Sliding Down Laffer's Curve: The Ideal Tax Rate
I favor flat taxes: the principle of the tithe. There is no "graduated tithe."
The tithe is good enough for God. Ten percent should be more than enough for all the imitation gods -- combined -- that want to get their hands into our wallets.
I favor direct flat taxes on real estate, but only at the local level: the county and city (50/50 split). States should tax only cities and counties. The federal government should tax only states.
I favor local sales taxes because they are necessarily flat taxes. Also, many of them can easily be evaded: the Internet and UPS. Finally, they are collected from local businesses, not from individuals. I prefer to keep taxation away from individuals. I favor liberty for living, breathing individuals. I am less concerned about liberty for judicial, non-breathing individuals: corporations. Corporations should be taxed by the states in which they are incorporated. (I recommend Nevada.)
But wouldn't my plan starve the federal government? No, but it would make it look more like Manute Bol than a sumo wrestler.
We can make it look like what it was as a percentage of the net private product (net national product minus government spending) in 1789. Then, if we work long and hard, maybe we can get it back to where it was in 1787. That would be good enough for me. I do not want to be thought of as a Utopian.
THE LAFFER CURVE
Arthur Laffer recently wrote a defense of the corporate VAT tax substitution being proposed by Rand Paul and Ted Cruz.
Dr. Laffer understands that there are conservative opponents of his flat VAT tax plan. He doesn't seem to know why. I know why. The reason is expressed by Dr. Laffer.
The U.S. government should collect taxes in the most efficient way possible so as to do the least damage to the economy.
This sounds good. In fact, it is conceptually inaccurate and highly misleading. The opponents of Dr. Laffer's famous curve -- I am among them -- line up against "the most efficient way possible" for the government to collect taxes. Why? Because we do not want efficient tax collection. We want inefficient tax collection. Why? Because we want the least damage done to personal liberty. (The economy can look out for itself.)
Good government is inefficient government in the realm of tax collection. Here, waste is good -- morally and technically.
Dr. Laffer has committed a conceptual error that I learned was wrong in an economics class at UCLA in the summer of 1962. I teach it to my economics students in the Ron Paul Curriculum. I challenge the idea that we should pursue more for less. No, we shouldn't. If we attempt this, we will make serious mistakes. We will not attain our goal. Here is how I explain this.
To maximize your rate of return, you must decide what your goal is, and then you should seek ways to buy this goal at the lowest possible price -- price being defined in the broadest sense. Do not confuse yourself by trying to achieve two inter-dependent variables. You cannot achieve both at the same time.You may choose to seek this: fixed output at the minimum value input.
You may choose to seek this: maximum output at a fixed-value input.
But do not try to choose both at the same time. You will not be able to come up with a plan to achieve maximum output and minimum input: two variables. Pick one or the other fixed goal. If you achieve this, then you may try to do it again under the new, improved economic conditions.
Life is like a ratchet, one gear click at a time.
With this in mind, let us consider Dr. Laffer's two variables: efficient tax collection (minimum cost for the state) and the least damage to the economy.
The more efficient that tax collection is, the more money the civil government will collect. Here is the law of demand: "When a price falls, more is demanded." I do not want the civil government to collect more taxes. I want it to collect fewer taxes. So, I prefer the price of tax collection to be high.
Why? Because I favor liberty. Every dollar that the IRS saves will be used either to collect more taxes or else invade our lives with the extra money that it collects. I want neither outcome.
The Laffer curve is all about maximum efficiency . . . for the government.
Dr. Laffer wants the tax rate to be set to maximize government revenue. This is why I opposed the Laffer curve from the day I heard about it.
Remember where he first presented it to politicians: on a napkin at a 1974 dinner with Dick Cheney and Donald Rumsfeld. We know where that got us.
(If this story is true -- it's on Dr. Laffer's site -- then the napkin belonged to the restaurant. It was not a paper napkin. So, the Laffer curve began with stolen goods. I prefer to think that it happened at a fast food restaurant, and it was a paper napkin, but that seems far-fetched for a dinner in Washington.)
EFFICIENCY IS AS EFFICIENCY DOES
Economists usually favor efficiency. They think it is a universally valid goal. I do not. I favor efficiency in my decision-making. I do not favor efficiency in tax collecting.
Here is the Laffer curve. It goes up. Then it goes down.
Dr. Laffer, who favors government efficiency, favors a tax rate at the top of his curve. I do not. I favor it way over there on the left.
The standard statist favors it way over on the right. He doesn't care about maximizing either liberty or business efficiency. He is driven by envy. He favors "pulling those rich bastards off their high horses, no matter what it costs in lost national wealth. It's the principle of the thing."
Pushing beyond point B is Bernie Sanders. He is convinced that the curve never turns down. He is a true believer in the old school of the welfare state. He is Pete Seeger, but with no banjo.
Dr. Laffer tries to sell his curve to Congress with this promise: "Maximize tax revenues." Congress isn't buying his curve, and never will. Congress sells tax favors to the super-rich in exchange for PAC money. If the rate were flat, there would be no favors to sell the super-rich. Congress will never substitute a VAT for the graduated corporate income tax. Congress may at some point add a VAT to the existing corrupt graduated tax system, but it will never replace the latter with the former. Corruption is fundamental to the American political system: "No corruption, no PAC money." To get away with selling corruption, Congress needs envy: "We'll pull those rich bastards off their high horses. 'Next year, in Washington!'" The voters have bought this ever since 1914.
Do you want to understand every politician's campaign promise to restore tax fairness for the middle class? Watch this.
CONCLUSION
Dr. Laffer favors efficient government. I do not. He wants us to get the most government possible from the least amount of money. I do not.
We can pursue this: (1) the least amount of government for a fixed amount of money.
We can pursue this: (2) the least amount of money for a fixed amount of government.
Since we cannot pursue both at the same time, I favor #2. I want to keep more of my money. I will then use some of the extra money I keep to promote the idea of cutting taxes again. The government will have to borrow. At some point, it will default. This will be a vast transfer of wealth from those who trusted government promises to those who didn't. Result: smaller government, wiser investors.
You can see where this is going: away from the equilibrium point.
I do not want Congress to climb the Laffer curve. I want it to slide down the curve to the left.
When it comes to the Laffer curve, I'm on the left.