Posts Tagged ‘Laffer maximum’

Taxing beyond the laffer maximum

Saturday, July 2nd, 2011

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.

Laffer curve

Thursday, March 31st, 2011

If the government taxes 0% of GDP, it will not get any money.  If it attempts to tax 100% of GDP it will not get any money either, since there will be no above ground wealth.  So somewhere between 0% and 100% is the tax that maximizes revenue.

Genghis Kahn and Raffles believed that the tax that maximizes revenue is quite low, close to 0%.  Today’s politician’s believe it is quite high, somewhere close to 100%.  I suppose that in a society with elaborate bookkeeping and large organizations, the maximum would be higher, so they could both be right about the respective societies that they ruled.

When the mandarins told Kublai Khan that he could not rule China from horseback, they were telling him that a bureaucracy, an elaborate apparatus of rule, can efficiently extract higher taxes than a gang of horsemen – that the revenue maximizing tax collected by a large and expensive bureaucracy is markedly higher than the revenue maximizing tax collected by horsemen, that bureaucrats and regulations are, for the ruler, a good investment.

But, on the other hand, naturally bureaucrats would say that.  Maybe Kublai Khan would have had more net revenue, and thus been able to support a larger army, if he had gone right on ruling the empire from horseback.  When the Mongols adopted bureaucracy, they ran out of puff.   Perhaps bureaucracy, regulation, and high taxes is not a good investment for the ruler.  This is the Mencius Moldbug argument: that economically efficient, rational, revenue maximizing absolute despots would be better than what we have got.   It might well be true, though actual, rather than theoretical, absolute despots have a tendency to irrationality.

So we need empirical data.  The Bush tax cuts were advocated on the basis that they would increase revenue.   Some people say they reduced revenue, others say they increased revenue.  This depends on how you measure things.  If you want to prove that the Bush tax cuts increased revenues, you look at revenue raised from people who had been highly taxed before the tax cuts, in which case it looks very much that the tax cuts increased revenue.  If you look at total revenue,looks like they reduced revenue, perhaps because a lot of people who had formerly paid some income tax, now paid no income tax.  Overall, the experience of the Bush tax cuts suggests that taxes on the rich in the US are well above the Laffer maximum, taxes on the poor are well below the Laffer maximum.  So if the government has to have more money, it has to do what European governments do:  Tax the working poor.

Consistent with this theory, more expensive governments, high welfare governments, tend to tax the poor.  Their redistribution is more progressive than the US, but their taxation is a lot less progressive than the US, suggesting that attempting to tax the rich more than they are taxed already just does not pay, suggests that as taxes hit the Laffer limit, and the state needs more money, it has no alternative but to tax everyone, including the working poor, at the Laffer limit – thus tax everyone who works in the above ground economy at much the same rate.

One such expensive government is the Greek government.  Facing financial crisis, it raised taxes, across the board, taxing everyone more, rich and poor alike, with the result that:

Compared with the first two months of 2010, revenues declined this year by 9.2 percent

This suggests that Greece is well and truly on the wrong side of the Laffer maximum.

Now obviously a rational self interested despot would only wish to tax at the Laffer maximum. Since taxes are universally unpopular, one might suppose a democracy would tax at well below the Laffer maximum – but clearly, at least some democracies are taxing above the Laffer maximum, and all democracies are taxing rather close to the Laffer maximum.

While a rational self interested despot would only wish to tax at the Laffer maximum, a rational self interested bureaucrat might well wish to tax far, far above the Laffer maximum,  since that maximizes the power of the mandarins relative to the power of the men on horseback. If Kublai Khan had taxed at lower rate, his power would have depended more on horsemen and less on mandarins, regardless of whether higher taxes or lower taxes are revenue maximizing.

A mandarin is more concerned with relative power than absolute revenue, and would be quite happy if the private sector and non government middle class was completely annihilated, even if meant some substantial reduction in his own standard of living.  Indeed, during the Allende regime Vuskovic made this argument explicitly, arguing that the regime should continue to socialize enterprises despite the fact that socialization immediately resulted in the enterprise losing money and producing fewer goods at higher prices, that to defeat the enemies of the regime it was necessary to destroy their power base, which was the private sector regardless of the economic consequences – that whether enterprises were socialized or destroyed, either result consolidated the power of the regime.  Allende’s socialism was exceptionally destructive because it was concerned with transferring goodies from enemies of the regime (the private sector) to supporters of the regime (government sector unions) without paying much attention to the fact that once upon a time these goodies had been used to create wealth.  Vuskovic and Allende employed Maxist rhetoric, class struggle rhetoric, but were in fact representing government as an interest group.  Their “land to the peasants program” did not transfer land to the peasants, but to administrators from the cities who had good university degrees but no experience in producing anything, and the boys who deployed the violence that implemented the land program were city boys from the universities, not local peasants.  If you are a politician dependent upon support from big government, the elite universities, and big government unions, your policies are going to resemble those of Allende and Vuskovic, whether or not you accept Marxist ideology and Marxist rhetoric.

As I have said before, the Bush/Obama regime strongly resembles the Freis/Allende regime, and history seems to be repeating itself, on a considerably larger scale.

Although the Allende regime had much rhetoric about peasants and workers, it was a regime of the new class, just like today’s Washington.  The peasants and workers never showed up except as astroturf.    The people who showed up for Allende at riots were pretty much the same people as today show up for the Democrats in the Wisconsin troubles – unionists rolled out by big government unions, many of them paid for showing up, and students studying to become members of the new class on class assignment. The violence that preceded the overthrow of the Allende regime was a bourgeois revolt against the new class, the violence was private middle class versus new class, which revolt was appeased by a military regime which imposed major concessions on the new class, in favor of the private sector middle class.

So, in the light of that analogy, what is the solution?  Britain and Europe are, I think, too far gone, and for them, like Chile, the only solution is military despotism, which will, perhaps, in time re-evolve into monarchy, but the American middle class remembers its revolutionary origins, and this time might well carry revolt all the way through, violently reimposing a constitution that forbids the Federal government to do anything much except defense and interstate transport.

Mencius has argued that the only way you can root out the New Class is something like denazification, which he argues that only something like a military despotism or foreign occupation could implement.  Getting rid of the New Class is more like getting termites out of your house, than getting a burglar out of  your house.  It will require a great deal of dispersed and detailed violence, which violence Mencius envisages being applied by something like the military police, or the Waffen SS.

But, contrary to Mencius, we have seen in the war with Islam that the private sector is a lot more efficient at producing dispersed and detailed violence, so the best solution would somewhat resemble anarcho capitalism.  Even a military despotism is going to have to delegate the application of violence more broadly than it can fully control, and in Latin America, the path to victory usually did involve delegating a lot of violence to militias and vigilantes.  Military despots are just bureaucrats with guns.  The bureaucracy gets in the way of the efficient and detailed application of violence.

Observe that as California collapses, the ever growing taxes and regulation only afflict the law abiding, only afflict the demographic categories  that vote republican.  But if Spanish speakers are free from taxes and regulation, why not everyone?  If the laws are enforced in such a partisan fashion, everyone should resist.