The Laffer curve

If you've listened to conservative talk radio, you've heard about the concept of the Laffer curve, although you might not have heard that name mentioned. The Laffer curve is a hypothetical concept about what happens when you change the tax rate. At a tax rate of zero, the government obviously gets zero dollars in taxes. As you raise the tax rate, as a percentage of people's income, the amount of revenue the government gets rises.

But as you raise the tax rate, you are also chewing away at people's incomes. The total income of the people gradually diminishes. As a result, taking a percentage of their income is less and less effective: for each percentage rise in tax rate, you get more tax revenue, but this is increasingly offset by the fact that there is less total income to take (as the very result of your taxes). Eventually you reach a point where the rise in taxes attacks the people's income so much that increasing the tax rate actually decreases your total revenue. You've gotten to the point where you're "better off" lowering the tax rate, because you'll then increase people's income so much you'll get more tax revenue even though the rate is lower. As you raise the tax rate all the way to 100%, eventually you'd get zero revenue: if you take all the people's money, they won't have any income at all, and they won't be able to invest it or use it to buy gas to get to work. Therefore they won't make any money, and even with a 100% tax rate, the government coffers will be empty.

I don't know if anybody's ever "proved" the Laffer curve concept, but it makes intuitive sense. Any tax is an economic disincentive on the people's income, and eventually it seems like this effect should begin to outweigh the amount of tax revenue you take in.

Conservative radio trumpets this concept all the time, although they don't often fully explain it. Conservative radio hosts seem convinced that we are perpetually on the top side of the Laffer curve, that we are always at a point where cutting tax rates will spur the economy and generate more revenue (while benefitting everybody in the process). They constantly cite successes in the Reagan and/or Bush administrations of instances where cutting taxes actually brought in more tax revenue. This is the triumph they say proves the concept, and they boldly declare that cutting taxes will always bring us more tax revenue, and is therefore always the right thing to do. (Of course, since I believe it's sinful to tax and harmful to tax, I'm glad to hear them proclaiming this.) I don't know if some of these conservatives just don't know about the lower end of the curve, or just think it's a safe bet given our exorbitant taxation that we are on the upper end of the curve, have been for a long time, and have little hope of getting out of it in the future.

Meanwhile, I don't know if liberals just don't believe in the Laffer curve concept, or believe we're in the lower end of the curve. (Or just aren't capable of the reasoning involved in the concept.)

But regardless, my perspective is that the Laffer curve is a big mistake in the first place. Not because it isn't true; it makes perfect sense to me. What I question about the Laffer curve is the whole goal involved: maximizing government revenue. Sure, if you're goal is to get as many dollars into the government as possible, then it makes sense to use this curve to try to maximize that. But that's not my goal. My goal is to a) do what's right, and b) do what's best. What's right and what's best is to not steal. Taxation is wrong, and it harms the economy. And increasing the size, scope, and budget of government is wrong (insofar as government engages in activities other than defending the rights of its citizens, and it certainly does!). So why do I want the government to have more dollars? And why in the world would I think that doing a little damage to the economy is okay as long as it's offset by getting enough dollars to the government to spend? That's not success; that's a tragedy!

A far better goal than "maximize government revenue" (so you can maximize government spending) is "maximize the productivity of the economy." When you have this goal, you produce as many goods and services as possible, and people's needs and wants are best served. Want to help the poor? Aside from charity, one of the best things you can do for them is support dismantling all the government institutions that interfere in the economy that is supposed to be serving them. Wal-Mart has done far, far more to help the poor than all the government institutions in the history of the United States combined; because of Wal-Mart, the poor can get what they really need: cheap groceries. And the free market could help them still more if it wasn't hampered by government regulation. The theory goes that government should only take an action when the benefits outweigh the costs. But the fact is that when it comes to government interference, whether by taxation or regulation, the costs always outweight the benefits. Therefore, the government shouldn't take action. And Christians certainly shouldn't support these damaging and sinful interventions!

If you took the Laffer curve concept and plotted against some measure of economic output, like GDP, rather than government revenue, you'd see not a curve, but a straight line. Plummeting straight down. It would be obvious that every increase in tax rate results in less prosperity for everyone. And if your goal was to maximize economic prosperity, it'd be obvious what tax rate to set: ZERO.