The Poverty of Mainstream Debate, Part IV: Laffer, Taxes and Trickle-Down

Continuing the series on just how poor debate in the political arena has become, it’s time to look at the discussion of marginal tax rates, and by extension, the Laffer Curve and ‘trickle down‘ economics. These two represent the main (technocratic) arguments against higher marginal tax rates, so I will deal with them in turn.

The Laffer Curve

So goes the argument: don’t raise taxes on the rich, they will work fewer hours, move abroad, create less wealth, and so forth. It’s usually accompanied by logical ‘gotchas’ like this:

It’s intuitively appealing to people like us of course and as with the Laffer Curve at extremes it’s clearly and obviously true. Zero tax means zero government and without at the very least some form of defense, police and a criminal justice system there’s not going to be much economic growth. When the government takes and spends all of the economy there’s not likely to be much either.

Of course, even this isn’t true. The USSR effectively had 100% tax rates, give or take a few incentive schemes, and managed to achieve positive growth rates throughout its existence. At the other end, whilst I’m not much of an anarchist, no government doesn’t  necessarily lead to no growth whatsoever, as demonstrated by various stateless and taxless communities across the ages.

The evidence for the Laffer Curve is pretty underwhelming, with Mike Kimel’s work suggesting that, empirically, it appears to be upside down:*

Why? I can think of a few reasons:

- Economic rents are pervasive – as Schumpeter said, they are the ultimate aim of any capitalist firm. Taxing this unproductive activity discourages it and therefore encourages productive activity, meaning higher taxes can increase income. Michael Hudson’s video on this is recommended.

- As Kimel notes, if you reinvest your income it is tax deducted, which means that higher marginal rates will encourage investment.

- If a rich person can avoid/evade tax, they will – doesn’t matter how high the rate is.

- Corporations and rich people aren’t as mobile as they’d have us believe, as there are legal and personal barriers to simply upping and moving abroad. As Ha-Joon Chang says, ‘Capital has a nationality’.

- Cutting taxes on a small group of people at the top simply inflates prices up to what they can afford, and so doesn’t encourage production.

Whatever the reasons, the evidence is fairly conclusive: the Laffer Curve is a useless idea; there are so many conflicting factors that it probably resembles a rollercoaster at any one time, and something like a chaos pendulum over time.

 Trickle Down

‘Rich people create jobs’ is a mantra that is often repeated – sometimes, for obvious reasons, by rich people themselves, but even more sadly by useful idiots. Perhaps they revere the rich; possibly they expect to join them one day (of course, probability suggests that they won’t).

The basic fact is that jobs are created by demand. Ask any employer – a firm hires people if there is enough demand for its products to warrant said hiring. To the extent that taxes and regulations have a negative effect, it tends to be higher prices. What’s more, this obviously occurs more in firms who can afford to increase prices; that is, those with market power – the richest ones. In other words, higher taxes have the least impact on the hiring practices of the rich.

What’s more, when there is demand, it is small businesses who create the majority of jobs – a study by the University of Nottingham estimates their share at 65%. So the argument holds no water by any metric.

In summary, the Laffer Curve simply doesn’t exist in its napkin form, and trickle down economics is completely  incoherent and at odds with all the evidence. No wonder they’re all that Republicans can talk about.

*Yes, Kimel is only a blogger, but his conclusions corroborate well with peer reviewed work by others.

About these ads

, ,

  1. #1 by Daniel Becker on April 5, 2012 - 3:53 pm

    The problem simply for the Laffer curve is that it is a model for another time, that other time being an economic system that is derived from an individual or entity that actually pockets a desired portion of the taxes collected. Such examples are royalty, the king or queen and dictators.

    If all the taxes collected go back out into the economy, then the issue is not taxes being too high specifically, but what is the most diverse way to return the money collected to accomplish the broadest economic growth for the broadest of the population within the type of economy present (say financialized economy vs labor economy). If the taxes go out into the economy to the few (same effect from shifting tax burden down), then you are beginning to model the economy that the Laffer curve is appropriate for. And that gets us to the problem of “trickle down”.

    In short, the Laffer curve is the results of a mind that believes it is the center of the economy, such as a king, queen or dictator.

  2. #2 by Daniel Becker on April 5, 2012 - 4:07 pm

    Would like to point out that Mike Kimel is a published author. The book is Presimetircs. His blogging lead to the book.

    • #3 by Unlearningecon on April 5, 2012 - 4:16 pm

      Fair play – the comment wasn’t meant to undermine him, only to deflect silly criticisms.

  3. #4 by chris y on April 6, 2012 - 10:27 am

    When the government takes and spends all of the economy there’s not likely to be much either.

    If you really wanted to be pedantic you could argue that even this ain’t necessarily so, and cite examples such as pre-Columbian Peru.

    • #5 by Unlearningecon on April 7, 2012 - 2:33 pm

      I did have that point in mind when I mentioned the USSR.

      But Peru sounds interesting, could you elaborate or provide a link?

      • #6 by chris y on April 7, 2012 - 3:23 pm

        I’m afraid I was put in mind of it by reading Charles Mann’s 1491 in hard copy, so I can’t easily cite. However, here’s Gordon F McEwan, cited elsewhere:

        “With only a few exceptions found in coastal polities incorporated into the empire, there was no trading class in Inca society, and the development of individual wealth acquired through commerce was not possible . . . A few products deemed essential by the Incas could not be produced locally and had to be imported. In these cases several strategies were employed, such as establishing colonies in specific production zones for particular commodities and permitting long-distance trade. The production, distribution, and use of commodities were centrally controlled by the Inca government. Each citizen of the empire was issued the necessities of life out of the state storehouses, including food, tools, raw materials, and clothing, and needed to purchase nothing. With no shops or markets, there was no need for a standard currency or money, and there was nowhere to spend money or purchase or trade for necessities.”

        Mann suggests that in some earlier Peruvian states there may have been even less commerce.

      • #7 by Unlearningecon on April 7, 2012 - 4:25 pm

        Thanks for that, very interesting.

  4. #8 by presimetrics on April 6, 2012 - 6:39 pm

    Thanks for the mention. This has been a topic that has been of interest to me for a while… and has gotten me into a bit of trouble once or twice. Hopefully it will eventually gain traction as in the end, slower growth rates affect all of us in the form of increased poverty, fewer jobs, etc.

    • #9 by Unlearningecon on April 7, 2012 - 2:36 pm

      James Kroeger contends that rich people are stupid for wanting lower marginal tax rates, as they stand to gain little or nothing in real terms. I’m inclined to agree.

      • #10 by LORENZMAILFRANCE on April 7, 2012 - 6:17 pm

        Imho a lot of rich have internalized the capitalist rhetoric that rich people are rich because smarter/hardworker

        They don’t give a shit about personal gains,they like the idea of “punish” the “lazy/unworthy ”

        Ironically,from my anedoctal experience with the “1%” I personally know,this attitude is far more pronounced along the non-first-generation-rich (basically the spoiled brats who are born on third base and go through life thinking they hit a triple.) than the real self-made man/woman

Follow

Get every new post delivered to your Inbox.

Join 1,046 other followers