May 24, 2013

UFOs, Faked Moon Landings, and Fiscal Policy

5/20/2013 12:01:00 AM

 

I was very pleased to report the other day that the people of France overwhelmingly favor spending cuts, even when they were asked a biased question that presupposed that Keynesian-style spending increases would “stimulate” the economy.
Now I have some polling data about British voters, though I confess I’m not sure whether to be pleased or worried.
You’ll see below two slides that were presented earlier today at the Bucharest stop on the Free Market Road Show. They’re not from my presentation, but rather from the speech by Matthew Sinclair of the UK-based Taxpayers Alliance.
As you can see from this first slide, the good news is that only 12 percent of British people think government taxes and spends too little.

On the other hand, it’s a bit worrisome that nearly 1-in-5 Brits believe in UFOs.
What a bunch of idiots.
Then again, nearly 1-in-3 Americans believe that higher taxes would be used for deficit reduction instead of more spending, and that’s an even more preposterous conclusion.
So I shouldn’t make fun of our English cousins.
Here’s some more good-news/bad-news polling data.
The good news is that only 12 percent of Brits think that the government can pay promised benefits (and I bet that number would fall even lower if they saw this shocking data on the U.K.’s long-run fiscal outlook).

The bad news is that 13 percent of Brits think the moon landings were faked.
But since 17 percent of Americans actually admit to having positive feelings about the federal government, I’m reluctant to throw stones since my country is a glass house.
Let me close on a positive note. I’ve expressed considerable pessimism about the future of the United Kingdom, and I think the current leadership of the supposed Conservative Party is terrible.
But maybe there’s reason to hope. It wasn’t that long ago that I shared a very encouraging story from England about civil disobedience against a revenue-hungry government.
And now we know from Matthew’s data that the British people have appropriately jaundiced views of their government.
So perhaps if they ever find another Margaret Thatcher, there’s a 5-percent chance that they can pull themselves back from the fiscal abyss.

Question of the Week: Quit Dodging the Issue and Tell Us the Revenue-Maximizing Point on the Laffer Curve

I feel like I’m on the witness stand and I’m being badgered by a hostile lawyers. Readers keep asking me to identify the revenue-maximizing point on the Laffer Curve.

But I don’t like that question. In the past, I’ve explained that the growth-maximizing point on the Laffer Curve is where enough revenue is raised to finance the legitimate – and limited – functions of government.
And one of the earliest posts on this blog explained that we don’t want to maximize tax revenue.
But I still get versions of this question, including a few that accuse me of dodging the issue.
So what the heck, I may as well give an answer to the question. But I won’t give my answer. Instead, I’ll provide the analysis of a Nobel Prize winner.
James Mirrlees won the Nobel Prize in Economics in 1996 and he’s researched this issue, starting with a left-of-center perspective.

Many economists, including Mirrlees, want to use the tax system to achieve a higher degree of equality than would otherwise obtain. This means taking a substantial amount of the additional income of high-income people, which would imply high marginal tax rates on them. But when the government imposes such high marginal tax rates on the highest-income people, it reduces the incentive of the most productive people to be productive. …Economists have long wanted to figure out the optimum, but until Mirrlees’s work no one had been able to solve it.

And what did Mirrlees find? Well, notwithstanding his own preferences, he calculated that the tax rate should be no higher than 20 percent.

Mirrlees started with no presumption against high marginal tax rates. Indeed, he has been an adviser to Britain’s Labour Party, which for decades imposed marginal tax rates in excess of 80 percent. But Mirrlees found that the top marginal tax rate should be only about 20 percent; and moreover, it should be about the same 20 percent for everyone. In short, Mirrlees’s work justified what is now known as a “flat tax,” more appropriately called a “flat tax rate.” Mirrlees wrote, “I must confess that I had expected the rigourous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so.”

Not only a rate of 20 percent, but a flat tax!
Too bad the Labour Party politicians don’t listen to his advice. Heck, the Conservative Party politicians don’t follow his advice either.
But at least we have a rigorous estimate of the revenue-maximizing point on the Laffer Curve.

Though I hasten to add that it’s not the ideal tax rate. As the risk of being repetitive, the tax system should only fund the legitimate functions of government. For much of our history, the government only consumed about 10 percent of economic output and we didn’t need any broad-based tax. So you know where I stand.
That being said, it’s clearly destructive to have tax rates that are above both the growth-maximizing level and the revenue-maximizing level. And that’s where we stand now.
For more information, here’s my video on the Laffer Curve.

And if you want to learn specifically why Obama’s class-warfare agenda is misguided, here’s my Laffer-Curve-lesson-for-Obama post.
P.S. The Tax Foundation has estimated that the revenue-maximizing corporate tax rate is 14 percent.