Monday, December 10, 2007

Laffer Curve, What's Your Goal?

A quick comment on the Laffer Curve and tax cuts. The Laffer Curve shows how higher tax rates may not always result in higher tax revenues. Simply put, if the government takes too much, people will respond by producing less. Taxes that are too high may result in poorer people, or at least in people who do less of whatever is being taxed, or in mass tax avoidance.

So reducing taxes may, in some cases, result over time in higher revenues for the government, if the tax rates were too high before.

OK. So, to maximize revenues you need to hit the sweet spot in the tax rates. High enough to capture as much money as possible, but not so high as to force people into poverty or into tax avoidance.

That's fine, if your goal is to maximize the size and scope of government. The more money the better in that case. But what if you are, like me, a libertarian? I value, to some level, freedom over government support and over government control.

For me, the best point on the Laffer Curve is well to the left of the tax-maximizing point. Government should be taking in far less than it could take if revenues were maximized.

This comes down to values and to my conception of a good society. I believe that in the mass, people will be happier if they have more control over their own lives than if they are burdened by more regulations. People will be happier if they have money for their retirement in their own control rather than depending on Social Security, Medicare and the like.

If you believe the opposite, then it makes sense to always choose government over peoples' freedom.

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