The Laffer Curve and 100% tax rate. Would you?

[Cheetah]

So, from the Swedish election thread, there was a discussion about the Laffer Curve and its validity.

Some quotes:

Spoiler :

I actually meant the laffer curve luiz been harping on about. But I like your interpretation better than my own skallben. May I adopt it instead?

Otherwise:

Spoiler :

The Laffer curve is an American thought experiment, at best, and nothing to build an argument on. It has fundamental flaws like the "fact" that 100% tax would generate 0 income because "no one would work". I may seem reasonable but where is the truth when some suggests 20% to maximize and other 70%? I'd imagine you can't even use it scientifically unless you also provide an unreasonable amount of simplifications, considerations and adaptations.

Also, maximising tax returns may not even be the most desirable way to go. It's not a computer game. There are cultural considerations. Some people actually see other values in life than what's in their wallet.

The willingness and trust in the system is integral to it's efficiency as well. In Sweden we have according to studies during the election 70% of the population expressing full trust in their elected officials. You'd be hard pressed to find a higher number elsewhere. We have good reasons too because contrary to what some of my fellow swedes on here seems to believe we have exceptionally low corruption and one of the most developed democracies in the world. In Sweden we are bound by the Jante Law and it's a sin to boast about things like that but it's non the less the truth. We should be proud of it.

Using a study of EU and applying it to Sweden will not work. It's like doing a favourite food study and conclude that the favourite food in Sweden is coq au vin und strudle.

The Laffer Curve is a fact. The exact shape of it may vary from country to country and depend on economic particulars, but the basic idea is rock solid.

What you call "fundamental flaw" is actually the great truth about it. If the tax rate is 0% revenue is 0 (duh), and if it's 100% it's also 0 (I can't belive you have a problem with this statement). You can debate all else, but this is rock solid.

I don't know where you get the idea that advocates of the Laffer Curve seek to maximise revenue. That's not necessarily true and it's not the point of the ECB study I linked to either. In my opinion, for instance, maximising government revenue is a bad idea. But we still ought to know the theoretical maximum revenue, because such information may become relevant. We need to know how far up we can push taxes in case there is an urgent need to stop public deficit - and that's where Laffer's theory comes in. Just raising taxes forever won't result in raising revenues forever - after a certain point you actually get less revenue.

This is not an "American" concept, it's a fact.

Wow glad I checked back or, maybe not, but here we go. So your rock solid basic idea is a fact? I'm going to be very interested in seeing how you back up that fact. Please do begin by proving that 100% tax will rock solidly never in a million years lead to any tax income. let's start there. And if you say because people have no incentive to work I'm going to vomit and then provide the rock solid idea that could also be a fact that in la-la land people pool all their resources together have a big party and dance the night away.

Honestly, I'm not that interested but since you seem so eager to prove me wrong the field is yours...

Sveion asked: "Please do begin by proving that 100% tax will rock solidly never in a million years lead to any tax income. let's start there."

So, starting of with a little poll to test this:

Would you do any (non-black market) work under a 100% tax rate? Note that, in such a system, state welfare programs would necessarily need to support everyone.

 

[Mise]

I wouldn't declare any income I earned, obviously. Maybe a little, so as not to arouse too much suspicion when I spend money... I would, however, do "work" in order to feed and house myself!

The laffer curve is a "fact" only insofar as it's completely trivial and offers no predictive value whatsoever.

 

[FriendlyFire]

100% tax would only occur under a dictatorship or state slavery. (where people work for nothing)
Or in times of crisis where the state literally takes what it needs (Spain confiscating gold for her wars)

 

[bobalot]

Ah, the Laughter..err...I meant Laffer Curve.

A theoretical curve that has not one shred of empirical real world evidence for it.

 

[Till]

Why even bother arguing about this, when Laffer's Curve could have any non monotonic shape with any number of maxima, even if you accept his datapoints?

 

[Tani Coyote]

No. Non-profit work is generally charity, and that's what I'll save any work that doesn't pay for.

Until then, I would refuse to do anything economically productive if it'd all be taken from me. I want something to show for my efforts. If I am taxed at 100% at or above income x, then I will make sure my income is always x - 1.

 

[Justo]

Depends on how strong the State Welfare programs are and what rewards I get in such a system. If all I can get are generic state owned cars, housing and consumer goods chances are I'll get over it. However if I'm able to access(and afford) most of what I can now then I can live with that.

 

[Cutlass]

I abandoned the other thread and didn't look back because I just can't understand why someone would think supply side economics would produce anything other than a disaster. I mean, what nations other than the US have used it and gotten opposite results from the US?

The Laffer Curve was used, incorrectly, to justify an economic policy which has created mountains of debt, massive redistribution of wealth, and no positive effects at all.

But people also do not understand a tiered income tax system. If, for example, there are tax brackets at 10%, 20%, and 30%, there is no place where an increase in income results in less after tax cash in pocket. So the disincentive to work effects are never as pronounced as the opponents claim they are.

What's more, the incentive to the economy by lowering personal income tax rates doesn't make any sense at all. And I've yet to talk anyone into coming up with evidence that it exists. In theory, it shouldn't.

So yeah, no one is going to do work with reported income at a 100% tax rate. But by the same token, they aren't going to refuse to work at 39% rather than 33%.

edit

Further, there is no reason at all to assume that an increase in economic activity (which isn't likely to happen in the first place) would result in enough new tax revenue to replace the revenue lost to the reduction in rates.

And what that means is that it is entirely irresponsible to talk about cutting taxes at all. You want less taxes, you do not talk about cutting taxes, you talk about cutting spending. And cutting taxes can be an effect of that. But the spending must be cut before the taxes. Otherwise that is purely irresponsible incompetence.

So what is the spending spent on? What are the voters willing to cut? That is your question, not the tax rates.

 

[Arwon]

Some people would trip the curve inadvertently due to lack of close attention or interest in their tax situation. Therefore tax recepits would not be zero from a 100% income tax bracket.

 

[ParkCungHee]

I'm work 30+ hours a week for nothing.

 

[Terxpahseyton]

I would work, but only work I enjoy doing.

 

[warpus]

So, from the Swedish election thread, there was a discussion about the Laffer Curve and its validity.

Some quotes:

Spoiler :

Sveion asked: "Please do begin by proving that 100% tax will rock solidly never in a million years lead to any tax income. let's start there."

So, starting of with a little poll to test this:

Would you do any (non-black market) work under a 100% tax rate? Note that, in such a system, state welfare programs would necessarily need to support everyone.

I would, because my work offers me great benefits that I don't get taxed on: A $600 a year "personal development" fund, free eyecare, 80%+ off dental care, they deposit double of what I deposit each month into my RRSPs, and several other goodies.

So I'd have to get welfare of some sort to get by, but then on top I'd have a bunch of other "free" stuff. I probably wouldn't work 7 hours a day though.. Come in late, leave early.. They couldn't fire me because most other people wouldn't work, so it'd be hard to find a replacement.

 

[luiz]

As a I said in the other thread, just accepting that there is zero (or near zero*) revenue with a 0% or 100% rate does not make one a "supply-sider". As Mise said, the basic premiss of the Laffer Curve is essentially trivial.

*I had to add this "*" because obviously someone will show up and say that he would love to work even paying a 100% income tax. But that's largely irrelevant. People won't start any business if there is a 100% rate, and normal human beings won't bother to declare any income. Taxes under a 100% rate would be damn close to zero.

So it should be entirely obvious for anyone with 1/3 of a brain that tax revenues under a 100% rate would be much smaller than, say, under a 40% rate. Therefore, the Laffer Curve exists, because after a point you get less revenues by increasing the rates.

The end.

 

[civver_764]

If the welfare was really awesome and efficient yeah I would do it.

edit: But it would have to be adjusted so that except for needs only people who actually contributed income got access to the welfare.

 

[Arwon]

Has anyone ever attempted to guess or prove what the peak point for revenue actually is? Or whether it has a single peak or a long flat top or some other shape?

Seems like one of those theoretically nice but practically useless little curves, like the "minimum wage raises unemployment" curve which tricks the hell out of first years and then results in them having to be retrained later on.

 

[Cheetah]

Like Mise and luiz says, and I think thought everyone would agree on, it is trivial that at and near to 0% and 100% tax rates the actually tax revenue would be 0.

But apparently half of the people voting in this poll would be fine with working without getting anything in return...

However, while I'm pretty sure many people have tried to make some real mathematical model out of it, I'm not sure if it is actually possible to find one. To me it is simply a way of stating "0% and 100% tax rate is unfeasible, and the sweetspot is somewhere in between".

 

[SS-18 ICBM]

As much as I support government welfare programs, there should still be room for personal disposable income to do with as you please.

 

[Mise]

Luiz linked to an interesting paper in the Sweden thread which is another in a long line of attempts to model the Laffer Curve. Of course, like all attempts to model the Laffer Curve, it is highly model dependent and parameter sensitive; though it attempts to tune the parameters so that the model fits observed data (the "varied parameters" column/charts), this makes it highly susceptible to overfitting.

The paper is here: http://www.ecb.int/pub/pdf/scpwps/ecbwp1174.pdf

The most interesting part is Figure 4 on page 39 of the report (pg 40 in Adobe Reader). It shows the relative positions of each country on the modelled Laffer Curve, which is interesting insofar as it shows which countries you would expect to respond well to tax cuts, and which would respond better to spending increases, in getting those countries out of recession. Tax cuts would clearly do a lot less in the USA than in Sweden; vice versa for spending rises.

Of course, the absolute position of each country on the Laffer Curve can't reliably be taken from this study; it would be rather boorish for anyone to argue that Sweden or Denmark would increase revenues by lowering taxes on capital, on the basis of this paper. As is stated in the paper itself, many, many studies have attempted to model the Laffer Curve, and no doubt come to many, many different absolute conclusions. Ignoring the regulatory regimes and business freedom in each country also makes the study of limited practical value; Denmark, for example, surely benefits from its position as one of the easiest places in the world to do business. Still, it has some very interesting charts, and is useful to compare the effect of fiscal policies in different countries ceteris paribus (the "same parameters" charts).

 

[GhostWriter16]

So, from the Swedish election thread, there was a discussion about the Laffer Curve and its validity.

Some quotes:

Spoiler :

Sveion asked: "Please do begin by proving that 100% tax will rock solidly never in a million years lead to any tax income. let's start there."

So, starting of with a little poll to test this:

Would you do any (non-black market) work under a 100% tax rate? Note that, in such a system, state welfare programs would necessarily need to support everyone.

I voted no but I meant yes. I would probably try to overthrow such a government if enough people would be on my side, which, in America, they would.

That is, if this kind of stupidity came to America, where I live and what is probably the most sensible nation left. If I lived in Sweden and this happened there, I'd just move to America.

But, I'd never lived in a state socialist enough to even THINK of this unless I had no other options. To each according to his ability. We are not communists in America. Sweden, unfortunately, is very close.

 

[GhostWriter16]

If the welfare was really awesome and efficient yeah I would do it.

edit: But it would have to be adjusted so that except for needs only people who actually contributed income got access to the welfare.

Civver is making more sense than Sweden is actually (Though I am still disagreeing with him.) The impression of the OP was "Everyone is equal, everyone gets the same" whereas Civver is saying "Beyond the minimum, you get what you earn."

Personally, if you CAN work and you don't, you shouldn't eat, but at least Civver is acknowledging that those who work should be rewarded.

I can't imagine a society without money anyhow, but I think it would be a disaster. I think that's why its never happened, even after 6,000
, wait, 4,000,000,000 years according to you guys!