“In this world,” Ben Franklin observed with morbid humor, “nothing is certain except death and taxes.” Today is Tax Day, when all of us taxpayers reflect on all the many more useful applications to which we could put our own income than the government does. Drag shows, foreign wars, abortions, and woke universities aside, however, the very nature of our current income tax system is totally unjust.
First of all, there really shouldn’t be an income tax at all, and certainly not a permanently established income tax, which would have horrified many of the Founding Fathers. “A wise and frugal government… shall not take from the mouth of labor the bread it has earned,” said Thomas Jefferson.
But even worse than the mere existence of an income tax is our progressive income tax, which is completely antithetical to our founding principles and actually is less effective at bringing in revenue. There’s a simple way to understand this that apparently no one in government is interested in understanding, since even the new Republican Congress is planning to increase spending: the Laffer Curve.
The curve is named after economist Arthur Laffer, who, however, insists that his curve is actually something that wise economic experts for many centuries, even back to medieval times, have understood. You can watch Laffer himself explain it below.
If you increase tax rates, you reduce the attractiveness of doing the activity and shrink your tax base.
— Institute of Economic Affairs (@iealondon) July 8, 2019
Dr Art Laffer – the renowned American economist – explains the Laffer Curve 👇 pic.twitter.com/LhUDqS9Bsv
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“The Laffer Curve is the relationship between tax rates and total tax revenues,” Laffer tells us. “It’s been around for centuries and centuries,” at least since the 14th century.
Laffer added, quoting a medieval source, “At the beginning of dynasties, tax rates are low and revenues are high. At the end of dynasties, tax rates are high and revenues are low.
"That's the sort of logic behind it," he said. "But let me, if I can, say, how much would you work if you were taxed at 100% so that every time you go to the office, instead of getting a check, you get a bill? Obviously, you wouldn't work at all, and there'd be no work, but also the tax revenues would be zero.”
Even in America, we haven’t gotten that far, though the feds tax people who make over $609,350 annually at least 37%. But the reality is that raising taxes does not necessarily bring in more revenue for the government. At a certain point, you de-incentivize work or make increased incomes undesirable through over-taxing.
It is worth noting, by the way, that without any income tax, we would still have “a lot of output, employment production,” just not government revenues, as Laffer said. And there are other ways to raise revenues than income taxes — tariffs, for instance. America didn’t have a federal income tax for decades after its founding.
Laffer explained, “If they [government officials] start raising tax rates, as they start raising tax rates, what you're going to find is the revenues are going to increase, but they will increase at slower and slower rates, and these two curves will come at a point, the maximum point out here,” at which revenues don’t rise. “Now the key thing about the Laffer Curve that makes it fairly interesting for politicians is to remember, it's a pedagogic device, not an explicit measure of any one country. But what it does show you is that … no country should ever want to be in that high tax rate range. I mean, why would you ever want a tax at this point where, if you lowered tax rates, you collected more money and you have more output, employment, and production?”
Ultimately, Laffer concluded, taxes can have two effects on government revenues: “Number one, which we call the arithmetic effect, if you raise tax rates, you do collect more revenue per dollar of tax base … But there's also the economic effect, which, if you reduce increase tax rates, you reduce the attractiveness of doing the activity, and you will shrink the tax base. These two effects, the arithmetic effect and the economic effect, always work in the opposite direction.”
The economic effect is the one that the federal government always seems to ignore, but it does a great deal of harm to a nation’s economy. Maybe we can give Congress a tutorial on the Laffer Curve, and hope Donald Trump’s plan to abolish the federal income tax becomes a reality within the next four years.
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