Thursday, August 4, 2011

Not Debunking the Laffer Curve

I was discussing the Laffer Curve with a co-worker today, and I argued that it is just as real and just as valid as the effect of price on the law of supply and demand. The difference is in the shape of the curves. In a free market, people pay for things voluntarily, so the peak price point is where the selling price matches the perceived value of the purchase. The peak revenue point on the Laffer Curve is much higher because taxation is compulsory. The Laffer Curve peaks at the point where the oppression from taxation equals the people's will to persevere. What a grim prospect!

I had to admit, the theory that raising taxes would lower revenue, or that lowering taxes would increase revenue is probably a fallacy at our current tax rate, because the Laffer Curve peak is probably close to an 80% tax rate. We're still below that tax rate today. That is not to say the economy wouldn't tank at our current tax rate, but I digress...

It got me thinking, though. If you wanted to know what people really think government is worth, make taxation voluntary. Then, the amount of tax that people would be willing to pay voluntarily would exactly equal the amount of government that We the People think we really need and want. Wouldn't that be interesting?!


  1. Like the concept. That would be the free market ebbing and flowing the publics desire for balanced governance.

  2. If people could purchase, voluntarily, the amount of government they actually wanted -- with their own money, the government would probably be much, much smaller than it is today.

    Some people might fear that government would be too small. Too small for some, perhaps. And there would be freeloaders (as if there aren't now -- almost 50% pay no tax today!). People could refuse to pay taxes, and still get the benefit of the military, legal system, or fire protection. But that happens today, but instead of legitimate government functions, it's food stamps, housing, and soon, health care. With equal justice under the law, what's the difference between slackers and "victim" groups?

  3. When union dues for teachers were made voluntary in Oregon, the amount donated to the union went down to about 5% of what it had been. If Federal taxes were made totally voluntary, I suspect the same would happen there.

    The Laffer curve for taxes seems to peak somewhere between 10 and 20%. Former Soviet republics that have adopted flat taxes come in between 15 and 20%.

    With an 80% tax rate, 80% of my labor would go for things other people want, leaving me the remaining 20% to try to prevent starving and freezing, and little else.


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