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ryanpatgray Posted: Thu, Oct 25 2007 4:21 PM
Hi, I am new here and became familiar (to the extent that I am) with Austrian Economics via the wonderful Mises.org podcasts. Please forgive me if my questions seem somewhat naive. My first question is serious and the second one is of semantics. What is the Austrian School's view of the Laffer Curve? Specifically, if it is valid could it be said to apply to more than just taxes? Could the theory be applied to all forms of state oppression? My second question, the one of semantics is this: How does one distinguish between an economist of the Austrian School who may or may not be from Austria from, for example a Keynsian economist who just happens to be from Austria? Would you call the first an austrian economist (lower case) and the second one an Austrian economist (upper case)? Or is there another way of distinguishing? 

Thank you,

Ryan

 

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Firstly, I am not sure to what extent the Laffer curve has found supporters amongst Austrians, but it is definitely something inherent in Austrian teachings that the more liberal the economy, the more wealth it will produce, and consequently the more will be available to tax.

 On the other question, usually Austrians are referred to as "Austrians", i.e. within quotation marks.

 

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Paul replied on Sat, Oct 27 2007 2:30 AM

ryanpatgray:
What is the Austrian School's view of the Laffer Curve? Specifically, if it is valid could it be said to apply to more than just taxes?

Rothbard writes (Making Economic Sense, ch 2):

This is the so-called "Laffer curve," set forth by California economist Arthur Laffer. It was advanced as a means of allowing politicians to square the circle; to come out for tax cuts, keeping spending at the current level, and balance the budget all at the same time. In that way, the public would enjoy its tax cut, be happy at the balanced budget, and still receive the same level of subsidies from the government.

It is true that if tax rates are 99%, and they are cut to 95%, tax revenue will go up. But there is no reason to assume such simple connections at any other time. In fact, this relationship works much better for a local excise tax than for a national income tax. A few years ago, the government of the District of Columbia decided to procure some revenue by sharply raising the District's gasoline tax. But, then, drivers could simply nip over the border to Virginia or Maryland and fill up at a much cheaper price. D.C. gasoline tax revenues fell, and much to the chagrin and confusion of D.C. bureaucrats, they had to repeal the tax.

But this is not likely to happen with the income tax. People are not going to stop working or leave the country because of a relatively small tax hike, or do the reverse because of a tax cut. 

There are some other problems with the Laffer curve. The amount of time it is supposed to take for the Laffer effect to work is never specified. But still more important: Laffer assumes that what all of us want is to maximize tax revenue to the government. If--a big if--we are really at the upper half of the Laffer Curve, we should then all want to set tax rates at that "optimum" point. But why? Why should it be the objective of every one of us to maximize government revenue? To push to the maximum, in short, the share of private product that gets siphoned off to the activities of government? I should think we would be more interested in minimizing government revenue by pushing tax rates far, far below whatever the Laffer Optimum might happen to be.

 

ryanpatgray:
How does one distinguish between an economist of the Austrian School who may or may not be from Austria from, for example a Keynsian economist who just happens to be from Austria?

By saying something like "Keynesian who just happens to be from Austria", I suppose.
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Thanks to both of you for responding. How does this relate to the concept of "dynamic analysis" versus "static analysis"? I do not know how accurate this description is, but what I was told is that static analysis assumes a boxer in a ring will not duck or swerve or block if the other boxer takes a swing at him and dynamic analysis assumes that he will do one or a combination of those things. In the case of the DC gasoline taxes, the drivers took a clear action in response to a tax. I certainly agree that one is not likely to see a mass exodus from the United States over a ten percent increase in income tax but you might see people try to minimize their taxes in other ways (i.e. more under the table or off the books transactions). I agree with Mr. Rothbard that we should not wish for or strive for an increase in government loot. But I have been fascinated by this concept for a while. I recall Hoppe describing the phenomenon that it is the more liberal (in the classical sense of liberal) states that have enough loot to dominate the world. The higher a tax the government imposes upon people the more of an incentive there is for clever people to find a way of avoiding taxes altogether or at least minimizing their taxes. I am sure more that one person has tried to think of a way to qualify for an exemption to Social Security and Medicaid benefits.

 

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Carl replied on Tue, Oct 30 2007 2:49 AM

Mises podcast. i cant get itunes to install properly no matter what i try or what version of the program i use, it always trys to install on the F: drive but i dont have an F: drive. Maybe there is another program that will play podcasts???

 

 

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Carl:

Mises podcast. i cant get itunes to install properly no matter what i try or what version of the program i use, it always trys to install on the F: drive but i dont have an F: drive. Maybe there is another program that will play podcasts???

 

Carl,

I use Google Reader myself. I have never used itunes myself and not familier with that program. You can find Google Reader at https://www.google.com/reader

Or if you are asking about a media player for your computer, VLC is very good.

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xahrx replied on Tue, Oct 30 2007 4:09 PM

There's also a big problem with the Laffer curve in that it assumes a constant discoverable utility from the government's budget expenditure.  There is at any given time likely an 'optimal' level and means of taxation that would maximize the government's revenue with the least negative impact, however defined, on the private sector.  The problem is people's valuation of the utility of government services can be expected to change over time as does their valuation of all things.  So the means and level of optimal taxation to maximize revenue are not only fluid and subject to change, but also unknowable because while maximizing revenue is something you can calculate, knowing whether or not anyone really wanted what that spending resulted in as opposed to the lost opportunities is impossible to know.

Or, put another way, there's probably also an 'optimal' level of theft people are willing to live with and let thieves get away with without too harsh of a punishment.  Theft itself however is still on net destructive of wealth because the thief, not knowing just how much he 'should' steal, will always go for how much he wants, and which is almost always more than what his victims are willing to 'give'.

"I was just in the bathroom getting ready to leave the house, if you must know, and a sudden wave of admiration for the cotton swab came over me." - Anonymous
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