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Sliding Down Laffer’s Curve

Written by Gary North on November 28, 2015

I favor flat taxes: the principle of the tithe. There is no “graduated tithe.”

The tithe is good enough for God. Ten percent should be more than enough for all the imitation gods — combined — that want to get their hands into our wallets.

I favor direct flat taxes on real estate, but only at the local level: the county and city (50/50 split). States should tax only cities and counties. The federal government should tax only states.

I favor local sales taxes because they are necessarily flat taxes. Also, many of them can easily be evaded: the Internet and UPS. Finally, they are collected from local businesses, not from individuals. I prefer to keep taxation away from individuals. I favor liberty for living, breathing individuals. I am less concerned about liberty for judicial, non-breathing individuals: corporations. Corporations should be taxed by the states in which they are incorporated. (I recommend Nevada.)

But wouldn’t my plan starve the federal government? No, but it would make it look more like Manute Bol than a sumo wrestler.

We can make it look like what it was as a percentage of the net private product (net national product minus government spending) in 1789. Then, if we work long and hard, maybe we can get it back to where it was in 1787. That would be good enough for me. I do not want to be thought of as a Utopian.


Arthur Laffer recently wrote a defense of the corporate VAT tax substitution being proposed by Rand Paul and Ted Cruz.

Dr. Laffer understands that there are conservative opponents of his flat VAT tax plan. He doesn’t seem to know why. I know why. The reason is expressed by Dr. Laffer.

The U.S. government should collect taxes in the most efficient way possible so as to do the least damage to the economy.

This sounds good. In fact, it is conceptually inaccurate and highly misleading. The opponents of Dr. Laffer’s famous curve — I am among them — line up against “the most efficient way possible” for the government to collect taxes. Why? Because we do not want efficient tax collection. We want inefficient tax collection. Why? Because we want the least damage done to personal liberty. (The economy can look out for itself.)

Good government is inefficient government in the realm of tax collection. Here, waste is good — morally and technically.

Dr. Laffer has committed a conceptual error that I learned was wrong in an economics class at UCLA in the summer of 1962. I teach it to my economics students in the Ron Paul Curriculum. I challenge the idea that we should pursue more for less. No, we shouldn’t. If we attempt this, we will make serious mistakes. We will not attain our goal. Here is how I explain this.

To maximize your rate of return, you must decide what your goal is, and then you should seek ways to buy this goal at the lowest possible price — price being defined in the broadest sense. Do not confuse yourself by trying to achieve two inter-dependent variables. You cannot achieve both at the same time.

You may choose to seek this: fixed output at the minimum value input.

You may choose to seek this: maximum output at a fixed-value input.

But do not try to choose both at the same time. You will not be able to come up with a plan to achieve maximum output and minimum input: two variables. Pick one or the other fixed goal. If you achieve this, then you may try to do it again under the new, improved economic conditions.

Life is like a ratchet, one gear click at a time.

With this in mind, let us consider Dr. Laffer’s two variables: efficient tax collection (minimum cost for the state) and the least damage to the economy.

The more efficient that tax collection is, the more money the civil government will collect. Here is the law of demand: “When a price falls, more is demanded.” I do not want the civil government to collect more taxes. I want it to collect fewer taxes. So, I prefer the price of tax collection to be high.

Why? Because I favor liberty. Every dollar that the IRS saves will be used either to collect more taxes or else invade our lives with the extra money that it collects. I want neither outcome.

The Laffer curve is all about maximum efficiency . . . for the government.

Dr. Laffer wants the tax rate to be set to maximize government revenue. This is why I opposed the Laffer curve from the day I heard about it.

Remember where he first presented it to politicians: on a napkin at a 1974 dinner with Dick Cheney and Donald Rumsfeld. We know where that got us.

(If this story is true — it’s on Dr. Laffer’s site — then the napkin belonged to the restaurant. It was not a paper napkin. So, the Laffer curve began with stolen goods. I prefer to think that it happened at a fast food restaurant, and it was a paper napkin, but that seems far-fetched for a dinner in Washington.)


Economists usually favor efficiency. They think it is a universally valid goal. I do not. I favor efficiency in my decision-making. I do not favor efficiency in tax collecting.

Here is the Laffer curve. It goes up. Then it goes down.

Continue Reading on www.garynorth.com

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