In the interest of not hijacking the other thread, let’s discuss the properties of the Laffer curve. But instead of a frozen moment in time, let us view the curve as a representation of the economy over a longer period.
Premises:
The valid range of tax revenue (Y axis) is bounded by zero and some hypothetical maximum. Said maximum is not a constant or a percent of the economy or whatever, as it would depend on the levels of technology, capital, and labor levels. Let us call it M for simplicity’s sake.
At a 0% tax rate, the tax revenue is zero.
At a 100% tax rate, the tax revenue is not zero, but several orders of magnitude below M. A modern economy will not be sustained, and regression to something like subsistence farming is likely in the long run.
The curve is continuous. There could hypothetically be discontinuities from, say, massive government funding leading to a breakthrough in cold fusion and unlimited energy, but there is no way to accurately predict such events.
Divergence from the original graph:
Over some initial range, the curve must be concave upward (i.e. increasing marginal returns). A tax rate of zero means no military, which will invariably lead to enslavement by an external entity. Local police protection is also required. Public education generates net economic benefit up to a (debatable) point as well.
At some point below M, there’s an inflection point, and the curve becomes concave downward. Otherwise it would have to grow into infinity, or M would represent a cusp in the curve.
There may be multiple local extrema (not too likely) and inflection points (more plausible). Since we’re looking at a nation-state, the level of taxation and corresponding expenditures will affect immigration, which may have greater impact on some stretch of the curve than domestic variables.
Ideas? Let’s flesh this out further so it could be of some use in policy discussion.
I think you’re over-using the concept if you’re going to start factoring things in like the effect on immigration.
The problem with trying to apply the Laffer curve to long-range variables is that there are so many confounding variables and other forces in the economy that it’s impossible to say if one thing leads to another.
For example, let’s say that a tax cut results in a 200 billion dollar reduction in revenue in year 1, but has the effect of increasing GDP by an extra .5% per year. So you grow a 10 trillion dollar economy by an extra 50 billion dollars in the first year, and it compounds in subsequent years. Eventually, that tax cut may pay for itself, but by the time it does, there will have been so many other forces acting on the economy that you’ll never be able to show that it was the tax cut that did it. Which is one of the reasons why there is still so much disagreement on tax policy.
Modern Republicans are certainly WAY too simplistic in their blanket statements that tax cuts always pay for themselves. In the short term, they certainly do not. Some obviously wouldn’t pay for themselves in the long term, either.
Also, all tax cuts are not equal. A tax cut on production and research and capital gains is going to have very different effects than a tax cut on consumption (say, a reduction in sales taxes). Yet Republicans tend to treat them all the same.
On the other hand, Democrats are guilty of the same thing in reverse - assuming that any supply-side rhetoric is nonsense, and that revenues can always be raised predictably by raising taxes. They tend to not include the growth-restricting effects of tax increases in their revenue estimates - especially the compounding effect of GDP growth restriction over years.
Immigration is a perfectly valid aspect to look at on the macro scale. It represents a change in labor, one of the three big variables.
And of course, the losses from the tax cut differ depending on what spending is cut correspondingly. Take those 200 billion from primary education, and the losses down the road will exceed the resulting economic growth. Take it from Medicare (does that even reach 200B?) and there will almost certainly be a net gain in the long term. But let’s work it out in a more general sense.
Good luck with that. I think all this will boil down to are the same old assertions-without-fact that both sides have been engaging in since the Reagan Administration.
And by the way, I’d also dispute that taking 200 billion from primary education would result in reductions in growth. If parents want their children education (and they do), they’ll pay for it. They managed to pay for it when per-capita incomes were a tenth of what they are today. In fact, I think education would probably be better. I don’t trust the state to provide my shoes - why should I trust them with my child’s education?
Well, we’re hijacking this thead, but I’ll note that the availability of free education in the ghetto has not prevented frightingly high levels of illiteracy. For that matter, I don’t see any improvement in educational statistics in the U.S. whatsoever since the Dept of Education was formed, and it’s blowing something like 70 billion dollars a year now, isn’t it?
The history of our society shows that people take the education of their children seriously. My grandmother and mother both went to school in a community-supplied one room schoolhouse. There was no federal education bureaucracy, no school taxes. So the people of the community built a school, hired a teacher, and taught their children. This was at a time when they were all dirt poor and could barely afford to eat.
And anyway, I’m not opposed to local school mandates. We’re talking about shrinking the federal government, are we not? I think you could completely eradicate the federal government’s role in education, and you wouldn’t see the difference in education quality. It might even improve.
While I really can’t contest this statement–which reflects my own cynical opinion about the US Department of Education and the wastage it engages in as a bureaucratic matter of course–the difference in quality would be lopsided. Certainly some parents find great value in education and would provide for it if it were not provided and mandated by the government. There are other subcultures in which education is not held in great esteem, or would be hijacked by religious or other interests which would use it to impose a dogma on students. In the absence of publically-funded education in the American South, for instance, private alternatives would almost certainly be parochial, which may definitely impact the quality or impartiality of education provided. Public and non-sectarian education is an overall benefit to the community, even when not appreciated directly.
As for the Laffer curve, it represents a simple concept, i.e. that there is some point at which a government can maximize tax revenue. It is, however, not a directly applicable concept, and glomming on a bunch of variables with uncertain weights or functions doesn’t make the concept more employable. Martin Gardner’s famous Neo-Laffer curve demonstrates the futility of trying to make any kind of simple fit to tax revenue versus gross product data. But hey, that never stopped anyone from turning an unworkable concept into a campaign plank.
Nationwide mandatory grade school education pre-dates the Department of Education quite a bit, and widespread grade school education predates it being mandatory by quite a bit. There’s nothing stopping states from enacting all the education laws and funding they want, either. There is no need for a huge federal bureaucracy in this area, is all I’m saying.
The existence of a bureaurcracy is not always a bad deal; sometimes, you need full-time employees to keep things running.
This faith that “parents will see to their kids’ education” is no good. Many won’t, and simply throwing up one’s hands and saying, “Well, they should have thought ahead,” isn’t going to change the FACT that society as a whole will suffer. Even the elites have to answer for this. In the uglier cases, the educated wealthy need to travel in armored cars from walled enclave to walled enclave. I’m not saying the US is anywhere near that, but isn’t it nice that a substantial portion of the citizenry feels confident enough that they don’t engage in predatory activities every time they see a “winner?”
This sort of applies to a lot of things besides education. I’m none too confident in this “Laffer Curve,” and haven’t thought of any good reason to even look at it. It pains my anarchist soul to say this, but gummint is, ideally, an expression of the common well-being, and to that extent, needn’t be regarded as some external enemy. At least not ALL the time.
I am puzzled about the discussion of inflection points. The key empirical question relates to the Laffer curve’s peak. As long as the peak is much higher than existing tax rates, the Laffer curve remains a theoretic curiosity, much like a Giffen good, though less interesting.
For those wanting to know the dose-response relationships between taxes and revenues, there are plenty of labor market studies, though they require careful interpretation. This isn’t the sort of question that can be settled from an armchair though.
That image doesn’t at all resemble the one that Martin Gardner drew in his Mathematical Games column way back when. To be fair, the page Stranger cites says that Gardner inspired the idea. But this page has a drawing closer to Martin Gardner’s technosnarl:
Gardner said that, while the Laffer Curve was correct near the beginning and end (you get bnegligible revenue from nearly 0% or nearly 100% tax rates), the space between was occupied by the highly complex “technosnarl”, which changed with time and location.
This page seems to have an actual reproduction from Gardner’s column:
