Art Laffer has a guaranteed spot in the liberty hall of fame because he popularized the common-sense notion that you can’t make any assumptions about tax rates and tax revenue without also figuring out what happens to taxable income.
Lot’s of people on the left try to denigrate the “Laffer Curve,” but it’s worth noting that even left-wing economists now admit that you don’t maximize revenue with a 100 percent tax rate.*
Indeed, I think the only people who now cling to that absurd view are the bureaucrats at the Joint Committee on Taxation.
But this post isn’t about the Laffer Curve. It’s about a disappointing column that Art Laffer wrote for today’s Wall Street Journal.
The issue is whether states should have the power to impose taxes on sales that take place outside their borders. Art starts the column with a very good point about the link between growth and living standards.
After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000. The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted.
That’s a great point. I’ve also tried to get people to focus on the importance of long-run growth.
Heck, just look at what’s happened in Hong Kong and Singapore and you’ll agree.
In his column, Art also correctly defines good tax policy.
The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems.
But he then asserts that an Internet sales tax cartel somehow will result in better policy.
…there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web. So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet). …The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.
This is a very disappointing collection of sentences. Let’s review.
1. States have declining sales-tax bases because state lawmakers treat that levy the same way that politicians in Washington treat the income tax – they put in loopholes in exchange for campaign cash and political support. For them to complain about declining sales-tax bases is sort of like the old joke about the guy who murders his parents and then asks the court for mercy because he’s an orphan.
2. Art offers zero evidence that state governments would use the additional revenue from a state sales tax cartel to reduce income tax rates. What’s next, a column saying we should have a value-added tax because the politicians may use the revenue to get rid of the income tax? Yeah, good luck with that approach.
3. Why is it “inequitable” for there to be different tax policies in different states? That’s another way of describing federalism, and it’s something we should be celebrating and promoting. Particularly since it promotes tax competition, which is one of the most effective ways of restraining the greed of the political class.
4. The Internet sales tax cartel being promoted by Art and various politicians requires that governments have the ability to tax sales that tax place outside their borders. That’s an assault of sovereignty, particularly since out-of-state merchants will be coerced into being tax collectors for a distant government. This is the same dangerous ideology that is used by high-tax governments to promote global anti-tax competition policies.
5. Art offers zero evidence that the absences of a state sales tax cartel has led to higher income tax rates. Yes, some states have raised tax rates in recent years, but others have lowered tax rates.
For more information on why a sales tax cartel among the states would be a bad idea, here’s my short speech to an audience on Capitol Hill.
*This should be an obvious point, but I can’t resist emphasizing that maximizing revenue should not be the goal of fiscal policy.
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While I won’t defend Art on this particular policy, he has often promoted broadening the tax base, in order to minimize the tax rate.
As we have seen with current budget discussions, the flaw in the broadened base argument is that spending must be capped or reduced first. Broadening the base should only be done in conjunction with tax rate reduction, where the net tax revenue is the same or reduced in the short term. In the long term, an increase in tax revenue may well be acceptable based on an increase in the growth rate.
Good stuff, Sir Zorba!
Relentlessly compounding growth becomes the overwhelming determinant of prosperity, eventually dwarfing all other factors? Who knew?
But to the voter-lemming, “A redistribution dollar today is worth five perpetually compounding growth dollars in the future”. So the hope lives on – the march towards pitchfork democracy intensifies — and the decline of western civilization continues.
Perhaps Art Laffer is banking on the fact that widening the tax burden will (a) dampen class warfare and (b) eventually lead to a revolt against taxation and thus perhaps less taxation overall. Empirical evidence from Europe is squarely against that outcome. VAT sales taxes in Europe have risen to 20-25% across the continent. In Europe, the cycle has closed and the middle class and poor have finally been drafted to pay almost as much taxes as the rich. Like a modern day Saturn, socialism has run out of food and is now forced to eat his children.
America’s fiscal problems are mostly motivational problems. But what has changed? What has changed is that…
Three billion emerging world people have moved from once nearly flat effort-reward curves, more and more towards the natural, unadulterated, steeper personal effort-reward curves. In desperate response, the less than one billion stressed Americans and other Western World voter-lemmings have reacted by flattening their own effort reward curves. Convergence will be swift. A three to four percent growth differential wipes out prosperity differences rather quickly. Once privileged Western World voter-lemmings should prepare for their destiny: Average world prosperity. The world’s top 20% in prosperity (the occupy protesters) are waging civil war against the top 1%. How will this civil war end? Genghis Khan has neither the desire nor the patience to find out. He will take no prisoners.
Like moths under the light, voter-lemmings will join the pilgrimage of HopNChange into decline, guided by America’s 21st century economic Jim Jones.
Sales tax is far more complicated that indicated in your article. Many states have sales taxes “add ons” by county”. So now we are proposing that ever state in the union keep track of for example every county in the state of Utah. And if the state of Utah is not will to for example to send auditors to Maine the why should they even bother to charge the sales tax? Yes, it can be tracked by computer imagine writing the program that track the shipment to you state by every county in the country and then determine which part is taxable and to which county it was shipped. And remember to regain the lost revenue this must be done for no cost.
Those of us that shop on the internet compare the shipping cost to the sales tax to get the product. By taxing internet sales more people will by locally. So we would be giving up property taxes, utility charges, income taxes, property taxes and so on for sales taxes. I don’t think that increased sales tax makes up for the other lost revenue for most states.
I am very surprised that A. Laffer would every consider one type of tax in a vacuum without taking into consideration the other consequences. The answer as usual is to increase the productive activity of your state. The bottom line is that there is no replacement for increased productive and increased consumption.