6 ms·

The Laffer Curve illustrates a sweet spot of taxation to produce maximum revenue. People will always avoid tax if it's too high. Either they'll pay millions to

by cbeach 11y ago

The Laffer Curve illustrates a sweet spot of taxation to produce maximum revenue. People will always avoid tax if it's too high. Either they'll pay millions to accountants to avoid paying tens of millions to the taxman, or they'll simply not bother working so hard and they'll stop fighting to realise their career potential. The answer is not for the taxman to spend tens of millions to reclaim tens of millions of tax. The answer is to lower tax rates to the sweet spot of the Laffer Curve and thus maximise revenue. That's all too boring and technical for the media, though, and it won't sell papers. The media aren't concerned with maximising Treasury revenue. Instead they indulge people's instinctive grievances around inequality and demonize the wealthy. https://en.wikipedia.org/wiki/Laffer_curve https://en.wikipedia.org/wiki/Laffer_curve

theyoungestgun 11y ago
See-also: trickle down economics.
jbooth 11y ago
So you're saying that if the tax were lower, people would fire their accountants and pay more taxes out of the goodness of their hearts? A sense of fairness?
- cbeach 11y ago
  If tax is lower, tax loopholes are less lucrative. Basically you kill the market for accountants.
- viscanti 11y ago
  They would if the cost of hiring someone to help save money on taxes cost more than it saved. It's not about a sense of fairness. If paying someone to save on taxes is a bad investment, people stop doing that.
  - jbooth 11y ago
    So, if we're talking revenue of billions.. cut taxes to 0.0001% and that's the peak of the Laffer Curve where we maximize revenue? That's the argument?
    - dennisgorelik 11y ago
      No. Typical assumption is that the peak of Laffer Curve is somewhere between 30% and 70%.
- skylan_q 11y ago
  Capital moves more easily than labor. Not only are there loopholes to not pay taxes, they can also shift operations so that profits are realized in a different jurisdiction and the money goes there instead. Despite large cuts in corporate income tax and a reduction in consumption tax coupled with temporary increased spending, Canada's debt to GDP ratio is where it was before the '08 crash. The debt increased about 50% during this time, but so did the GDP. Companies stayed in Canada/came to Canada and with growth came more tax revenue. The fear was that the books would never get near balanced again with drastically reduced tax rates, but 2014/2015 was roughly balanced. (Arguably about -$3 billion for the whole year)
maxerickson 11y ago
The Laffer Curve deftly illustrates that lower tax rates can result in higher revenue than higher tax rates. The hypothetical does not demonstrate that there is a single sweet spot, and as noted in the Wikipedia article The shape of the curve is uncertain and disputed. It could well be that current taxes rates are at a point on the Laffer Curve where increasing tax rates would increase revenue.
- cbeach 11y ago
  Personally I think tax and welfare should just be simplified to a flat rate of tax and a universal basic income to all citizens. That way we avoid welfare being a trap (no welfare is lost when the claimant gets a job). And we simplify both the collection of tax and the payment of welfare, saving significant cost. Finland are going to pilot this: http://finlandpolitics.org/2015/11/05/710/ http://finlandpolitics.org/2015/11/05/710/ I think it's an idea that could appeal to both the Right (like myself) and the Left.
- SilasX 11y ago
  That cuts both ways. The more complex you claim the curve's shape is, the less confidence you have in "tax cuts reduce revenue" as well. So what's the bottom line? "hey, we shouldn't cut taxes because we might just be moving to a different sweet spot"?
  - maxerickson 11y ago
    The bottom line is that the Laffer Curve as a concept should be dismissed as a rhetorical device and we should demand an elucidation of the likely consequences of tax cuts and tax increases given our current situation. (The CBO spends a lot of their time doing exactly that, scoring bills and whatnot)
    - SilasX 11y ago
      The fact that there are diminishing revenue-returns and (socially) wasteful behavioral responses to taxation is not at all theoretical, but has tangible implications for policy. Even the very CBO you cite is implicitly recognizing these effects. Both a $0 and a $1 million tax on shoes will raise approximately zero revenue. Why is is the former so much better? Your answer is going to make the very same points elucidated by the Laffer Curve.
sbov 11y ago
It illustrates that there is a sweet spot. It does not illustrate the sweet spot. Which makes sense because it likely varies based upon the economy & tax laws of this and other countries. The article you linked quotes anywhere from 20% to 70%.
sgift 11y ago
Unfortunately we still don't know where that sweet spot is. In a world where it is really easy to move money to avoid taxiation we may very well find out that the "sweet spot" is at 0%. Then we only have to find out how a country can survive without taxes ... another unsolved problem.
Marazan 11y ago
The Laffer curve is a gross simplification of reality. There is no evidence the tax income "curve" has a single turning point (given multiple differing sources of of income that are earned in different ways this is almost self evident). Even if that assumption about a single turning point holds there is no evidence that the US are on the right-hand side of the curve.
- iheartmemcache 11y ago
  Yeah, I had no idea people still appealed to that nonsense as acceptable economic theory.
  - minimuffins 11y ago
    From what I can tell actual economists across the political spectrum don't take it seriously in any way.
hackuser 11y ago
For some context: The Laffer curve was used by the GOP in the 1980s to intellectually legitimize[1] the policy of cutting taxes.[2] They said cutting tax rates on the wealthy would increase tax revenue (!) and the benefits to the wealthy would "trickle down" to everyone else through increased investment, etc. The results were simply that the wealthy had more money. The federal government developed a massive deficit and while the economy has grown since the 1980s almost all the resulting wealth has been acquired by the wealthiest; incomes of 'everyone else' have stagnated since then. IIRC, the Laffer curve was never taken seriously by any but partisan economists, and was widely discredited. ---- [1] You'll note that all parties love to create 'research' that provide intellectual ballast to their predetermined policies. They know what sells to the intellectual crowd, who see something that looks like legtimate research but certainly don't have the time to study the issue themselves. The parties have pet think tanks that produce studies for them; for example, the Heritage Foundation is a prominent example for the GOP. [2] As evidence for note #1: Consider whether the GOP ever would consider a higher rate the appropriate level for taxation. Of course not. The results of the research are predetermined by the desired policy. The Democrats do it too, but I don't think they take it to the extremes of the GOP: Climate change denial, the evidence for the Iraq War, not regulatng the housing market before the crash, fighting finacial regulation after the crash, etc. (People want to be 'even-handed' and say it's balanced, the same on both sides, but really it would be a surprise if any situation worked out that way. I'm not partisan, I support any route to more pragmatic and less crazy policies.)
- vezzy-fnord 11y ago
  There's a difference between illustrating a qualitative economic phenomenon (which the Laffer curve does) and actually building policy proposals based on it. It doesn't get more laissez-faire than Rothbard, and here's him ripping apart Reaganomics from 1987: https://mises.org/library/myths-reaganomics https://mises.org/library/myths-reaganomics That said, one should be careful on quantifying "incomes" since it's a multifaceted idea.
minimuffins 11y ago
> The media ... demonize the wealthy What a joke! The media OCCASIONALLY reports on their activities. But most of the time they just don't. NYT has become moderately more adversarial in recent years, though not consistently. Most of the press not counting explicitly left-wing outlets operate as uncritical stenographers, the credulous, fawning tech press especially.
jmilloy 11y ago
First, simply invoking the Laffer curve is irrelevant. I think most of us implicitly understand that there is a maximum revenue somewhere above 0% and below 100% taxation. What's not obvious is where that is, ie whether current tax rates put us above or below maximum revenue. Second, people will always avoid tax, period. If one can spend $1 to save $10, then people will, no matter how low the tax rate is. The bare existence of tax avoidance is not a sufficient indication that the tax rate is too high. Third, no one wants the "taxman" to lose money trying to reclaim taxes. There are obviously more options than the two you are strawmanning: A) lose money trying to reclaim taxes and B) lower the tax rate.
ryandrake 11y ago
So, let me get this straight--people will choose to "work less" and make less money if their tax rate was higher? In what universe? That makes zero sense. If anything, a higher tax rate will incentivize one to increase their pre-tax income in order to maintain their post-tax take-home.
- SilasX 11y ago
  There are many such marginal cases that decide not to work (for cash on the market) due to changes in after tax income: housewives (who eg must balance the income against new childcare expenses and less free time), students, people near retirement, high-income professionals (surgeons), wealthy actors ("I have so much there's no point to getting out of bed for less than a million"). But yes, the "backward bending supply curve"/income effect you describe also exists, usually for primary breadwinners.

by cbeach 11y ago

theyoungestgun 11y ago

See-also: trickle down economics.

jbooth 11y ago

So you're saying that if the tax were lower, people would fire their accountants and pay more taxes out of the goodness of their hearts? A sense of fairness?

cbeach 11y ago
If tax is lower, tax loopholes are less lucrative. Basically you kill the market for accountants.
viscanti 11y ago
They would if the cost of hiring someone to help save money on taxes cost more than it saved. It's not about a sense of fairness. If paying someone to save on taxes is a bad investment, people stop doing that.
- jbooth 11y ago
  So, if we're talking revenue of billions.. cut taxes to 0.0001% and that's the peak of the Laffer Curve where we maximize revenue? That's the argument?
  - dennisgorelik 11y ago
    No. Typical assumption is that the peak of Laffer Curve is somewhere between 30% and 70%.
skylan_q 11y ago
Capital moves more easily than labor. Not only are there loopholes to not pay taxes, they can also shift operations so that profits are realized in a different jurisdiction and the money goes there instead. Despite large cuts in corporate income tax and a reduction in consumption tax coupled with temporary increased spending, Canada's debt to GDP ratio is where it was before the '08 crash. The debt increased about 50% during this time, but so did the GDP. Companies stayed in Canada/came to Canada and with growth came more tax revenue. The fear was that the books would never get near balanced again with drastically reduced tax rates, but 2014/2015 was roughly balanced. (Arguably about -$3 billion for the whole year)

maxerickson 11y ago

The Laffer Curve deftly illustrates that lower tax rates can result in higher revenue than higher tax rates. The hypothetical does not demonstrate that there is a single sweet spot, and as noted in the Wikipedia article The shape of the curve is uncertain and disputed. It could well be that current taxes rates are at a point on the Laffer Curve where increasing tax rates would increase revenue.

cbeach 11y ago
Personally I think tax and welfare should just be simplified to a flat rate of tax and a universal basic income to all citizens. That way we avoid welfare being a trap (no welfare is lost when the claimant gets a job). And we simplify both the collection of tax and the payment of welfare, saving significant cost. Finland are going to pilot this: http://finlandpolitics.org/2015/11/05/710/ http://finlandpolitics.org/2015/11/05/710/ I think it's an idea that could appeal to both the Right (like myself) and the Left.
SilasX 11y ago
That cuts both ways. The more complex you claim the curve's shape is, the less confidence you have in "tax cuts reduce revenue" as well. So what's the bottom line? "hey, we shouldn't cut taxes because we might just be moving to a different sweet spot"?
- maxerickson 11y ago
  The bottom line is that the Laffer Curve as a concept should be dismissed as a rhetorical device and we should demand an elucidation of the likely consequences of tax cuts and tax increases given our current situation. (The CBO spends a lot of their time doing exactly that, scoring bills and whatnot)
  - SilasX 11y ago
    The fact that there are diminishing revenue-returns and (socially) wasteful behavioral responses to taxation is not at all theoretical, but has tangible implications for policy. Even the very CBO you cite is implicitly recognizing these effects. Both a $0 and a $1 million tax on shoes will raise approximately zero revenue. Why is is the former so much better? Your answer is going to make the very same points elucidated by the Laffer Curve.

sbov 11y ago

It illustrates that there is a sweet spot. It does not illustrate the sweet spot. Which makes sense because it likely varies based upon the economy & tax laws of this and other countries. The article you linked quotes anywhere from 20% to 70%.

sgift 11y ago

Unfortunately we still don't know where that sweet spot is. In a world where it is really easy to move money to avoid taxiation we may very well find out that the "sweet spot" is at 0%. Then we only have to find out how a country can survive without taxes ... another unsolved problem.

Marazan 11y ago

The Laffer curve is a gross simplification of reality. There is no evidence the tax income "curve" has a single turning point (given multiple differing sources of of income that are earned in different ways this is almost self evident). Even if that assumption about a single turning point holds there is no evidence that the US are on the right-hand side of the curve.

iheartmemcache 11y ago
Yeah, I had no idea people still appealed to that nonsense as acceptable economic theory.
- minimuffins 11y ago
  From what I can tell actual economists across the political spectrum don't take it seriously in any way.

hackuser 11y ago

For some context: The Laffer curve was used by the GOP in the 1980s to intellectually legitimize[1] the policy of cutting taxes.[2] They said cutting tax rates on the wealthy would increase tax revenue (!) and the benefits to the wealthy would "trickle down" to everyone else through increased investment, etc. The results were simply that the wealthy had more money. The federal government developed a massive deficit and while the economy has grown since the 1980s almost all the resulting wealth has been acquired by the wealthiest; incomes of 'everyone else' have stagnated since then. IIRC, the Laffer curve was never taken seriously by any but partisan economists, and was widely discredited. ---- [1] You'll note that all parties love to create 'research' that provide intellectual ballast to their predetermined policies. They know what sells to the intellectual crowd, who see something that looks like legtimate research but certainly don't have the time to study the issue themselves. The parties have pet think tanks that produce studies for them; for example, the Heritage Foundation is a prominent example for the GOP. [2] As evidence for note #1: Consider whether the GOP ever would consider a higher rate the appropriate level for taxation. Of course not. The results of the research are predetermined by the desired policy. The Democrats do it too, but I don't think they take it to the extremes of the GOP: Climate change denial, the evidence for the Iraq War, not regulatng the housing market before the crash, fighting finacial regulation after the crash, etc. (People want to be 'even-handed' and say it's balanced, the same on both sides, but really it would be a surprise if any situation worked out that way. I'm not partisan, I support any route to more pragmatic and less crazy policies.)

vezzy-fnord 11y ago
There's a difference between illustrating a qualitative economic phenomenon (which the Laffer curve does) and actually building policy proposals based on it. It doesn't get more laissez-faire than Rothbard, and here's him ripping apart Reaganomics from 1987: https://mises.org/library/myths-reaganomics https://mises.org/library/myths-reaganomics That said, one should be careful on quantifying "incomes" since it's a multifaceted idea.

minimuffins 11y ago

> The media ... demonize the wealthy What a joke! The media OCCASIONALLY reports on their activities. But most of the time they just don't. NYT has become moderately more adversarial in recent years, though not consistently. Most of the press not counting explicitly left-wing outlets operate as uncritical stenographers, the credulous, fawning tech press especially.

jmilloy 11y ago

First, simply invoking the Laffer curve is irrelevant. I think most of us implicitly understand that there is a maximum revenue somewhere above 0% and below 100% taxation. What's not obvious is where that is, ie whether current tax rates put us above or below maximum revenue. Second, people will always avoid tax, period. If one can spend $1 to save $10, then people will, no matter how low the tax rate is. The bare existence of tax avoidance is not a sufficient indication that the tax rate is too high. Third, no one wants the "taxman" to lose money trying to reclaim taxes. There are obviously more options than the two you are strawmanning: A) lose money trying to reclaim taxes and B) lower the tax rate.

ryandrake 11y ago

So, let me get this straight--people will choose to "work less" and make less money if their tax rate was higher? In what universe? That makes zero sense. If anything, a higher tax rate will incentivize one to increase their pre-tax income in order to maintain their post-tax take-home.

SilasX 11y ago
There are many such marginal cases that decide not to work (for cash on the market) due to changes in after tax income: housewives (who eg must balance the income against new childcare expenses and less free time), students, people near retirement, high-income professionals (surgeons), wealthy actors ("I have so much there's no point to getting out of bed for less than a million"). But yes, the "backward bending supply curve"/income effect you describe also exists, usually for primary breadwinners.