Cognitive dissonance is what happens when we compartmentalize contradictions.
There’s one more curve to throw into the mix: the Krugman
curve. Paul Krugman has never claimed
it, but I’m officially nominating him right now…
The Laffer curve is the maximum progressive Federal
tax rate.
The Krugman curve is the maximum progressive academic
tax rate.
In theory the Krugman curve would be identical to the Laffer
curve. Economic studies are nearly
unanimous in placing the peak of the Laffer curve between 65% to 70% maximum
progressive tax rates, which is the same as 35% average tax rates.
My own calculations placed the idealized capital gains maximum at 35%, which
would create a maximum revenue point on progressive
tax rates at 65%. That is, capital gains
are flat rates, so a 35% average is the same as a 5% to 65% progressive tax.
So then, Paul Krugman and I agree with virtually all mathematical
studies of the Laffer curve: a progressive tax rate should peak at 65% (which
is an average of 35%).
And yet… my historical graph of actual per capita revenues
shows a peak when the maximum tax rates are at 35% -- not 65%.
When I first produced that graph I had to scratch my head,
because the graph for maximum
progressive IRS revenues was identical to the curve of where average revenues should be.
It was perfect.
It was also perfectly wrong.
And there are exactly 50 reasons for it to be wrong:
Alabama, Alaska, Arkansas…..
Right, the Federal government only gets part of our
taxes. The states get another part. That 35% average or 65% maximum is for all taxes put together – not just the
IRS. When you plot the actual IRS
revenues, then, you can only plot the Federal government’s share.
The Laffer curve is what’s left of the Krugman curve after
reality takes a bite out of it.
Add all State and Local taxes together, and they’ve cut that
65% maximum down to the 35% maximum we see from actual Federal revenues:
Art Laffer himself never gives an actual number for the
peak, because it is impossible to do so unless you also know what other taxes
are forcing the curve to contract.
A European VAT tax at 20% would cause the Laffer curve to
peak at a 25% max / 15% average.
The State and Local taxes are also close to 20%, but many of
them can be deducted from your Federal taxes, leaving us with the 35% max / 20%
average for the historical IRS revenues.
Occasionally you’ll see an economist laugh at Conservatives who
point to the true peak at 35%, because the math very clearly shows it SHOULD be
at 65%. And, unfortunately, Liberals
tend to stick with the Krugman curve as well.
Krugman and the Liberals would be 100% correct – if there
were only one tax in the entire country.
So, their math is perfect.
And it is also perfectly wrong.
So, that’s the back story: in the absence of all other
taxes, the average tax rate would be 35%; but the presence of other taxes turns
that 35% average into a 35% maximum.
So what are all those other taxes? On the state level, here are some categories
from the United States census bureau:
Property Tax (T01)
Tot Sales & Gr Rec Tax
Total Gen Sales Tax (T09)
Total Select Sales Tax
Alcoholic Beverage Tax (T10)
Amusement Tax (T11)
Insurance Premium Tax (T12)
Motor Fuels Tax (T13)
Parimutuels Tax (T14)
Public Utility Tax (T15)
Tobacco Tax (T16)
Other Select Sales Tax (T19)
Total License Taxes
Alcoholic Beverage Lic (T20)
Amusement License (T21)
Corporation License (T22)
Hunt and Fish License (T23)
Motor Veh & Oper Lic
Motor Vehicle License (T24)
Motor Veh Oper License (T25)
Public Utility License (T27)
Occup and Bus Lic NEC (T28)
Other License Taxes (T29)
Total Income Taxes
Individual Income Tax (T40)
Corp Net Income Tax (T41)
Total Other Taxes
Death and Gift Tax (T50)
Docum and Stock Tr Tax (T51)
Severance Tax (T53)
Taxes NEC (T99)
Yeah, some of those overlap, but who can keep track?
Tim
