| Lesson 7: Taxes, Revenue and Curved Thinking. |
A common misperception is that Economics is all about math. It is not. It uses math,
just like Physics and many other sciences do. Economics is the study of people, primarily
the behavioral patterns of people in the face of limited resources. The reason that this
misunderstanding is important is because it leads to a common, destructive mistake: the
assumption that government can always increase revenue and decrease deficits by raising
taxes. This assumes that the relation between taxes and revenue is linear:
Certainly the left end of this graph is true: Zero taxation leads to zero revenue. But the
right end is completely wrong because it does not take human behavior into account. 100%
taxation does not lead to maximum revenue. It actually leads to almost zero revenue. That
is because 100% taxation requires that we work for free, which is slavery. People will flee
slavery whenever they can: either by physically running across borders, by changing
citizenship, or by simply working under the table (tax evasion).
That means that the right side of the graph must also approach the x-axis, and the
relationship must be curved.
This is known as the Laffer curve (invented by economist Arthur Laffer). It means that
when the tax rate is on the right side of the curve, you actually increase money to the
government by decreasing taxes.
I don't know the exact shape of revenue/rate relationship. It is obviously very complicated
and involves a lot of factors.
It might lean left: or right:
However, we may safely guess that it leans left, and that we spend most time somewhere
on the downslope.
It is a safe guess because whenever we have reduced the federal tax burden, going all the
way back to 1925, we have increased government revenue.
One important question: If 100% taxation is the same as slavery, then how much of your
life is spent as a slave? Tax Freedom Day is the day, calculated by the Tax Foundation,
when the average American is finished for the year working to pay all taxes. Last year, it
was April 23. That assumes a total tax burden of 30%, which is probably underestimated
because it doesn't account for the hidden cost of bureaucracy (see Lesson 5).
Next Lesson: Government Unions are Anti-Union
References:
"The Laffer Curve: Past, Present and Future", by Arthur B Laffer
The Tax Foundation.org
just like Physics and many other sciences do. Economics is the study of people, primarily
the behavioral patterns of people in the face of limited resources. The reason that this
misunderstanding is important is because it leads to a common, destructive mistake: the
assumption that government can always increase revenue and decrease deficits by raising
taxes. This assumes that the relation between taxes and revenue is linear:
Certainly the left end of this graph is true: Zero taxation leads to zero revenue. But the
right end is completely wrong because it does not take human behavior into account. 100%
taxation does not lead to maximum revenue. It actually leads to almost zero revenue. That
is because 100% taxation requires that we work for free, which is slavery. People will flee
slavery whenever they can: either by physically running across borders, by changing
citizenship, or by simply working under the table (tax evasion).
That means that the right side of the graph must also approach the x-axis, and the
relationship must be curved.
This is known as the Laffer curve (invented by economist Arthur Laffer). It means that
when the tax rate is on the right side of the curve, you actually increase money to the
government by decreasing taxes.
I don't know the exact shape of revenue/rate relationship. It is obviously very complicated
and involves a lot of factors.
It might lean left: or right:
However, we may safely guess that it leans left, and that we spend most time somewhere
on the downslope.
It is a safe guess because whenever we have reduced the federal tax burden, going all the
way back to 1925, we have increased government revenue.
One important question: If 100% taxation is the same as slavery, then how much of your
life is spent as a slave? Tax Freedom Day is the day, calculated by the Tax Foundation,
when the average American is finished for the year working to pay all taxes. Last year, it
was April 23. That assumes a total tax burden of 30%, which is probably underestimated
because it doesn't account for the hidden cost of bureaucracy (see Lesson 5).
Next Lesson: Government Unions are Anti-Union
References:
"The Laffer Curve: Past, Present and Future", by Arthur B Laffer
The Tax Foundation.org
