Increased Tax Rates and the Laffer Curve
Here are the arguments I’ve heard from my anti-tax acquaintances:
1. If taxes are raised people will be less inclined to work to gain more money.
2. If they raise taxes too high (ill-defined) the very rich e.g. assumed here to be the really creative people, will leave the country and go elsewhere.
Let’s examine this in illustrative terms.
First I must say that a very small sample of attitudes and reactions is meaningless for judging the reaction and behavior of many, and of course, it is the many that really matter. With this caveat, we can look at “typical” attitudes:
Friend one is a retired executive, but if he was still working and faced a ten percent increase in taxes, I doubt he’d quit work. If he did, rest assured that someone would be waiting to sit at that desk and he wouldn’t be missed; just as there are many qualified people waiting in the wings to fill the top banking jobs for less money.
Friend two, a real estate developer, who like most are twiddling their thumbs because the real estate world ate the seed potatoes a few years ago. However, he still argues that the creative people such as he will just keep twiddling if tax rates are raised. I suggest that if they could obtain bank loans and demand hadn’t been killed by the earlier aggression (greed ?) in their segment they’d be back at it with pick and shovel ready.
Both are adherents of the Laffer Curve that seems to be a groove they’re stuck in since the 1980’s. This simple answer to all issues of taxation offers the obvious that at zero taxation, the government has no revenue, and at the other extreme if all earned money is taxed away, no one would bother to toil for simply the joy of working. In reality there are many variables and the stress point on the curve is very imprecise, and the marginal dollar of after tax earnings is attractive to most people. If it isn’t, one can assume that even people averse to taxes will still work. If not, their shoes will be filled. I don’t think that Bill Gates, Warren Buffett, Steve Jobs, and the like would have lost their drive for success over tax rates. While there is value in striving for success, it is measured differently by everyone.
Friend three has wealthy pals who invest in yachts and he figures they’d just pick up and go to friendlier waters with their cash hoard in the bilge. Wouldn’t that be nice – my first response is bon voyage, oh, and please don’t come back.
Yes we need to balance the budget at some point and it should be a realistic process rather than some game of mirrors. Therefore, increased taxes (not for punitive reasons) and curtailed government spending are essential and would have a stimulative impact on financial markets as well as respect for the dollar.
Thus, the broad generalization that tax rate increases and revenues will neatly follow the Laffer Curve is nonsense. I think there is a lot more room for growth in taxes and in the economy without causing stress.
I have sympathy for the people who are demonstrating over the soft touch applied to the bankers that were bailed out by government. Most of these people are unemployed or living on the edge or young people with diminished expectations. The niceties of the Laffer Curve debate is of no interest to them for obvious reasons.
I don’t wish to pay more in taxes, however, I will gladly if collectively we can put more people back to work, can meet our social and military obligations, and improve the general wellbeing of our citizens and country.
