"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Thursday, December 16, 2010

Smile of the Day

The economist Arthur Laffer is our smile of the day, appropriately so, given the debate over tax rates.   Laffer is the fellow who, in the 1970s, described what ought to have been a trivial notion, because it's so obviously true -- if the tax rate is 0%, the government collects $0 in revenue, but if the tax rate is 100%, the government also collects $0 in revenue, because the incentives to earn income (at least on the books income) will disappear.   Somewhere in between there must as a matter of mathematical certainty be a point where government revenue is maximized, and the path to that point from either direction is inevitably a curve. 

The upshot, of course, is that there are tax rates that are too high, that do not maximize government revenue because they inhibit economic activity; and there are tax rates that are too low (at least from the government's perspective), because they don't produce enough revenue.   The question that every politician ought to be made to answer before any tax increase is... "Do you have data that suggests that this tax increase will actually increase government revenue?   I.e., do you know where you are on the Laffer Curve?"

Laffer has been vilified by the Left for thirty years, not because he was wrong, but because he was so obviously right.

P.S.  The one caveat I'd have when speaking about the Laffer Curve is simply that, just because there is a rate at which government revenue is maximized, doesn't mean that rate is the appropriate rate.   We don't want to maximize government revenue.   We want to maximize the happiness and prosperity of individual Americans.   The appropriate tax rate is the one which simultaneously allows us to provide essential government services (which ought to be few) and allows the most freedom to individuals possible.  

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