. to spend).
I continue to be impressed with that series…
The "Laffer curve" hypothesis requires no evidence. I can't possibly be false.
The problem with a 70% marginal income tax rate that collects as much revenue as Bulldawg reports is that it collects so much revenue. Exemptions for investment should practically eliminate revenue collection at this level. The current debate over marginal income tax rates presents a false choice.
The luxury tax that Bulldawg describes is obviously designed to fail. A progressive consumption tax does encourage investment at the expense of marginal consumption but is not designed to fail. Building the costliest private yachts does employ people, but it doesn't employ people to produce what most people may consume, including the people building the yachts. People building these yachts, who never expect to own one, benefit more by building other things, including smaller private yachts and commercial yachts providing yachting opportunities to more people.
Building pyramids and space stations and highways to nowhere is similar. Building a highway employs people, but so what? The point is that neither the people with jobs nor anyone else much benefits from the highway.
We only consume what we produce. Entitling wealthy lords exclusively to consume private castles, large yachts and airliners organizes capital to produce what only wealthy lords produce. Limiting this entitlement is what Adam Smith intended when he advocated a tax on luxury. Since the type of "luxury tax" that Bulldawg describes doesn't have this effect, it's not what Smith advocated. Since it's obviously designed to fail, the tax is obviously designed to contribute to this false choice fallacy.
I don't want to get angry at the next installment, and I'm not angry at this one. I just want anyone anywhere genuinely to advocate a classically liberal tax policy.
If anyone is interested, the consensus among economists indicate that the tax rate that hits the peak of the Laffer curve is roughly 71%, assuming the structure of the system is a flat tax.
(The revenue-maximizing point is calculated like so: t*=1/(1+e) where e is the elasticity of labor supply. Since e is on average estimated at 0.4 for the US, that gives us 1/1.4 or roughly 71%)
Of course, analyzing the system for a progressive tax is more complicated.
//reposted from YouTube
We only consume what we produce. Entitling wealthy lords exclusively to consume private castles, large yachts and airliners organizes capital to produce what only wealthy lords produce.
In a world with no credit. But we live in a world with tons of credit. Seems that every unskilled labourer was using credit to obtain private castles for which the wealthy Lords are now paying.
Even then, Martin, the wealthy Lords become wealthy only by producing what the Plebes want to buy. The fact that the plebes are willing to part with their consumption credits for the production of the wealthy Lords means that what the wealthy Lords produce adds value to the lives of the plebes. Because in free market economy the wealthy Lord can only gain wealth by pleasing his fellow man (or inherit wealth created by a Lord who pleased his fellow man), then by what right do you take away their entitlements to the comforts which they have earned?
Further, in a free country, there's no stopping a mere Plebe from becoming a wealthy Lord.
Taxes distort economies because they effect incentives. The larger the tax, the bigger the distortion. Seems to me that the luxury tax is the most ill-conceived idea going. The thing about "luxuries" is that they are not "necessities". So, the demand for them is pretty elastic. Outside of jacking up the tax on less elastic luxuries like beer and cigarettes, how would your luxury tax avoid the pitfalls of the 1991 luxury tax?
It's irrelevant even if it were true.
Few unskilled laborers bought castles. I saw a story recently about a couple in California about to default on a house for which they recently they paid $300,000. I saw the house. I couldn't believe it. It's smaller than mine. It's not as well built. In my neck of the woods, it would be low rent and sell for $60,000. I'm not exaggerating.
Do I want someone bailing them out? Certainly not. I don't want anyone bailing out their creditors either. If some lords of credit take losses on loans to purchase these houses, that's entirely their problem. Extending credit rationally is their job. They didn't do their job. Lending these people $300,000 to buy this house was incredibly stupid.
That's fine with me. I want Bill Gates paying no more tax than you and I if that's his choice.
Absolutely. I wouldn't have it any other way.
Lords govern productive means as you say. They earn entitlement to consume this way. That's fine too. They don't earn entitlement to consume in proportion to the means they govern unless forcible propriety is structured this way. "What right?" is entirely a matter of this forcible propriety.
The idea that I would take anything away from anyone, other than this entitlement, is absurd on its face. Reforms I favor would cut Bill Gates taxes practically to nothing. I would take hundreds of billions of dollars away from Congress and leave it with people like Bill Gates to invest.
That's good. I wouldn't have it any other way.
Seems to me that much of the marginal value of capital is best reinvested and not consumed.
Demand for more common luxuries is also elastic. Nothing I advocate would eliminate luxuries. It would only replace less common luxuries with more common luxuries. We'd still have RVs, mp3 players and HD TVs. Demand for these luxuries is as elastic demand of a yacht.
It would have little effect on beer and cigarettes, because these luxuries are common. You obviously have no clue what I advocate, yet you go on and on as though you do.
I advocate a progressive consumption tax on the USA (Unlimited Savings Allowance) model. Essentially, that's the progressive income tax plus a tax deferred investment account (like an IRA) with unlimited contributions. If you earn a billion dollars in a year, you may reinvest $999,900,000 and pay tax only on the remaining $100,000 if you choose. The tax applies to all income, including wages, rents, dividends and capital gains alike. This simplification doesn't discourage investment at all, because no one is required to pay the tax on any income.
Most of us don't earn a billion dollars in a year, so the marginal rate at a much lower income, say $50,000, can't be very high. Bill Gates is free to pay this rate if he chooses to consume at this level. He may consume at a higher level but pays a higher tax rate on this consumption.
The tax doesn't apply to yachts or anything else particularly. It applies to any income you consume rather than invest regardless of what you consume. It's a tax on marginal consumption. Your consumption is not regulated at all. You only account for your investment and pay the tax on the balance of your income.
I'm extremely skeptical of this simple formula, and I can only hope that the Feds don't start believing it. The whole idea of maximizing Federal revenue is terribly frightening. I'd rather minimize it.
You obviously have no clue what I advocate, yet you go on and on as though you do.
No, I had no clue what you were advocating – I got distracted by your colourful diatribe about Lords and entitlement – but it's pretty easy to see that you have a giant chip on your shoulder. Try removing the chip as it's not conducive to conversation. Relax.
I'm in support of a consumption tax myself. However, your paragraph about Lords and Adam Smith's luxury tax gave a very different impression of what you favoured.
I'm extremely skeptical of this simple formula
As well you should be. Taxes raise the hurdle rate for investment. The only way to lower the hurdle rate is to give favourable tax treatment for certain investments. That's how tax loopholes are created and that's why in Capitalism and Freedom Milton Friedman had an exhibit which showed that the actual tax paid was about flat at 23% (if memory serves) despite a highly progressive tax rate to 90%.
and I can only hope that the Feds don't start believing it
And you think they don't believe that now?
I'm surprised that the 'Laffer notion of optimal tax rates is a furphy' hasn't been mentioned? Is it not like a robber who figures out how much to steal whereby the victim will hand over the money yet won't retaliate? Rather the government should only provide minimal services and levy the taxes to provide those services? That if technology means they can do the same work for less then tax rates should go down? That, ultimately, the government has no right to turn over a profit?
Above, you're talking about unskilled workers buying castles on the lords' tab, and now you've discovered a chip on my shoulder. Consider the mote in your eye.
I have no problem with the lords. I only want to call them by name and cut their taxes so they can invest. I don't want them ordering my children to build their castles. I thought we had outgrown this divine right.
I associate the consumption tax I favor with Smith's "tax on luxury". I don't associate a tax on yachts specifically with Smith's idea. That's just a political stunt designed to set up Bulldawg's argument.
It's Cafe Hayek. We're on the road to serfdom. Get it?
Above, you're talking about unskilled workers buying castles on the lords' tab, and now you've discovered a chip on my shoulder. Consider the mote in your eye.
You must be a real joy at dinner parties. Do you actually sniff after after drawing parallels between two entirely unrelated things?
To counter your anecdote I have one of an illegal unskilled labourer who earned a pittance able to obtain a mortgage on a $650K house. I don't know how you define "castle" but clearly this is one castle he couldn't afford. Now the "Lords" are being forced to bail him out. Of course, I agree with you that lenders who lent to this guy shouldn't be bailed out but bailing out one bails out the other.
I don't want them ordering my children to build their castles. I thought we had outgrown this divine right.
What are you talking about? I have a feeling the definition of "Lords" has suddenly shifted.
That's just a political stunt designed to set up Bulldawg's argument.
Except for the fact that it was a real tax that really did not do what it was supposed to do and backfired rather badly. Mitchell was illustrating the point. Or do you think that all illustrations are stunts?
*sniff*
Martin is clearly unhinged and is obsessing about "lords" and "castles". He's spent too many nights out at Mideval Fair.
Gil,
"That, ultimately, the government has no right to turn over a profit?"
There is, of course, no point to owning a chunk of the planet if you can't turn a profit. The government is in the rent collection business. Every government is in the rent collection business. And a government that stops collecting rents will quickly be replaced by one that does. The solution is professional government. As opposed to the myth filled monstrosity run by confidence artists and thugs that we currently have, a professional organization that is paid well to operate the services that people really want.
Heh heh heh.
"The solution is professional government."
That sound like solution muirgeo gives yet he gets criticised to the tune "yeah right, we just the need the right people in guvmint for it to work, suuuuure". :\
That's a good observation, Gil. But I'm not talking about a mytharchy ("the people") run by cons and thugs, I'm talking about individuals hiring professionals to perform the services that they want. Is this possible? Probably not. But if it isn't possible, then the facist state is inevitable.
Your talk of chips and dinner parties is related to something? You retreat into ad hominems here.
Your incredible talk of unskilled laborers buying castles reveals some "welfare state" chip you carry. Literal castles don't seem to bother you, but you resent the incredibly costly housing of unskilled laborers for some reason, so you describe them as castles?
Counter the anecdote all you like. It's true. If someone lent an illegal unskilled laborer earning a pittance $650k to buy a house, I suppose the lender gets the title when the price falls and the borrower defaults. When common houses sell for this price, I expect this outcome a lot.
A "private castle" in my way of thinking is a residence consumed exclusively by one or a few persons but requiring the resources of many people to build and maintain. For example, a structure like Biltmore House in Asheville, NC presumably required hundreds of man-lives to construct. If it were a private residence, it would be a "private castle". Biltmore House is a museum open to the public, so it's not a private castle. I like museums if they're profitable. I like Biltmore House. I've visited many times.
No one forced any lord of credit to write this mortgage, and no one should prevent the lender from repossessing the property in my way of thinking, but I'm not a lord of propriety myself.
You clearly have a chip on your shoulder about these alleged bailouts, because I've never advocated anything similar. You raise the issue, because you want me to knock the chip off your shoulder, but I don't. I make provocative statements to elicit discussion too. I don't see a problem with that. You respond by attacking me personally, while do you the same without similarly attacking yourself.
That's true.
A "lord" is a governor, someone exercising authority. People holding many titles and thus governing many productive resources are "lords". The word always had this meaning. The lords of Christendom were hereditary title holders swearing allegiance to a political party and obliged to govern resources according to their party's platform and to raise or select heirs governing the resources similarly, in theory. These lords claimed divine rights. Serfs lived on a lord's estate. They had rights to live there and obligations to labor there.
Anyone ordering the construction of a private castle for his exclusive use necessarily governs many resources. A certain political/ethical theory asserts that anyone exercising this authority has a "natural right" to exercise it without limits. This theory has nothing to do with economics and certainly is not classical liberalism.
I associate Nature with God, so I associate "natural rights" with "divine rights". I place words in quotations this way in different circumstances, sometimes when I'm defining a term and sometimes when I'm disputing the usage. I quote "divine right" above because I'm disputing the usage.
Property rights are not natural or divine, because they're artificial. Territoriality is natural, but that's not property.
I hope we understand one another.
No. As I said, enactment of the tax was the stunt. The illustration illustrates the stunt. Do you think that all illustrations are stunts? And when did you stop beating your wife?
*sniff*
See. I can write this word too. It's not difficult. Do you think I've accomplished something now?
FreedomLover is clearly obsessing about Martin's use of words like "lord" and "castle". He's spent too few nights learning the meaning of words.
If most people favor it, why don't we have it?
Juxtaposing extreme alternatives and ignoring other alternatives exploits the false choice fallacy.
Again, that's why I favor a progressive consumption tax. I don't believe that various "revenue maximizing" tax reforms maximize growth at all.
Ok, I've clearly had enough of Martin's trolling. He's clearly antagonistic, off-topic and irrelevant to the threads. I suggest a banning.
Proof of t*=1/(1+e):
Assume a flat tax t over N individuals with z average earnings (of course, z is a function of the tax rate, t).
Total tax revenue equals R = t · z(t) · N
(aka revenue equals total income times the tax rate)
In order to find that value of t that maximizes R, take the derivative of R, giving us…
∂R/∂t = z · N − t · ∂z/∂(1 − t) · N
= z · N − t/(1 − t) · e · z · N
where e = ∂z/∂(1−t ) · (1−t)/z. This is the elasticity of labor supply.
Set the derivative equal to zero and solve for t:
∂R/∂t = z · N − t/(1 − t) · e · z · N = 0
t/(1 − t) · e · z · N = z · N
t/(1 − t) · e = 1
(1 – t)/t = e
(1 – t)/t +t/t = e+1
(1-t+t)/t = e+1
1/t=e+1
t*=1/(1+e)
QED
Jason/Martin:
Maximize growth with what constraints? If we wanted to maximize growth (in GDP I assume is what you mean) then that would call for government control or regulation of the economy, by mandating that everyone work 16 hour days.
As Milton Friedman said in Capitalism and Freedom, the socialist system is more materialistic than the capitalist one because, for capitalist economies, the goal is not to maximize production but to let people make the appropriate trade off between production and leisure. Growth-maximizing policies are not social welfare-maximizing policies in the economic sense.
"The whole idea of maximizing Federal revenue is terribly frightening. I'd rather minimize it."
If by minimize you mean, set equal to zero, then I'll disagree. Of course, I don't think you mean shrink to zero. If you do, you are arguing for anarchism (you may be, I don't know). If you don't, then you're making some trade-off between the costs of taxation and the benefits of government services. Of course, only hard-core Rawlsians think that we should maximize tax revenue. The appropriate answer for anyone with a shred of utilitarian ethics is one that equates the marginal efficiency cost of taxation and the marginal benefits it brings, through government provision of public goods and the like.
The point I was making was not a moral/political one, but a technical/positive one. The debate over the Laffer curve shouldn't be about what we would *like* the Laffer curve to look like, but what it *does* look like. Unfortunately people on the left say that t* is high without looking at the evidence just like people on the right say that t* is low without looking at the evidence. I'd rather look at the evidence. The same goes for the marginal benefits of government services.
I'm extremely skeptical of this simple formula
Methinks: As well you should be. Taxes raise the hurdle rate for investment. The only way to lower the hurdle rate is to give favourable tax treatment for certain investments. That's how tax loopholes are created
A final point:
You're right that the simple formula does not clearly account for the effect of loopholes. Of course, the effect of loopholes on tax revenue is through changes in the level of taxable earnings (z) in that formula, but there is no direct variable that can be changed to show the effect of loopholes. But remember the definition of the elasticity of taxable earnings (the elasticity used in the formula above): the amount taxable earnings change with a change in the tax rate, so when we estimate this elasticity in practice, we usually include the incentive effects of loopholes. So really, the estimate of e takes into account loopholes.
If there were fewer loopholes, the Laffer rate t* would likely be higher, since the same tax rate would collect more revenue. The same would apply to stepping up tax enforcement: a higher chance of getting caught underreporting your income would lead people to more truthfully report their earnings, decreasing the elasticity of earnings with respect to the tax rate.
Why doesn't bulldawg extend his analysis to compare the effect of a top marginal tax rate of 28% in say, 1992, versus a top marginal tax rate of 39.6% (or whatever it was) in 2000?
Apples to oranges either way. 8 years is a long time.
Your incredible talk of unskilled laborers buying castles reveals some "welfare state" chip you carry.
I don't give a crap if the guy buys a "castle" or a dump. I don't want to be on the hook for a bailout for a guy who made irresponsible choices. the government's bailouts force me to back his loan with taxes collected from me. In effect, he gambled with my money without my permission. Gee, why should I be anything but delighted by that? In retrospect, my mistake was not taking out a mortgage I couldn't afford. Silly me.
no one should prevent the lender from repossessing the property in my way of thinking.
Yeah, but they are, aren't they? And that's my point. That's exactly the kind of legislation they're busy pushing through congress – the "alleged bailout".
A "lord" is a governor, someone exercising authority.
A "private castle" in my way of thinking is a residence consumed exclusively by one or a few persons but requiring the resources of many people to build and maintain.
See, it would have been easier to respond to you if you had provided a key with the dungeons and dragons parallel universe you've created. With the key it's hard enough to understand what you're going on about. Without it, you run the risk of being accused of "…obviously have no clue what I advocate, yet you go on and on as though you do." Gee, how could anyone NOT understand exactly what you mean by Lords and castles and dragons and pots of gold and what have you. All I a want to is: are the Lords a-leaping and are the Ladies dancing?
You're actually quite funny, Martin.
"All I a want to is" = "all I want to know is"
Gotta stop popping on this blog while working!
Having said that, if we're going to debate between a marginal tax rate that would maximize tax revenue and the (assumed) lower rate that would maximize long-term economic grown, I'm going with the latter.
/Agree. But then again, most everyone agrees with that. As I said before, only hard-core Rawlsians would prefer the former, and even some of them would agree with you!
Of course, those aren't the only two options. We are not limited to just the extremes of the Laffer curve. We can (and should!) be somewhere in between, trading off between growth and the benefits of public goods.
No. I haven't claimed to know what you advocate without having a clue. You're clearly bent out of shape over some bailout you imagine, particularly if the beneficiary is an unskilled laborer. Your grievance has nothing to do with me. I don't have a mortgage, and I don't advocate any bailout.
Is it a differentiable function?
http://en.wikipedia.org/wiki/Laffer_curve#The_Neo-Laffer_curve
You're clearly bent out of shape over some bailout you imagine
I'm relieved that things are so clear for you. No, my grievance has nothing to do with you or your Leaping Lord universe or your ability to to twist everything into a personal slight. It's all about you, Martin. As I said, you must be just a delight in person.
I don't. I'm not. I consider myself a minarchist, but when I say "minimize Federal revenue", I don't imagine the minimization we learn in differential calculus, and I don't associate government services exclusively with the Federal government. It is possible in principle for private companies selling gasoline along roads to own and maintain roads, for example. We pay for road construction and maintenance with a gasoline tax anyway.
I don't necessarily favor this approach. It's problematic for various reasons, but it's possible in principle. If we restructured entitlements to encourage privatization of this kind, roads would still be a government service in my way of thinking, subject to many regulations and eminent domain to establish rights of way, but the administration would be less centralized.
The system is problematic, because we'd need to forbid people buying gasoline from people who don't own the roads, or it wouldn't work. Privatization with toll booths is also problematic, but privatized roads could become practical eventually, and I think that's fine, but I don't expect road construction or operation to be free of any regulation imposed on road owners.
That's another personal slight. An earlier example is "You must be a real joy at dinner parties. Do you actually sniff …" They're on the record along with the chips on your shoulder. People who live in glass houses shouldn't throw stones. I don't care what you say about me personally, but the personal references are clearly there. I note them because they're a classic diversion. Yours aren't special.
I think the technology for road usage fees would be fairly simple – a registration fee in conjuntion with an RFID device. You pass by a network of readers in urban areas. If a reader can't get a response from your registration device you get a bill with a penalty tacked on. Get clocked for speeding and your device gets disabled or flagged. Don't update your insurance – same story. In addition, certain roads and bridges could collect additional fees by placing readers on the ramps. I think the result would be a lot more bicycles and scooters.
"Yours aren't special."
Coming from you, you can only imagine how much that means.
It seems that pretty much everyone here is at least capable of civil discussion except for you and maybe one other poster. Your treatment of everyone as a mortal enemy makes you very difficult to "talk" to and it distracts from you ideas. Thus, I will remove my non-special little self from this attempt at conversation with one who clearly believes himself to be superior to everyone on the blog – you.
Please feel free to have the last word to once and for all prove my inferiority to you.
What a lot of baloney. My discourse is every bit as civil as yours.
When I wrote, "Yours aren't special," I meant that I haven't singled you out by drawing attention to sarcastic personal references like "you must be just a delight in person." I point them out reflexively when anyone uses them. Then you accuse me of being uncivil toward you. The record is very clear.