THE OBVIOUSNESS OF LAFFER
The same occurs with the Laffer Curve as with the word ‘Obviousness’. Both have a horrible name in Spanish, and, at the same time, represent something obvious in themselves. The evidence of the word ‘obviousness’ does not need to be emphasised, but it is necessary to insist on the evidence of Laffer because, I don’t know why (although I can guess), many experts and wise politicians and economists harshly criticise it or, at least, cast doubt on it.
The theoretical Laffer curve is a graph in the form of a bell which relates total tax revenue that the government collects, to the tax rates that are applied in each case. The extremes are clear and give rise to identical tax revenue:
1) If the tax rate is zero the income will be zero; and
2) If the tax rate is the maximum of 100%, no-one (company or private individual) would be so silly and masochistic to work and produce only for the state with no profit for themselves. In this case that levied by taxes would also be zero.
Between both extremes there is the logical circumstance that, in the beginning, in proportion to the rising tax rates, total tax revenue also rises, but there always comes a time when individuals and companies, faced with new marginal tax rate increases, begin to work less and divert their activities towards leisure and the black economy. The consequence of this is that, in turn, they save less. In the culminating point of the Laffer curve the total tax revenue collected by the Treasury is maximized.
If the prevailing fiscal system has high current rates, the effect produced by the lack of stimulus for the worker is greater than the total tax revenue effect, so that we can refer to a situation in which the greed for taxation produces the opposite of the effect desired. The abuse in the zealous levying by the government actually leads to a slump in the productive system and, when all is said and done, the total collected is less. The consequence is that the State has less handling margin to spend if it wants to avoid incurring more deficit and public borrowing which future generations will end up paying. In this way the inactive and underprivileged population would suffer as they would not even be able to benefit from state subsidies. Of course the coming generations will also have to put up with the inefficiency of the present greedy levying.
Both Arthur Laffer and Wanniski and others, emphasized the importance of low marginal tax rates in order to obtain good economic results which will avoid recession, production slowdown, high inflation and a low saving level. The theses raised had special prestige in the eighties in the United States where it was clear that oppressive State intervention smothered initiative and innovation. The importance of self confidence was valued more and the risks run when free individuals rely too much on economic State intervention were not taken into consideration. This coincided with the need to increase expenditure to tackle the American military escalation – which in the end resulted in the backing down of the Soviet power – so that the effects of the Laffer curve were not so visible.
But in fact, there is no possible objection to this theoretical principle and it is not a new thesis either. To avoid falling into the Anglo-Saxon inferiority complex we only have to quote the case of the Spanish Minister Figuerola in 1869 who, as the teacher Martin Niño recollects, with a meticulous interpretation of the suppression of dignity and freedom of the individual, wanted to abolish the extortionate taxation by the Treasury on individual activities. Faced with the need to generate new income, a liberal reform of tariffs could contribute to this objective by promoting activity. Furthermore, the idea that higher duties could correspond to lower income for the Exchequer had been repeated several times by Florez Estrada in his Course of Political Economy.
It’s not worth expanding further. 56 per cent of 5 million is less than 35 per cent of 9 million. Evident, Figuerola and Florez Estrada would say. Obvious- we would now say following the pattern of a decadent oratory.