Community discussions

Economics, Taxes and Capitalism

by Tom Reynolds

January 6, 2012

Prior to 1913, there was no federal income tax. The effort to create an income tax came from the progressive movement. Be sure to thank a Progressive for the federal income tax.

Think of this for a moment. In less than 140 years, the United States rose from a primarily agricultural nation to the preeminent nation in the world and did this without a personal income tax to feed the federal government! No Washington based bureaucrats to tell citizens how to behave or what is important. There were no bureaucrats because there was no money to pay them. (But more about self interest later.) Local issues were decided locally, not by “grants” from the federal government. Local people, who were closest to the issue, decided if something was a worthy priority for spending taxes. Politicians in Washington were limited as to the number of votes they could buy, because they didn’t have enough money to buy more votes.

Medical diseases are named after the person who first discovered or described them. This has led to some unfortunate names. Who would want to be told they have “Graves Disease”. (It’s actually a treatable disease of the Thyroid.)

Acronyms can also have unfortunate side effects. The principle that kept us from nuclear destruction during the Cold War was Mutually Assured Destruction - MAD. Its opponents had a wonderful time with that acronym. The only problem that its opponents had was – it worked!

Economic theories are also named after the person who first discovered or described them. Unfortunately, the economic theory that is most significant to our current economy was described by “Laffer”. The Laffer Curve simply says that at a 0% tax rate there will not be any taxes collected and at a 100% tax rate there will not be any taxes collected; no one will go to work if every penny is taken in taxes. In between 0 and 100 there is an indefinable point on a Bell Curve where raising the tax rate will actually lower tax receipts; people will have less incentive to go to work or invest their money when taxes rise above a certain point.

This applies to areas other than taxes. People who have jobs but also get welfare and tax breaks will occasionally refuse wage increases that will put them in a higher tax bracket and lower their welfare benefits. Who says these people don’t understand the economics of self interest?

Alexander Hamilton is conceded by many to be our smartest founding father. He is on the short list of “Greatest Americans who never were President”. Hamilton was a supply side economist – a precursor of the Laffer Curve. In 1782, he wrote, “Experience has shown that moderate duties (moderate taxes) are more productive than higher ones”. While Hamilton got it right on economics, he got it wrong on political human nature. He also wrote that officials “can have no temptation to abuse this power (of taxation), because the motive of revenue will check its own extremes”. Apparently, he anticipated a higher level of economic sophistication than our current politicians possess.

Wouldn’t it be better to call it the Hamilton Principle rather than the Laffer Curve?