MISTERScienceAintSoBad doesn’t write about economics much. It is a science. But nobody seems to BELIEVE it. So I get dirty looks when I write about it.
Still. Economics has its uses.
Right now the US economy’s suffering from serious butt-drag as it recovers (Please ScienceGod) from the recession. So, naturally, some want to stimulate things a little more. Course, the other side of it is that there’re concerns about raising revenues so the government doesn’t go broke.
Is it possible to do both? Can you lower taxes (tax RATES, that is) and still make a buck doing it? Can we separate the politics and the BS from the EVIDENCE?
A thought experiment:
EINSTEIN’S ELEVATOR.
In 1905, Albert Einstein was thinking about elevators.
“Whoa!,” he said. ” I shove my physics professor into a falling elevator. He says ‘what a cool little room with no gravity.’ When it hits bottom? No more elevator. No more Herr Kleiner. No more finals.”
” This is my happiest thought,” Einstein said.
Smart guy, that Einstein.
LAFFER’S CURVE.
Thought experiments aren’t limited to physics.
At a 1974 meeting, Arthur Laffer, an economist from the University of Chicago’s Graduate School of Business, took out his ballpoint pen – the one with the American flag on it. He drew a curve on a napkin for an attentive Dick Cheney and Donald Rumsfeld. President-to-be Gerald Ford was there too.
SIMPLE!
“Not to oversimplify, but couldn’t we oversimplify the way taxes are calculated?,” he said. “Mind if I use yer napkin?”
“uh..”
“Two axes, OK? The one going up? That’s all the revenues for the government. Then.. crap! Pencil broke. could you pass me that one? Then, across the page are tax rates, OK?”
“See on the left where I put the zero? That’s where we show how much revenue we make if we don’t charge any taxes.”
“Dick? You’re a smart guy, how much would that be?”
“Uh..”
“EXACTLY! There wouldn’t BE any revenues because the tax rate is ZERO! Now look at the other extreme. What if we charge a hundred percent taxes? What then?”
“Dick?”
“Isn’t that a little edgy?”
“EXACTLY, Dick! Would you (or any Republican you know) go to work every day, knowing you don’t get to keep a penny?”
“How much power would I have?”
“Forget power, Rumsfeld. You’re overcomplicating things. This is a THOUGHT experiment.”
“No power?”
“Do you see power along that axis? Try to focus. OK, man?”
Rumsfeld adjusted his tie.
“So. You’re with me, so far, right? 100% taxation – government revenues go to zero. Same with 0%. “In between there’s a curve. It rises up and then it falls back down. We’ll label the peak ‘Equilibrium’. Ok?”
“This is a nice SCIENTIFIC way to understand tax policy AND you will note that tax rates to the right of curve are kinda counterproductive. If you increase the rate, revenues go down. Lower the rates, and revenues go up. And I’ll TELL you something, gentlemen, I’m p-r-e-t-t-y sure we’re on the right hand side of that curve.”
Cheney raised his hand.
“Don’t DO that!”
“What?”
“Raise your HAND! You’re the Ambassador to NATO. You don’t raise your hand. You just talk.”
“OK,” Cheney said, lowering his hand.
“So, you’re saying we could LOWER the tax rate and make a profit on the deal?”
“I don’t believe I would call it that.”
“You’re SAYING that we can project power ALL over the third world, scare the URINE out of Russia, finally order some decent o-rings for the Space Shuttle and still reduce the deficit at the end of the year? All by LOWERING the tax rate?
“Only a napkin. Let’s not get TOO carried away.”
“This is sensational,” Rumsfeld chimed in. Wait’ll the Bushes hear about this one.
“Look, this is a little simplistic.”
“Which is perfect, really. You don’t WANT to have Congress deal with anything complicated. Been there. Regretted that.”
At the end of the meeting, the three prominent officials went away feeling inspired.
The professor wanted to get his napkin back.
MISTERScienceAintSoBad realizes that “Laffer’s Curve” can’t go up against Einstein’s refined thought experiments. “The Curve” was a little more back-of-the-napkin. Trying to make a point, not a revolution.
And it oversimplifies who pays taxes and how. The extreme behaviors (100% and 0%) are just assumptions which SOUND right but might not BE right.
The whole thing’s a little fuzzy. What’s the time frame? Would a change in tax rates have an effect in two years? Twenty years? How would we sort that out? What about all the different tax brackets? And the corporations? And the nonprofits? And the underground economies?
However. I’ve heard crazier ideas. I’ve COME UP with crazier ideas.
So COULD the government reduce taxes and make more money?
Best we can tell – and with profound regrets – it is probably UNlikely that (in most conditions) decreasing taxes’ll boost tax collections.
NOBODY’S beyond suspicion where there’s a potential political agenda, but the independent Center On Budget and Policy Priorities looked at this four years ago and pissed off a lot of people by failing to find evidence for a negative correlation between tax rates and collections. This seems consistent with other serious scholarship.
Doggone!
Couple of notes:
My reportage might be a little off when it comes to the above conversations where fun trumps accuracy. But the curve is Laffer’s (who concedes its origins go back to Keynes and, even, Khaldun). And, while MISTERScienceAintSoBad, might not be able to resist spicing up some verbiage, he would never tinker with the facts themselves. Evidence RULES!
And attribution for the cartoon image (with modified text): 
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 Unported License.
