Laffer Curve Prepositions

Regarding the role of government, Abraham Lincoln gave us the three most important prepositions of liberty of all time delivered in the Gettysburg Address to remind us of our exceptionalism.    As an English grammar reminder, a preposition is a word governing and usually preceding, a noun or pronoun and expressing a key relation to another word—the object.  In his Address as its benediction, Lincoln said, “—that we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the earth.”  To describe this American Experiment of freedom, liberty and self-governance, countless observers since then have evoked this clause of prepositions to describe ideal government.

To not prematurely perish, selecting and maintaining a government OF the people, BY the people and FOR the people is likely optimal.   These governmental prepositions of a people’s relationship to rule also have their direct opposites.  Government on the other end of the liberty spectrum is a government OVER the people, away FROM the people and AGAINST the people.  These governments tend to perish—and preceding that, the overall well-being of the people is typically poor, with the ruling class always more well-off.

Collected now or deficit spent now to be paid back later, government must always take before it can give.  Government expenditures are always an economic load carried by the people.   Regardless of the liberty spectrum of the people, to finance government expenditures is always accomplished by coercion and confiscation of resources by degree.   This ranges from simple taxation all the way to outright nationalization.   When the compulsory load is smaller, the people are happy to shoulder the burden.   When the taxation load is larger, there is political dissatisfaction and no economic motivation to be willfully subject to big government.   This later condition leads to several outcomes—low growth, low per-capita income, gray-markets, unstable economies, less freedom, high inflation and political turmoil.   Those in power allocating the exacted resources are insulated from this lower-class malaise of poverty and hardships.  Uprisings are usually eventual.

Conversely, to stem these possible national conditions, policy makers around the globe have embraced tax reform, deregulation and improving infrastructure to better compete in the world economy.  To accomplish these mainstream aims, Laffer Curve principles are becoming a larger part of modern governance.   Arthur Laffer first developed the theory in 1974.  The Laffer Curve describes how total taxation revenue for government spending is garnered at rates charged in an acceptable range and prohibitive range.  According to the Laffer model, there are always two rates of taxation that yields the same government revenue—those easy and the other onerous.   With higher growth and prosperity, the lower taxation rates are associated with national governments OF the people, BY the people and FOR the people.  With lower growth and concomitant poverty, the higher taxation rates are associated with national governments OVER the people, away FROM the people and AGAINST the people.   As to tax rates, the former approach is acceptable, the later prohibitive and discouraging to the people.   Higher tax rates ignores incentives and freedom.

Having been present at the meeting when Author Laffer first illustrated the model on the back of a napkin, this observed axiom was thereafter first described, expanded upon and made popular by Jude Wanniski, a journalist, who wrote the resulting prescient book, “The Way the World Works.”  ISBN 0-89526-344-0.  (https://www.amazon.com/dp/0895263440/ref=rdr_ext_tmb) This book stood alone by almost two decades forecasting the imminent government collapse of communism, the ultimate level of government coercion and property confiscation.  Indeed, socialism/communism is essentially a form authoritarianism, which is government OVER the people, away FROM the people and AGAINST the people.  What starts out as a promise of prosperity, equality, and security, socialism/communism ultimately operates in the wrong side of the Laffer Curve to finance their policies.  Eventually they deliver poverty, misery, and tyranny.   Check out Venezuela and Zimbabwe as of late.

In this continuous conduit of the way the world works, facts are more and more being assembled to support greater government revenue receipts derived from lower taxation rates resulting in increasing infrastructure development and relying on less regulation for greater national growth and prosperity.   In an effort to regain lost U.S. competitiveness and increase real growth, Dr. Kevin A. Hassett, Chairman of Economic Advisors to the Trump Administration, recently reported the following findings in a daily Whitehouse press briefing (https://www.youtube.com/watch?v=98KKuI1X7Nc) November 16, 2017:  “If you have lower marginal rates, you get higher growth…Countries around the world have cut their corporate rates and had broad-based reforms on the individual side and then seeing economic growth as the result….Countries around the world found when they cut the corporate tax their economic activity increased and the welfare of their workers improved….and they very often did it again…two or even three times.  And, what that does for economists is that it gives us an enormous amount of data to analyze of countries that change their rates and countries that don’t, and you can compare the experiences of those two-types of countries…The fact is that the OECD has a study…that says that the U.S. in the corporate tax space is on the wrong-side of the Laffer Curve.  That we have such a high corporate tax rate that we are chasing business off-shore and loosing revenue….If you lower marginal tax rates, broaden the base, give the middle-class a tax-cut, lower the corporate rate; if you do any of those things, it is positive for the growth rate.”  There were many more facts reported by Dr. Hessett regarding such real-world tax policy and growth.   In summary, the best economic position is to be on the side of a government taxation system that is OF the people, BY the people and FOR the people.   Holding to those prepositions, we prosper rather than perish.