A Libertarian's Thoughts on Whatever

Wednesday, April 23, 2003

 
The Iraq conflict is looking more and more pyrrhic all the time. I'm glad Saddam is gone, but there were much better ways to deal with the situation.
There have been numerous requests for a better explanation of the Laffer Curve. Ok, one request. Ok, it wasn't really a request, just a statement of not understanding it. Anyway, hopefully the following will help. Imagine that the income tax was 0%. Obviously, the government would raise no money with it. Now imagine that the tax were 100%. Ask yourself how much you would work if every last cent you earned was taken from you. I suspect you wouldn't work at all, at least not in the formal economy (maybe you'd barter or deal drugs or mooch off your parents savings, or something else like that where you wouldn't be paying taxes). In this scenario the government would also raise no money from the income tax. When the tax is in between these extremes the government does raise money, as happens every day. So there must be a point beyond which raising taxes will actually hurt revenues. If we are past that point, then cutting taxes will increase revenues.
There are a few important points to remember about the Laffer Curve. The first is that it does not really tell us what the tax rate is that maximizes revenues, it just reminds us that taxes can be raised too far. Paraphrasing Art Laffer, if you raise the tax rate by 5%, you may get 3% more revenue, you might even get 4% more, but you will not get 5%, and you may in fact hurt collections. Another thing to remember is that even if we could determine exactly what the revenue-maximizing rate were, if doesn't stay constant; in a time of war people will put up with much more than they will when they are at peace. Lastly, we need to look at all taxes in conjunction, as they will have feedback effects on eachother. The capital gains tax raises money, but a lot of people (I am one of these people) believe that it slows the economy enough that it reduces the revenues other taxes bring in far more than the small amounts it generates.
Here are a couple of websites that may help you understand it better if you wish to learn more.
Maestro 12:07 AM