Skip to comments.Can You Spell L-A-F-F-E-R-C-U-R-V-E?
Posted on 07/13/2013 11:52:31 AM PDT by Kaslin
I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.
Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such as Australia or Switzerland that has a relatively low risk of long-run fiscal collapse.
That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.
We also know that many states and cities suffer from the same problems.
A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.
The most spectacular mess, though, is about to happen in Michigan.
The Washington Post reports that Detroit is on the verge of fiscal collapse.
After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.
This is a dog-bites-man story. Detroit’s problems are the completely predictable result of excessive government. Just as statism explains the problems of Greece. And the problems of California. And the problems of Cyprus. And theproblems of Illinois.
I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.
Detroit obviously is an example of a government that is collapsing sooner rather than later.
Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.
More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.
Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.
Check out this sentence.
Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.
This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.
The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?
And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.
In some cases, higher tax rates will discourage people from earning more taxable income.
In some cases, higher tax rates will discourage people from reporting all the income they earn.
In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.
In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.
Here’s my three-part video series on the Laffer Curve. Much of this is common sense, though it needs to be mandatory viewing for elected officials (as well as the bureaucrats at the Joint Committee on Taxation).
The Laffer Curve, Part I: Understanding the Theory
The Laffer Curve, Part II: Reviewing the Evidence
The Laffer Curve, Part III: Dynamic Scoring
P.S. Just in case it’s not clear from the videos, we don’t want to be at the revenue-maximizing point on the Laffer Curve.
P.P.S. Amazingly, even the bureaucrats at the IMF recognize that there’s a pointwhen taxes are so onerous that further increases don’t generate revenue.
P.P.P.S. At least CPAs understand the Laffer Curve, probably because they help their clients reduce their tax exposure to greedy governments.
P.P.P.P.S. I offered a Laffer Curve lesson to President Obama, but I doubt it had any impact.
People don’t generally learn until they try something and it goes poorly for them. Sorry, but that’s just how it works. In fact, it’s almost illogical at this point not to suck up as much government largesse as possible, because many people have indeed been on the upside of this for a long time. Experience has taught them that wealth redistribution (corporate and private welfare) pays. Sure. We know it’s going to collapse at some point, but that hasn’t happened, yet. It will keep growing until the point where it can’t. Then it will stop.
I’m sorry to say articles like this will almost certainly not change government. We can hope enough responsible, independent Americans still exist to stop it before it reaches its inevitable conclusion, but there’s simply no evidence of that. Again, sorry. That doesn’t mean we should stop trying, but we should be aware of the odds against us.
We should try to take steps to protect ourselves from the coming American decline or collapse. Knowing what steps to take is the difficult part for me.
It’s a looooong story, but when I was 13 I walked up to Art Laffer’s front door and he let me in and gave me a tour of his exotic bird collection. I was amazed and fascinated beyond words. He is an energetic, engaging person.. Always cheerful and amiable but sharp as a tack. I didn’t know who he was until AFTER I met him.
to be fair... hiroshima had another thing going for it that helped recover
it was full of japanese people
Stupid people don’t have the opportunity to learn things the hard way in the USA anymore and it’s just getting worse.
Good judgement comes from experience.
Experience comes from bad judgement.
Don’t you agree it’s reasonable to try and take advantage of as many government programs as one can? Historically, what’s the downside of being a welfare mom? We have three or more generations that are totally dependent on handouts, but the fact remains. They’ve gotten away with it for decades.
Consider corporate welfare and using regulations to target opponents. That’s been going on for decades, too. Any large corporation that doesn’t try and buy influence in DC is at a distinct disadvantage. The same things goes with all the illegal immigration. Run a business that doesn’t want to hire illegals? Prepare to be undercut by your competition!
The illogical ones appear to be those like us who don’t want government to take care of us, but I think we’ll ultimately be proven right. However, entire lives will have been lived (HAVE been lived) under our socialist system before it collapses.
We are in total agreement my FRiend. You are just better at sarcasm than I.
Going Galt is the only option left.
Ayn Rand nailed it.
Economic decline and decay is the result of capital decumulation. High tax rates lead to less saving, which leads to less investment, which leads to less productive expenditure, which leads to stagnation or capital decumulation.
Not necessarily a new game.
We can call it “No limit hold-em”.
Different players and rules that will leave you scratching your head.
The players, the central bankers around the world, seem to all be in agreement. The best thing for their respective nation is the destruction of the value of their currency.
There is no limit to the extent of what can only be described as calling and raising one bluff after another.
There was a time when the chips on the table were finite. The game was played and as the bets were placed there were consequences. If you ran out of chips, you lost.
The world is drowning in cash and unless you are a “Primary Dealer”, that cash is out of reach. The Central Banks around the world are feeding profits to their partners with the hope that some of that money will trickle down and fuel some sort of “breakthrough”, some new fangled technology that will break this cycle.
Sorry to be such a cynic, however any honest and objective analysis of what is required for economic growth requires true innovation.
Smart phones and tablets are cool, and cloud computing may be more efficient, but they are simply an extension of what is known. Much like putting brakes on cars. It is still a car.
Green/alternative energy, Nano technology and Bio-mimicry all show promise, but all lack the natural market necessary for a true economic breakthrough.
While I’m not saying that everything that can be invented, has been invented. I am saying that capitalism requires growth, it requires something new that destroys what was before.
Governments around the world know this.
They are all printing money in an effort to buy time.
And as the BOJ calls our Fed, and the Eurocrats raise, Bernake calls and says, “My printing press is bigger than yours”.
17 percent is the magic number, any more and you stifle growth, and the more you deviate from 17 percent the greater the loss in revenue and the more you drag economic activity.
Sorry, the number is 33%. Done by none other than Obama’s
No reason to be impressed. Art Laffer voted for both Clinton and Obama.
This is global. There is no escape.
Ayn Rand nailed it.
No. She offered valid criticism, but her solution set was bogus. There was no description of how Hank Riordan treated those who were injured fighting his steel mill fire. There was no discussion of how Francisco's copper mine tailings were handled in Galt's Gulch. There was no discussion of a legal system in her idyllic community. It was fantasy, not reality.