Quote:
Originally Posted by d-ray657
Are we still relying on the Laffer curve?
Regards,
D-Ray
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We still want to refute an entire idea with 1/2 the argument?
It is about revenue, and it is about spending. Our government is currently being dishonest about both. They understate revenues, they refer to a "loan" as revenue for purposes of declaring a balanced budget while having zero intention of making payments on the loan principle. They declare a budget plan a success if if fixes a current problem 6 to 8 years hence.
If we can't agree on fundamental principles of economics when we discuss government financing, then the argument is lost before it starts between us, and the winner is the the guy in Washington who keeps us distracted with an argument while he continues to steal us blind.
So, let's try some fundamental principles, at least one to start with.
When a particular activity is penalized do you get more or less of that activity?
When a particular activity is subsidized, do you get more or less of that activity?
The answer, of course, is that subsidies increase the occurrence of an activity, while penalties decrease it.
Are taxes a penalty or a subsidy when engaging in an activity? They are, of course, a penalty.
So, which do you think would be the best fuel for economic activity: an increase or decrease in the penalty? If we can agree that a reduction in penalty, or subsidy, increases the likelihood that a particular activity will be repeated, then should the goal of encouraging economic growth focus on increasing subsidy or increasing penalty? Hopefully, we're still on the same page at this point, and can a agree that a subsidy encourages growth.
So, if the economic value of producing one widget is $1.00, and the widget is currently taxed at 50%, the government takes home $0.50. While, on its face, the government might be satisfied with retaining that $0.50, that $0.50 must also abide by the fundamental principles of economics.
If the government decided to test the Laffer curve, and drop tax (penalty) on producing that widget to $0.40, the widget will now cost $1.40 rather than a $1.50 in the marketplace. The law of supply and demand suggest that the widgets demand level will increase at the lower price point. We now have to produce more widgets to meet demand.
Increasing productive output has a whole host of positive effects beyond just the production of the widget. Certainly Widget Inc. will now be operating with potentially increased efficiency / capacity to produce more widgets. Widget Inc will be buying more raw materials to make more widgets, they may have to add to the workforce to increase demand, converting capital into product and wages.
Let's say the demand in creases by 50%: Widget incorporated must sell 1.5 widgets for every one widget that they sold previously. Well, the government used to collect $0.50 for each widget sold, now they're collecting $.40 for each widget, but more widgets are being sold. At a 50% increase in demand, that's $0.40 on the first widget sold, and an extra $0.20 on the additional 1/2 widget sold due to increased demand. So, now the government is collecting $0.60 when it used to collect $0.50.
You can start to put other names on this: Laffer curve, Reaganomics, whatever. Those names refer to government economic policies and budget law: Of course, the old joke about not wanting to see either sausage or laws get made has to apply here as well. But in a classic economic sense, the principles are sound.
The reverse is also true. If you increase the penalty for widget production, you will get less widgets. If you tax an activity, you will get less of it, and therefore antcipated revenue from the tax increase will fall as well (tax policy projections are typically based on an assumption of static demand, which doesn't exist in economics).
Therefore, making bold economic projections about balancing the budget by increasing taxes (whether its just on the "1%" or more broad-based) is Fantasyland to me. Further, those folks in the "1%" who have the means to do so will be particularly adept at changing their tax strategy to avoid a tax. Its the 99% for don't have the means - or the expert tax advice - who typically become collateral damage when Washington plays with tax policy.
Of course, if we can't agree on the application of fundamental economic principles in these discussions, then what's the point?