It takes temerity to write on the Laffer curve given that the majority of my audience believes all taxation is theft, but it is an important concept that leaders tend to ignore. Putting the ethics of taxation aside, which is not something I normally recommend, it is something that warrants discussion.
My home province of New Brunswick elected a remarkably inexperienced, fiscally-negligent, rhetorically-gifted, leader in 2014 named Brian Gallant. He had an idea of raising taxes to pay for his social programs. Income tax revenue plummeted from $1.4 billion to $1.2 billion. The left was baffled. The social programs never came, and he was swiftly voted out of office at the earliest opportunity.
The Laffer curve didn’t originate with Arthur Laffer, though he is credited with popularizing the notion. It dates back to Ibn Khaldun, an Arab scholar of the 14th century, who noted that small tax assessments yield high revenues, and high tax assessments yield small revenues.
The idea is rooted in supply and demand. A candy bar selling for 10 cents will sell well, but not generate profit. A candy bar selling for $10 will sell poorly, and not generate profit. A candy bar selling for $1 will still sell well and generate profit. There is a price at which profits are maximized.
The same can be said of taxation. If it’s raised to such a degree that increased business activity is unprofitable, people won’t do more business or work longer hours, and tax revenue diminishes.
The idea that one can cut taxes and increase revenue is a point so obvious yet so thoroughly ignored that George H. W. Bush once referred to it as voodoo economics.
The lie that raising taxes raises revenue is so thoroughly repeated that it’s stated without the expectation of being challenged. These proposals that are coming from the Green New Deal, Jeremy Corbyn, and the like, involve serious government expenditures but the government doesn’t necessarily have the capacity to raise revenues.
Donald Trump recently cut the tax burden for Americans and the U.S. federal treasury was slightly increased. The economic growth offset the decreased rate of taxation, and so the smaller rate managed to take in equivalent revenue.
Justin Trudeau had an interesting approach to raising taxes. He sold it to Canadians as a tax cut, because he slightly lowered income tax rates for middle-class Canadians. This has the disadvantage of being a lie. In reality, he canceled boutique tax credits and so the overall tax burden on the middle class increased. Interestingly enough, he managed to raise tax revenue this way.
The economic lesson is that there are efficient and inefficient ways of increasing or decreasing taxation. Corporate tax has been shown to be the more deleterious form of taxation, while boutique tax credits are the easiest to cancel without significant impact to the treasury.
The asphyxiation of the economy via taxation is unethical, but there are means of giving us a little more air to breathe and herein lies at the very least starting point.