Taxing beyond the laffer maximum

Why do governments tax beyond the Laffer maxium?

You have probably read about the California’s Amazon tax. Amazon said it would flee the tax, promptly did so, and so, predictably, instead of gaining two hundred million, the state lost taxes on something like one hundred and fifty million of income.

Some people blame retailers such as Walmart, and there is much truth in that, but bloggers are not without influence, supplying, as they do, something politicians and judges crave more than money.

In Greece, the private economy is vanishing. The government applies ever more extreme measures to get people to submit their taxes, yet the very extremism of the government’s measures is becoming counter productive. A poor working class Greek pays 27 cents income tax on the marginal dollar, plus 23 cents vat (sales tax) on everything he spends, leaving him about half, and of course the well off, the people who actually make the economy go, pay substantially more. If someone in Greece owns a business, and operates it in a legitimate above ground manner, the business profits get taxed as profits, then they get taxed as income when paid out to the owner, and then when the owner finally spends what little remains, he pays vat.

Clearly this is counterproductive, and yet the main form of “austerity” in Greece is to raise tax rates yet further, which of course every time results in an immediate and substantial decline in tax revenue.

The Californian state government certainly knew that the Amazon tax would result in substantial loss of revenue, and the Greek government appears to be aware that every increase in tax rates results in massive and immediate loss of revenue, because they denounce those they tax as wicked and immoral, which denunciation implicitly acknowledge that these people are going respond to increased tax rates by wickedly and immorally paying less taxes.

The attitude expressed by these words may well explain these counterproductive actions. Government thinks it wicked for private people to keep their own money, which wickedness deserves punishment, regardless of whether the punishment actually benefits the government. Government selects people with politically correct attitudes, in practice pro government attitudes, a loyalty and value expressed and displayed by irrational support for higher taxes. Thus taxes against people who don’t have a lot of votes tend to exceed the Laffer limit, though taxes against people with lots of votes are in the US substantially less than the Laffer limit, and in Europe, with a few notable exceptions such as Greece, somewhat below the Laffer limit.


5 Responses to “Taxing beyond the laffer maximum”

  1. bgc says:

    I suppose the answer is ‘democracy’ – government by vote – because no rational individual would behave this way (no monarch, tyrant, or dictator for example). But bureaucracies think a vote is more rational and less corrupt than an individual decision – and this is what happens. And I don’t see any significant countervailing forces – the process could go right through to completion…

    • jim says:

      Democracy elects a government, but the people do not, cannot, run things. The government appoints a bureaucracy, but the politicians do not, cannot, run things. And what do the bureaucrats do? They diffuse and obfuscate responsibility.

      When the Challenger fell out of the sky, the inquiry first set to finding out why it fell out of the sky in the sense of physical cause. It found the answer (Or rather two of them found the answer while the rest of the inquiry commissioners issued a squidlike cloud of ink).

      The o-ring material was not rubbery when cold. Not rubbery, could not accomodate metal flexing, a gap opened, intensely hot fire sprayed out of the gap, and cut the challenger apart.

      Then it examined the human causes. Who made these decisions and why. Well, turned out that no one admitted making the decision, and in a sense, no one did, it was consensus, a consensus that people found themselves under extreme pressure to go along with. An engineer explained that how and why the Challenger was going to blow up. His analysis went up to the highest levels, was duly considered, and they considered that they did not like to hear downer stuff like that and insisted on hearing something more cheerful.

      Similarly, they don’t like to hear stuff about the Laffer limit.

    • Leonard says:

      I’ll second that. It’s democracy — government by giant committee.

      Jim, you can’t push the blame down to bureaucracy for either of the policy-choices you mention. In both cases, the policy was voted on at the highest legislative level.

      There are lots of reasons why people might support economically inefficient taxation. What this gets down to is that democracy is, as a matter of design, incoherent and irresponsible. By incoherent I mean there is no consensus (nor anything even close) on what the ends of democratic government are. By irresponsible, I mean that even to the degree there is consensus, or at least, a working majority, on what ends to pursue, there is no way to connect good or bad results to any policy maker. Thus, good policy will happen only accidentally. Counterintuitive good policy (like the idea that lower taxes will increase income) won’t happen at all.

      By contrast, both neocameralism and anarchocapitalism (if stable) have profit-driven government. The drive for profit makes the government coherent (all owners agree on profit and, with alienable ownership, make it first priority) and also responsible. (Owners will not tolerate bad policy, and will change whatever is necessary to get control to prevent it.)

      • jim says:

        “Jim, you can’t push the blame down to bureaucracy for either of the policy-choices you mention. In both cases, the policy was voted on at the highest legislative level. “

        The politician can lose his job, but cannot fire the bureaucrat. Who is the monkey and who is the organ grinder?

        Madoff was blessed by the SEC. A senate inquiry summoned the leading lights of the SEC, and the leading lights of the SEC gave them the finger. Who then is the monkey and who then is the organ grinder?

        Politicians are best understood as competing for the post of public relations officer for the permanent government.

  2. Alrenous says:

    Ah, of course.
    Turns out the turn of phrase, ‘punishing levels of taxation’ is more literal than I imagined.

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