Monday, December 15, 2008

The Laffer Curve Across the Centuries Low Tax Rates = Prosperity

The Confucious Curve
This Chinese Sage understood the principal of what people today know as the Laffer curve and it's implication for economic expansion and contraction as you can see from the following passage:

Duke Ai asked asked Yu Zo : It has been a year of famine and there are not enough revenues to run the state. What should I do ?
Zo said “ Why can't you use a 10 percent tax?
The Duke answered : I can't even get by on a 20 percent tax, how am I going to do it on 10 percent?
Zo said , “If the people have enough what prince can be in want? If the people are in want how can the Prince be satisfied”

- analects of Confucious (12:9)

The Tao Te Ching Curve
Was written in the fifth century BC it's author also understood the Laffer Curve. Chapter 57 contains the following passage:

Run the Country by doing what's expected.
Win the war by doing the unexpected.
Control the world by doing nothing.
How do I know this?

The more restrictions and prohibitions in the world the poorer the people get.
The more experts a country has the more of a mess it's in .
The more ingenious the skillful are the more monstrous their inventions.
The louder the call for Law and order the more the thieves and con men multiply.

So a wise leader might say:
I practice inaction and the people look after themselves.
I love to be quiet and the people themselves find justice.
I don't do business and the people prosper on their own.
I don't have wants and the people themselves are uncut wood ( naturally virtuous)

The Ibn-Khaldun Curve
The 14th century 's Arab economic genius wrote the following about taxes and regulations

In the early stages of the state , taxes are light in their incidence , but fetch in a large revenue; in the later stages the incidence of taxation increases while the aggregate revenue falls off

Now where taxes and impost are light , private individuals are encourage to engage actively in business: enterprise develops , because men feel it worth their while, in view of the small share of their profits which they have to give up in the form of taxation. And as business prospers ... the total yield of taxation grows.

From this you must understand that the most important factor making for business prosperity is to lighten as much as possible the burden of taxation

The Jean-Bapitise Say Curve had his take on the Laffer curve ( circa 1803).

A tax is not productive to the public exchequer in the proportion to it's ratio[rate] ... it had become sort of apophthegem, that two and two do not make four in the arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity , or upon those of luxury.
Were it not almost self evident , this principle might be illustrated by abundant examples of the profit the state derives from a moderate scale of taxation, where it is sufficiently awake to it's own interests.

The Calvin Coolidge Curve
From a speech delivered in 1924
An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if if the rewards of such action are very largely taken away by taxation If we had a tax whereby on the 1st working day the government took 5 percent of your wages , on the second day 10 percent, on the third day 20 percent , on the fourth day 30 percent on the fifth day 50 percent ,and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week?

The Franklin D. Roosevelt Curve
This from a campaign speech in 1932
“Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive , they are reflected in idle factories in tax sold farms , in hordes of hungry people, tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay. They pay in deductions from wages , in increased cost of what they buy, or as now in broad unemployment through out the land. There is not an unemployed man , there is not a struggling farmer, whose interest in this subject is not direct and vital. It comes home to everyone of us.”

The Laffer Curve
(Circa 1970's)
The theory is simply saying that at theses higher tax rates ( “in the prohibitive range”) there is a disincentive to make more money, which will result in lower revenues from taxes . In the end, it's really all about incentives to work, invest, take risks and earn money.
Here have a look: The Laffer curve

No comments: