From time to time I enjoy thinking about somewhat arcane areas like the relationship between politics and economics. One of the aspects of economics that I find intriguing is that it simultaneously seeks legitimacy as a very scientific social science but manages to continually find itself fouled up by aspects of politics . Today I would like to look at the Laffer curve, made most famous during the 1980’s when it became an article of faith among many who supported Supply Side economics, and examine how it presents an interesting case study when it comes to economic “laws.” While it is easy to criticize a hostility to taxes, speaking from a biblical perspective, any taxation rate that equals even a tithe is excessive by biblical standards (see, for example, 1 Samuel 8:10-18), and so the sort of taxation in our present world far exceeds anything that the Bible would consider as legitimate for a godly government. Be that as it may, there are still many people who have some sort of perverse longing for the United States to become a social democracy with high rates of taxation and a paternalistic government, and if they ridicule the Laffer curve, they in turn are ridiculed for their failure to understand the importance of politics and psychology when it comes to economic law.
One of the criticisms that is often given to Supply Side Economics in general, no matter who it is practiced by, is that government revenue invariably declines when tax rates are reduced. There are at least a few reasons why this is either untrue or irrelevant, though, and these reasons strike at the heart of the complexities of economics as they relate to public policy. For one, a reduction of government revenues and even a reduction in the role of government in an economy is not in itself a bad thing. While there are certainly some public goods which can be provided for through taxation, there is also a great deal of waste and inefficiency that results from bloated bureaucracies as well that make them easy targets for reform whether or not they are doing the job they were set up to do. Whether or not a given part of government is a net benefit or detriment to the well-being of society as a whole depends on a detailed look at its behavior and the distortion that it provides to what would happen in its absence. For another, there are at least two aspects of money that a simplistic view of bigger government = bigger government revenues fails to account for. One of these is the multiplier effect by which increased revenues can become increased wages and sound capital investments which in turn power further benefits in an economy than would be the case with mere taxation alone. The other is the fact that international companies in particular have a great deal of freedom in where they place money, and are inclined to shift that money around based on corporate tax rates to maximize the amount of money and resources they have, and so the mobility of that money can be greatly impaired by laws on the part of states to siphon off more of that money to governments.
If one can criticize those who support supply side theories by pointing out that lowering taxes paid by the wealthy need not increase the well-being of ordinary people, and this is certainly a valid criticism, it is equally valid to point out that the desire of the wealthy to escape taxation and appropriation can sabotage attempts by governments to create a more just society. In cases where the wealthy feel a disproportionate and unjust rate of taxation, such people are likely to move to places where their wealth does not attract the envy and theft of governments. During the dark decades when England was mired in socialism, those people who made a great deal of money in music or business found other places to live. In the present day, we see an exodus of people from California to states with a less burdensome taxation, and while the people of those states may grumble about the large amount of clueless Californians present, the movement of such people and their money is a sign that at least those who are able to move are highly sensitive to the hostility of governments towards their well-being.
This suggests that we ignore the human angle of economics at our peril. The creation of empirical laws about the past behavior of people ought not to fool us into believing that we are dealing with something that is purely rational when we examine the intersection between economics and public policy. To the extent that companies share tax breaks with employees and customers, such tax breaks gain in legitimacy by serving the interests of a broader part of the population than would be served if those same people hoarded tax refunds or put them in luxury goods. Likewise, attempts to legislate morality through attempts at redistribution of wealth through confiscatory rates of taxation often fail because those who have the wealth that governments want to confiscate and redistribute have both the means and the motive to preserve that wealth through a variety of means, including exploitation of complicated accounting rules, the mobility of wealth and wealthy people, and the strategic use of access and influence held by those with a great deal of wealth. Whatever it is that we wish to accomplish through the passage of laws, we cannot forget that people are not simply passive recipients of our coercion through law, but are active agents who may indeed foil our plans and hopes and expectations through their responses to the laws that we seek to enforce. It is often far more beneficial to persuade than it is to attempt to coerce, even if it takes a lot of time and effort to build trust and consensus about what sort of people we wish to be.
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