SHRINKING GOVERNMENT: Bill Hobbs
writes that Laffer Associates, the firm founded by the creator of the famous "Laffer Curve" of supply-side economics fame, is moving from San Diego to Nashville because Tennessee doesn't have an income tax. Sucks for us Californians, but oh well.
Bill quotes a site
that sums up the idea behind the Laffer curve and supply-side economics quite well:
The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government.
In theory, there's an "optimal" tax rate such that if the rate goes either up or
down, government revenue will go down. The rate is "optimal" in the sense that it maximizes government revenue, but may not be optimal from other perspectives (such as burden on the economy, for instance).
In his update at the end of the post, Bill makes an important point: many conservatives want to shrink the size of government, and try to enact tax cuts in order to do so. However, if we're currently taxed at a rate above the optimal rate, government revenue will actually rise
when taxes are cut.
Ideally, from my perspective, taxes would be cut down past
the government-optimal point and government revenue would then continue to fall. My own optimal point is different from the government's; I don't want to maximize government revenue, I want to maximize my freedom and quality of life. I believe that eliminating many functions of government would benefit me greatly, and so my optimal tax rate is lower than the Laffer optimal rate. For more of my opinions on the matter, see this previous post
In a sense, a tax rate below Laffer's optimal is "benignly sub-optimal", since the lesser government revenue isn't due to harm inflicted on the economy (and should actually benefit the economy as a whole). "Lost" government revenue that's caused by a tax rate that's too high
, however actually reflects a real economic loss.