Trying to explain this idea to an eager Cheney, "Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it," writes the liberal New Republic journalist Jonathan Chait. "The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And if the government sets a tax rate of 100 per cent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income.
A 100% tax rate on everything was tried before, of course: they called it communism. Whereas not advisable, government revenues sure weren't zero. And even if you rule out authoritarian methods, it is very likely that even at such high levels of taxation some market activity would take place simply to support non-market, non-taxable activities. And of course, I would expect considerable social pressure on individuals to work (if you don't work alongside me, we all die), plus a lot of activity from people who actually enjoy doing their job.
Thanks for bearing with me - now I got this off my chest I can return to posting mildly interesting stuff again.
You have a funny idea of what communism was...
ReplyDeleteWhat do you mean?
ReplyDeleteCommunism (at least the Soviet variety)didn't have a 100% tax rate. Even they weren't that stupid. The workers did have incomes and there was an income tax upon it but it wasn't 100%.
ReplyDeleteIn other areas there was a 100% rate. On small business in the later 20s (Stalin cleaning up the NEP). As you'll be able to note, of course there was indeed income from this ....for a year or two. Then none, as there were no small businesses left.
If everyone is the employee of the state, the state guarantees employment and your salary has little (if anything) to do with how productive you are, in what sense is an 'income tax' on your state-determined income an actual income tax?
ReplyDeleteThe way I see it, in a pure communist system it's exactly like there is a 100% tax on everyone's income (i.e. product) which is then used to finance a lump sum transfer to each individual ('the salary').
With private property also out of the way, there is actually no incentive for you to work harder (other than the fact they may shoot you, but this doesn't count) - your salary will always be the same.
Yes, I realize that 'communist' countries had to introduce market reforms - some more than others - but this is not the paradigm of communism.
'From each according to his ability, to each according to his need' - is that a 100% tax rate or not?
"the state guarantees employment and your salary has little (if anything) to do with how productive you are"
ReplyDeleteBut it does have a lot to do with ... certain non-pecuniary aspects of quality of life. Do you want to work in ye ol' regular dreary factory or do you want to work in Siberia? Do you want to work or would you rather have a visit from the Cheka? There were still incentives in the Soviet system.
Anyway, all that matters for the Laffer curve theoretically is that that sucker is non-monotonic somewhere in the middle. In at least one place.
Yours is essentially a quibble about what "100% tax rate" means.
Younotsneaky! - of course it's just a quibble! I said early on in the post that this is pedantry (would government revenues be exactly zero with a 100% tax rate?), not a real objection to the fact that beyond some level of taxation government revenues will go down. And I'm sure there were incentives in the Soviet system (sticks rather than carrots I guess), otherwise it wouldn't have taken so long for it to collapse.
ReplyDeleteStill, 'From each according to his ability, to each according to his need' is a 100% tax rate - and yes, this is pedantic too...
Fair point made in an honest way. Greed has far too much importance these days.
ReplyDelete