Tag: taxation

Should International Bureaucracies Get Taxing Powers or Direct Funding?

Over the years, I’ve strenuously objected to schemes that would enable international bureaucracies to levy taxes. That’s why I’ve criticized “direct funding” proposals, most of which seem to emanate from the United Nations.

Interestingly, the American left is somewhat divided on these schemes. House Democrats have expressed sympathy for global taxes, but the Obama administration has come out against at least certain worldwide tax proposals.

Unfortunately, proponents of global taxes are like the Energizer Bunny of big government, relentlessly pushing a statist agenda. If the world economy is growing, it’s time for a global tax. If the world economy is stagnant, it’s time for a global tax. If it’s hot outside or cold outside, it’s time for a global tax (since “global warming” is one of the justifications for global taxation, I’m not joking).

Given this ongoing threat, I’m glad that Brian Garst of the Center for Freedom and Prosperity has put together a two-page Libertas explaining why international bureaucracies should not get taxing powers or direct funding.

…it would be imprudent to give international bureaucracies an independent source of revenue. Not only would this augment the already considerable risk of imprudent budgetary practices, it would exacerbate the pro-statism bias in these organizations. …The issue of taxing powers and direct funding has become an important issue because international organizations are challenging the contribution model and pushing for independent sources of revenue. The United Nations has been particularly aggressive in pushing for global taxes, seeking to expand its budget with levies on everything from carbon to financial transactions.

He then highlights one of the most dangerous proposals, a scheme by the World Health Organization to impose a “Solidarity Tobacco Contribution.”

Another subsidiary of the United Nations, the World Health Organization (WHO), is also looking to self-fund through global taxes. The WHO in 2010 publicly considered asking for global consumer taxes on internet activity, online bill paying, or the always popular financial transaction tax. Currently the WHO is pushing for increased excise taxes on cigarettes, but with an important condition that they get a slice of the added revenue. The so-called Solidarity Tobacco Contribution would provide billions of dollars to the WHO, but with no ability for taxpayers or national governments to monitor how the money is spent.

I have to give the left credit. They understand that few people are willing to defend tobacco, so proposing a global tax on cigarettes sounds noble, even though the real goal is to give the WHO a permanent stream of revenue.

Brian explains, though, why any global tax would be a mistake.

What all of these proposals have in common – in addition to their obvious intended use in promoting statist policies – is that they would erode the influence of national governments, reduce international accountability, promote waste, and undermine individual sovereignty and liberty. …Before long, international organizations will begin proposing – no doubt in the name of efficiency or reducing the burden on nation states – that affected taxpayers withhold and transfer taxes directly to the international body. This would effectively mean the end of the Westphalian system of sovereign nation states, and would result in a slew of new statist policies, and increased waste and corruption, as bureaucrats make use of their greater freedom to act without political constraint.

He concludes by noting that a global tobacco tax would be the proverbial camel’s nose under the tent. Once the statists succeed in imposing the first global tax, it will simply be a matter of time before additional levies are imposed.

National governments should not be fooled. Any sort of taxing power or direct funding for international bureaucracies would undermine national sovereignty. More importantly, it will further weaken the ability of people to influence and control the policies to which they are subjected. Moreover, once the first global tax is imposed, the floodgates will be opened for similar proposals.

The point about fiscal sovereignty is also important. Not because national governments are keen to adopt good policy, but because nations at least have to compete against each other.

Over the years, tax competition among governments has led to lower tax rates on personal and corporate income, as well as reductions in the double taxation of income that is saved and invested.

Politicians don’t like being pressured to lower tax rates, which is why international bureaucracies such as the Organization for Economic Cooperation and Development, acting on behalf of Europe’s welfare states, are pushing to undermine tax competition. But so long as there’s fiscal sovereignty, governments will have a hard time imposing confiscatory tax burdens.

Any form of global taxation, however, cripples this liberalizing process since taxpayers would have no safe havens.

Daniel in the Looter’s Den: My Adventures at the UN

I was at the United Nations yesterday for something called “The High Level Thematic Debate on the State of the World Economy.”

Most speakers, including the secretary general of the United Nations, the president of the European Commission, Paul Volcker, and Joseph Stiglitz, to varying degrees blamed private markets for the fiscal and financial problems of the world. Not surprisingly, there also was a consensus for more government—usually wrapped up in buzzwords such as “sustainable development” and “equitable growth” and ”coolective action”

I spoke in the afternoon as part of a roundtable on the economic crisis (see full schedule here). There were five speakers on my panel, including yours truly. Here are my thoughts on what the others said.

Dr. Supachai Panitchpakdi, secretary-general of the United Nations Conference on Trade and Development, must have been part of the buzz-word contest I mentioned yesterday. Lots of rhetoric that theoretically was inoffensive, but I had the feeling that it translated into a call for more government. But maybe I’m paranoid, so who knows.

Professor Dato’ Dr. Zaleha Kamaruddin, rector of the International Islamic University of Malaysia, was an interesting mix. At some points, she sounded like Ron Paul, saying nice things about the gold standard and low tax rates. But she also called for debt forgiveness and other forms of intervention. She explicitly said she was providing Islamic insights, so perhaps the strange mix makes sense from that perspective.

Former U.S. senator Alan K. Simpson also was a mixed bag. Simpson was co-chair of President Obama’s fiscal commission, which I thought was a disappointment because it endorsed higher taxes and urged subpar entitlement changes rather than much-needed structural reforms. He also went after Grover Norquist because of the no-tax pledge, which I think is a valuable tool to keep Republicans from selling out for bigger government. All that being said, Senator Simpson is a promoter of smaller government and he wants lower tax rates. So while I disagree with some of his tactical decisions, he was an ally on the panel and would probably do a pretty good job if he was economic czar.

Last but not least, Professor Jeffrey Sachs of Columbia University was a statist, as one would expect based on what I wrote about him last year. We clashed the most, arguing about everything from tax havens to the size of government. Interestingly, we both said nice things about Sweden, but I was focusing on policies such as school choice and pension reform, while he admired the large public sector. But I will admit he was a nice guy. We sat next to each other and did find a bit of common ground in that we both were sympathetic to the way Sweden dealt with its financial crisis about 20 years ago (a version of the FDIC-resolution approach rather than the corrupt TARP bailout approach).

My message, by the way, was very simple: Higher taxes won’t work. The “growth” vs. “austerity” debate in Europe is really a no-win fight between those who want higher spending vs. those who want higher taxes. The only good answer is to restrain spending with—you guessed it—Mitchell’s Golden Rule.

The good news is that I wasn’t tarred and feathered. Indeed, I even got a modest amount of positive feedback. The bad news is that I doubt I moved the needle.

But at least the United Nations was willing to have contrary voices, unlike the Organization for Economic Cooperation and Development, which once threatened to cancel a Global Tax Forum because of my short-lived participation.

Facebook Billionaire Gives Up Citizenship to Escape Bad American Tax Policy

It is very sad that America’s tax system is so onerous that some rich people feel they have no choice but to give up U.S. citizenship in order to protect their family finances.

I’ve written about this issue before, particularly in the context of Obama’s class-warfare policies leading to an increase in the number of Americans “voting with their feet” for places with less punitive tax regimes.

We now have a very high-profile tax expatriate. One of the founders of Facebook is escaping to Singapore. Here are some relevant passages from a Bloomberg article.

Eduardo Saverin, the billionaire co-founder of Facebook Inc. (FB), renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill. …Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion. …Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. …“Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement. …Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign-sourced income,” according to a government website on tax policies there. …Renouncing your citizenship well in advance of an IPO is “a very smart idea” from a tax standpoint, said Avi-Yonah. “Once it’s public you can’t fool around with the value.” …Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, according to government records. …“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

What makes this story amusing, from a personal perspective, is that Saverin’s expatriation takes place just a couple of days after my wayward friend Bruce Bartlett wrote a piece for the New York Times in which he said that people like me are exaggerating the impact of taxes on migration. Here are some key excerpts from Bruce’s column:

In recent years, the number of Americans renouncing their citizenship has increased. …This led William McGurn of The Wall Street Journal to warn that the tax code is turning American citizens living abroad into “economic lepers.” The sharply rising numbers of Americans renouncing their citizenship “are canaries in the coal mine,” he wrote. The economist Dan Mitchell of the libertarian Cato Institute was more explicit in a 2010 column in Forbes, “Rich Americans Voting With Their Feet to Escape Obama Tax Oppression.” …[T]he sharp rise in Americans renouncing their citizenship since 2008 is less pronounced than it appears if one looks at the full range of data available since 1997, when it first was collected. As one can see in the chart, the highest number of Americans renouncing their citizenship came in 1997. …The reality is that taxes are just one factor among many that determine where people choose to live. Factors including climate, proximity to those in similar businesses and the availability of amenities like the arts and cuisine play a much larger role. That’s why places like New York and California are still magnets for the wealthy despite high taxes. And although a few Americans may renounce their citizenship to avoid American taxes, it is obvious that many, many more people continually seek American residency and citizenship.

I actually agree with Bruce. Taxes are just one factor when people make decisions on where to live, work, save, and invest.

But I also think Bruce is drinking too much of the Kool-Aid being served by his new friends on the left. There is a wealth of data on successful people leaving jurisdictions such as California and New York that have confiscatory tax systems.

And there’s also a lot of evidence of taxpayers escaping countries controlled by politicians who get too greedy. Mr. Saverin is just the latest example. And I suspect, based on the overseas Americans I meet, that there are several people who quietly go “off the grid” for every person who officially expatriates.

The statists say these people are “tax traitors” and “economic Benedict Arnolds,” but those views are based on a quasi-totalitarian ideology that assumes government has some sort of permanent claim on people’s economic output.

If people are leaving America because our tax law is onerous, that’s a signal we should reform the tax code. Attacking those who expatriate is the fiscal version of blaming the victim.

Sometimes, Governments Lie (6th Anniversary Ed.)

(This blog post first appeared at Cato@Liberty following the release of the 2006 Medicare and Social Security trustees’ reports. I repost it, with updated links and “exhaustion dates” because sadly nothing else has changed.)

Sometimes, Governments Lie

Year after year, federal officials speak of the Social Security and Medicare trust funds as if they were real.  Yesterday Today, the government announced that the Social Security trust fund will be exhausted in 2040 2033 and that the Medicare hospital insurance trust fund will be exhausted in 2018 2024— projections that the media dutifully reported.

But those dates are meaningless, because there are no assets for these “trust funds” to exhaust.  The Bush administration wrote in its FY2007 budget proposal:

These balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds…are not assets…that can be drawn down in the future to fund benefits…When trust fund holdings are redeemed to pay benefits, Treasury will have to finance the expenditure in the same way as any other Federal expenditure: out of current receipts, by borrowing from the public, or by reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits.

This is similar to language in the Clinton administration’s FY2000 budget, which noted that the size of the trust fund “does not…have any impact on the Government’s ability to pay benefits” (emphasis added).

I offer the following proposition:

If the government knows that there are no assets in the Social Security and Medicare “trust funds,” and yet projects the interest earned on those non-assets and the date on which those non-assets will be exhausted, then the government is lying.

If that’s the case, then these annual trustees reports constitute an institutionalized, ritualistic lie.  Also ritualistic is the media’s uncritical repetition of the lie.

Time for Me to Defend My Work on Tax Havens

A few days ago, I explained why I’m a big fan of tax competition. Simply stated, we need to subject governments to competitive pressure to at least partially offset the tendency of politicians to over-tax and over-spend.

Tax havens play an important role in this liberalizing process, largely because they do not put themselves under any obligation to enforce the bad tax laws of other jurisdictions. They also use privacy laws to protect their sovereign control of what gets taxed inside their borders (this is what separates a “tax haven” from a more conventional low-tax jurisdiction). This means they are fiscal safe zones, particularly for people who want to protect their assets from the pervasive double taxation that exists in so many nations.

Not everybody agrees with my analysis (gee, what a surprise). To cite one example, the petty bureaucrats at the OECD got so agitated at me in 2009 (when I was offering advice to representatives of so-called tax havens while standing in a public lobby of a public hotel) that they threatened to have me thrown in a Mexican jail.

Now I have a new critic, though hopefully someone who would never consider thuggish tactics to suppress dissent. Ann Hollingshead writes for the Task Force on Financial Integrity and Economic Development, which (notwithstanding the name of the organization) seems to favor bigger government.

Anyhow, she wrote an article specifically criticizing my work on tax havens. So I figured it was time for a fisking, which means a point-by-point rebuttal. Here’s how she begins, and I’ll follow up her points with my responses.

Officially Dan Mitchell is a Senior Fellow at the Cato Institute, a conservative public policy research organization, and a researcher on tax reform. Unofficially, he has (perhaps ironically?) called himself the “world’s self-appointed defender of so-called tax havens.”

No irony on my part. As I have openly stated, tax havens are a key part of tax competition, which is a necessary (though sadly not sufficient) process to restrain the greed of the political class.

Oddly enough, Mitchell and I agree on many of the facts about these havens. We both have observed, for example, that there are buildings in Delaware and the Cayman Islands that house thousands of corporations. Mitchell concludes there is nothing wrong with either; I conclude there is something wrong with both. Mitchell also agrees that the United States“could be considered the world’s largest tax haven.” On that topic, he’s even cited my paper on non-resident deposits in secrecy jurisdictions. In his comment, he does not take issue with my methodology or my results, but rather concludes that my finding that the United States is the largest holder of non-resident deposits “makes the case for pro-market policies.” I, on the other hand, have argued that these findings support across the board reform, rather than that limited to traditional offshore financial centers.

Fair enough. We both recognize that the United States is a big tax haven. But we have different conclusions. I think it is unfortunate that only non-resident foreigners can benefit from these policies, while Ann wants to crack down on small low-tax jurisdictions such as Monaco, Bermuda, Liechtenstein, and the Cayman Islands, as well as big nations such as the United States. Sadly, Ann’s side has somewhat prevailed, and many of the havens have agreed to become deputy tax collectors for nations with bad tax law.

So how is it that two (relatively intelligent?) people can draw such different conclusions? I would argue our differences lie not in our facts, or perhaps even our economics, but in our underlying philosophical and theoretical differences.

I guess I should be happy that she holds out the possibility that I’m “relatively intelligent.”

Mitchell implicitly takes the position that tax havens do enable tax evasion and this helps to lower tax rates. He argues “it is largely globalization—not ideology—that has driven [a] ‘race to the bottom’” where global top corporate tax rates now average about 27 percent, down from 67 percent in 1980. Mitchell does not only believe this has occurred, but also maintains it is a positive development. He argues tax competition drives tax policy in the “right direction” (i.e., lower tax rates), has called these developments “positive,” and has even likened policy makers to “thieves” and tax competition to home “alarm systems.”

Ann makes one minor error. Corporate tax rates have dropped from a high of about 48 percent (and are now down to less than 25 percent). Top personal tax rates, by contrast, used to be more than 67 percent (and have now dropped to about 41 percent).

Regarding these developments, I think they are very positive. And I also think that politicians are akin to thieves, though Godfrey Bloom, a British member of the European Parliament, says it with a much better accent.

Mitchell’s argument that lower tax rates are always better and that those who tax others are thieves, makes several implicit assumptions about the relationship of citizens to their government. From his line of reasoning, Mitchell either believes, on a philosophical level, that governments do not have the right to tax their citizens or, on an economic level, that lower tax rates are always better, or both.

I definitely believe that lower tax rates are better than higher tax rates.

Mitchell may believe that taxation is the equivalent of thievery—and therefore that governments do not have the right to tax their citizens, just a thief does not have the right to steal. But he is also (more than likely) not an anarchist, which is the next logical extension of this reasoning, because on a number of occasions he has advocated a flat tax.

Ann makes a good point here. I’ve already admitted, in this post featuring a funny video mocking libertarianism, that I don’t see how to privatize the justice system and national defense, so I’m not an anarcho-capitalist.

Mitchell also argues lower tax rates are universally better, so at what point does the tax rate become acceptable? Clearly he doesn’t believe the tax rate should be zero, because that would get back to the anarchism theory. And he did once offer tepid support for Herman Cain’s 9 percent rate.

Another fair point. If a 50 percent tax is confiscatory and if politicians who impose such a tax are akin to thieves, then why would a 10 percent tax be acceptable? And would politicians imposing low tax rates still be acting like crooks?

Those are tough questions. But at the risk of dodging thorny philosophical issues, I’ll claim it doesn’t really matter. Government is too big right now and taxes are too onerous and unfair. If I somehow manage to bring government down to 10 percent of GDP, as the Rahn Curve suggests if we want to maximize prosperity for the American people, then I’ll have the luxury of worrying about the moral legitimacy of a limited public sector.

Clearly there’s a disconnect. Taxation cannot both be thievery, but also acceptable at a lower level. There is no evidence that, if tax competition through tax evasion is real, it would cease to drive down tax rates at some level that has been deemed acceptable by Dan Mitchell. So at what point does the “race to the bottom” bottom out? And is that a point where the United States can still maintain services that I’m sure Mitchell doesn’t advocate giving up, like police and law courts?

If I understand this passage correctly, I disagree. Tax competition does not drive tax rates to zero. It just encourages better policy. There’s pressure to lower tax rates, and there’s pressure to reduce double taxation of income that is saved and invested. But there’s no reason to think that tax competition and/or tax evasion forces the overall tax burden “to the bottom.”

But I would be remiss not to point out some internal inconsistencies in Mitchell’s arguments, in addition to his logical ones. While he argues tax competition through tax evasion in havens has fostered lower tax rates worldwide, he has also reckoned that “only a tiny minority” of people who keep their money in havens “are escaping onerous tax burdens.” First of all, I would be interested to see where Mitchell got that statistic because no one knows how much money is deposited in havens, let alone its origins. Such information isn’t publicly available. That’s actually the whole point. And secondly, and more importantly, I’m unclear on how such a “tiny minority” of oversees deposits could drive international tax policy to such an extent that the average corporate tax rates have dropped by more than half in thirty years.

Actually, there is considerable data about the amount of money in tax havens. The Bank for International Settlements is a good place for those who like to peruse such information.

But that’s a secondary point. Her main criticism is that I’m inconsistent when I say tax evasion is minor, so allow me to elaborate. Tax competition works by making politicians fearful that jobs and investment will migrate to jurisdiction with better tax law. It works just as well when people engage in legal tax planning and legal tax avoidance as it does with illegal tax evasion.

Places such as the Cayman Islands, for instance, rely on completely legal and transparent lines of business such as hedge funds and captive insurance companies. Places such as Panama have completely legal shipping registries. Places such as the British Virgin Islands specialize in completely legal company formation. Places such as the Channel Islands focus on completely legal trusts. Places such as Bermuda are known for completely legal reinsurance firms.

The “illegal” part of the offshore business does exist (at least as defined by high-tax nations), and it tends to be in the areas of private wealth management and banking. And even then, only in jurisdictions that have very strong human rights laws protecting financial privacy.

To be sure, there’s no way to precisely state how much tax evasion exists, but I can say with total certainty that the left’s claims are absurd. During the 2008 campaign, for instance, then-candidate Obama said that his anti-tax haven policies would generate $100 billion every year. When his law was enacted in 2010, that huge amount of money shrank to only $870 million per year. And even that estimate is a mirage because the President’s FATCA law is discouraging productive investment in the United States.

It is not my intention to demonize Mitchell and I hope you’ll notice that I’ve neither called him, nor implied that he is, a “careless and know-nothing hack.” I also have no interest in taking easy jabs that imply he is personally benefiting from tax evasion through havens or that he is seeking to destabilize theU.S.government by removing its ability to tax its citizens. Such attacks might generate readers, but they don’t generate thoughtful discussion and I’m much more interested in the latter than the former.

You may be wondering why she included the comment about a “careless and know-nothing hack.” It’s because I used that phrase to describe a journalist who wrote a very sloppy article. But I don’t automatically disparage those with different views. I’ll disagree with people and argue with them, but I don’t mock them if they have serious and substantive views.

I suppose I should also say, just for the record, that I fully comply with all the onerous demands imposed on me by the government. Not because I want to, but rather because I worry that my work on public policy sooner or later will attract some discriminatory and politically motivated attention from the IRS. It hasn’t happened yet, so I hope I’m being needlessly paranoid, but suffice to say that I go out of my way to even declare income that I know isn’t reported to the tax police.

So here are my questions, to anyone who will answer. 1) On what philosophical basis, if any, do governments draw the right to tax their citizens?; 2) Do citizens have a moral or philosophical right to evade taxation by using tax havens under any circumstances?; 3) If so, at what level of taxation do those citizens no longer have a moral right to evade tax?; and 4) what is the philosophical reasoning that justifies this level?

Now we’re back to the hard-to-answer questions. When is government too big and when does it impose so many demands that people are justified in evading taxation? I’m not sure, but I’ll fall back on what former Supreme Court Justice Potter Stewart said about pornography: “I know it when I see it.”

Put in context, I don’t blame people from France for evading confiscatory taxation. I don’t blame people in corrupt nations such as Mexico for evading taxation. I don’t blame people in dictatorial nations such as Venezuela for evading taxation.

But I would criticize people in Singapore,Switzerland, Hong Kong, or Estonia for dodging their tax liabilities. They are fortunate to live in nations with reasonable tax rates, low levels of corruption, and good rule of law.

Let me now circle back to the main point. In a world with vigorous tax competition, especially when augmented by the strong human rights laws of tax havens, nations will face some pressure to move their policies closer to Hong Kong and away from France. That’s something worth protecting and promoting, not something to be stamped out by high-tax nations seeking to create a tax cartel—sort of an OPEC for politicians.

Last but not least, if you haven’t yet overdosed on this topic, here’s my speech to a Capitol Hill audience on the valuable role of tax havens in the global economy.

The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue

The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and taxable income. It is frequently cited by people who want to explain the common-sense notion that punitive tax rates may not generate much additional revenue if people respond in ways that result in less taxable income.

Unfortunately, some people misinterpret the insights of the Laffer Curve. Politicians, for instance, tend to either pretend it doesn’t exist, or they embrace it with excessive zeal and assume all tax cuts “pay for themselves.”

Another problem is that people assume that tax rates should be set at the revenue-maximizing level. I explained back in 2010 that this was wrong. Policy makers should strive to set tax rates at the growth-maximizing level. But since a growth-generating tax is about as common as a unicorn, what this really means is that tax rates should be set to produce enough revenue to finance the growth-maximizing level of government - as illustrated by the Rahn Curve.

That’s the theory of the Laffer Curve. What about the evidence? Where are the revenue-maximizing and growth-maximizing points on the Laffer Curve?

Well, ask five economists and you’ll get nine answers. In part, this is because the answers vary depending on the type of tax, the country, and the time frame. In other words, there is more than one Laffer Curve.

With those caveats in mind, we have some very interesting research produced by two economists, one from the Federal Reserve and the other from the University of Chicago. They have authored a new study that attempts to measure the revenue-maximizing point on the Laffer Curve for the United States and several European nations. Here’s an excerpt from their research.

Figure 6 shows the comparison for the US and EU-14. …Interestingly, the capital tax Laffer curve is affected only very little across countries when human capital is introduced. By contrast, the introduction of human capital has important effects for the labor income tax Laffer curve. Several countries are pushed on the slippery slope sides of their labor tax Laffer curves. …human capital turns labor into a stock variable rather than a flow variable as in the baseline model. Higher labor taxes induce households to work less and to acquire less human capital which in turn leads to lower labor income. Consequently, the labor tax base shrinks much more quickly when labor taxes are raised.

There’s a bit of jargon in this passage, so here are the charts from Figure 6. They look complex, but here are the basic facts to make them easy to understand.

The top chart shows the Laffer Curve for labor taxation, and the bottom chart shows the Laffer Curve for capital taxation. And both charts show different curves for the United States and an average of 14 European nations. Last but not least, the charts show how the Laffer Curves change is you add some real-world assumptions about the role of human capital.

Some people will look at these charts and conclude that there should be higher tax rates. After all, neither the U.S. or E.U. nations are at the revenue-maximizing  point (though the paper explains that some European nations actually are on the downward-sloping portion of the curve for capital taxes).

But let’s think about what higher tax rates imply, and we’ll focus on the United States. According to the first chart, labor taxes could be approximately doubled before getting to the downward-sloping portion of the curve. But notice that this means that tax revenues only increase by about 10 percent.

This implies that taxable income would be significantly smaller, presumably because of lower output, but also perhaps due to some combination of tax avoidance and tax evasion.

The key factoid (assuming my late-at-night, back-of-the-envelope calculations are right) is that this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue.

Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue.

What about capital taxation? According to the second chart, the government could increase the tax rate from about 40 percent to 70 percent before getting to the revenue-maximizing point.

But that 75 percent increase in the tax rate wouldn’t generate much tax revenue, not even a 10 percent increase. So the question then becomes whether it’s good public policy to destroy a large amount of private output in exchange for a small increase in tax revenue.

Once again, the loss of taxable income to the private sector would dwarf the new revenue for the political class. And the question from above bears repeating. What should we think about politicians willing to make that trade?

And that’s the real lesson of the Laffer Curve. Yes, the politicians usually can collect more revenue, but the concomitant damage to the private sector is very large and people have lower living standards. So that leaves us with one final question. Do we think government spending has a sufficiently high rate-of-return to justify that kind of burden? This Rahn Curve video provides the answer.